Posted on Mon, Apr. 28, 2003 BY MELITA MARIE GARZA centredaily.com-Chicago Tribune

CHICAGO -(KRT) - The prospect of Iraq's return to the company of oil producers is contributing to growing disarray within the OPEC cartel, even though the war-torn country is weeks, if not months, away from resuming shipments.

U.S. crude oil prices, which had fallen 30 percent as U.S. armed forces marched through Iraq, rose 7 percent to close at $30.57 a barrel in the days approaching OPEC's April 24 meeting, in anticipation that the oil cartel would then tighten the spigot.

On Friday, crude oil prices closed at $26.26 a barrel on the New York Mercantile Exchange, down 38 cents from Thursday as traders puzzled over OPEC's surprise deal to raise formal output quotas while promising to cut excess supply.

At the meeting, OPEC decided to curb production by 2 million barrels a day and aim to maintain a price of $25 a barrel, with an accepted minimum of $22.

Iraq's share of the market has been minimal, amounting to less than 2 million barrels a day, and OPEC members have no how much oil Iraq will eventually export, according to John Kingston, global oil expert for Platts, an energy information service of the McGraw-Hill Co.

"Saudi Arabia is one of the last believers in OPEC. They tend to adjust their production based on what the market needs. If they (Iraq) go up to three million barrels a day, that's one million barrels a day that is going to have to come out of somebody's hide," Kingston said John Kingston, global oil expert for Platts, an energy information service of the McGraw-Hill Co.

"It tends to come out of Saudi Arabia's."

The cartel has to deal with the possibility that Iraq soon will be a member and make room for it, said Daniel Yergin, chairman of Cambridge Energy Research Associates, a Massachusetts-based global energy consulting firm.. Iraq has the world's third largest proven oil reserves, after Saudi Arabia and Canada.

Iraq may prove to hold more than 9.3 percent of the world's reserves, but it will take years and billions of dollars of mostly foreign investment to find and develop the fields.

Yergin estimated that Iraq could begin producing oil in six to 10 weeks, though at about half of its prewar level of 2.8 million barrels a day.

"But for Iraq to return to its production level prior to the war, or to get back to its 1990 output of 3.5 million barrels a day of capacity probably would take two-to-three years and $5 billion," Yergin said. "Basically Iraq has not lived up to its potential as an oil producer," he said.

He estimated that it would take seven years and $30 billion to add 2 million barrels a day on top of the original 3.5 million barrels a day.

"They also need a government, a petroleum law, a fiscal system, and negotiations between a government and a company," Yergin said.

The primary hurdle for Iraq is the U.N. Security Council, which must rescind economic sanctions against Iraq that have been in place since Iraq invaded Kuwait in 1990. Sanctions eventually led to the Oil-for-Food program, which initially allowed Iraq to sell only a limited amount of oil in return for humanitarian aid.

Although President Bush on April 16 called for the United Nations to lift the sanctions, the decision will be up to the Security Council, which includes France, Germany and Russia, countries the United States had lambasted for failing to support the war.

Questions about a broader U.N. role in Iraq's reconstruction, which the United States does not want, likely will muddy the decision-making process.

For the time being, the sanctions mean that money to rebuild Iraq will be sharply curtailed. The program requires that 70 percent of the revenues be devoted to humanitarian aid, with most of the rest sent to Kuwait as war reparations.

Robert Ebel, director of energy programs at the Center for Strategic and International Studies in Washington said the United States is not going to "go in and open the valves and flood the market with oil. I don't see any real impact deriving from the re-emergence of Iraqi oil this decade."

Still, Mark Baxter, director of the Maguire Energy Institute at Southern Methodist University in Dallas, said that now was not the time to cut production.

Despite the recession, oil markets remain tight, primarily because of strife in Venezuela and Nigeria.

"There is only one million barrels a day of excess capacity in the world today," Baxter said. "Before the war there was around 4.5 million to 5 million barrels a day of excess capacity."

But Ebel said OPEC is trying to account for the normally slower second and third quarters of the year.

"It has nothing to do with Iraq," Ebel said. "We are now coming out of the winter heating season," Ebel said. "They are thinking that if they don't cut back on production, prices will fall even farther and faster than they already have."

Ebel believes Iraq will remain in the cartel, at least initially.

"I think they will stay in OPEC until they reach parity with Iran in export quotas, and until they think that staying in OPEC will limit future growth," he said.

Yergin agreed: "OPEC was founded in Baghdad in 1960 before Saddam Hussein came to power. The basic interest for the U.S. is to see Iraq generate high oil revenues so that it can rebuild."

© 2003, Chicago Tribune.

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April 25, 2003, 6:34PM By SEAN EVERS and TOM CAHILL Houston Chronicle-Bloomberg Business News

VIENNA, Austria -- Saudi Arabian oil minister Ali al-Naimi, clad in a black Nike jogging suit and New Balance sneakers, set out Thursday morning for his regular loop of Vienna's ring road before an OPEC meeting.

The 67-year-old, who covers a little over three miles in half an hour, was pursued by three Lycra-clad bodyguards and some 10 reporters straining to catch words that rattle the $2 billion-a-day world oil market. Thursday, he told reporters OPEC is determined to keep prices at $25 a barrel by cutting production, foreshadowing the outcome of an emergency meeting.

Because of term limits in the Saudi kingdom, al-Naimi's run last week may have been one of his last in the Austrian capital. In eight years as the most influential voice in the Organization of the Petroleum Exporting Countries, al-Naimi has convinced members from Iran to Venezuela that stable oil prices are better than the swings between $40 and $10 seen in the 1980s and 1990s. During the past four years, oil prices averaged $24.57, almost in the center of OPEC's target range of $22 to $28 a barrel.

"Before his arrival, OPEC was defined by its public squabbling," said Bruce Evers, an oil analyst with Investec Henderson Crosthwaite in London. "Now they are businesslike, professional and do what they say they will do. Al-Naimi has to take a lot of the credit for that."

Al-Naimi, who shuns questions from reporters in the lobbies of Vienna's Intercontinental and Grand hotels, during his morning jog past Vienna's Hofburg palace and opera house not only discusses oil but opens up about everything from his seven grandchildren to hunting quail and pheasant. The minister also shoots turkey, which he said can be as tricky to predict as the price of crude.

"You have to have fun," the minister told the reporters, who in the past have rented bicycles to keep up with a man at least 30 years their senior. "Even maintaining the price of oil is fun. They say if I can keep it here for 10 years, they will give me a medal."

At 7:45 a.m. Thursday, Viennese commuters overlooked the 5-foot-2-inch man sharing their streets, the man who largely sets the price they pay at the gas pump by deciding how much oil to sell.

"He speaks softly and carries a very, very big stick," said Fadel Gheit, an oil industry analyst at Fahnestock & Co. in New York, who calls al-Naimi the Alan Greenspan of oil. "With Saudi Arabia's supply, he can single-handedly change the course of OPEC by adding or taking away product."

Al-Naimi has been involved in Saudi Arabia's oil industry since he was 12, working as an office messenger for state oil company Saudi Aramco, at that time controlled by four U.S. oil companies.

He benefited from the company's commitment to train and educate young Saudis. Eventually he received a bachelor's degree in geology from Lehigh University in Bethlehem, Pa., and a master's in geology at Stanford University in Palo Alto, Calif.

"I started as an office boy, doing the same thing as I did when president, shuffling papers from in-trays to out-trays," al-Naimi said as he jogged.

He rose to chief executive officer of Aramco, which was nationalized in the 1970s and now pumps more than twice as much crude as Exxon Mobil Corp., the largest oil company that is not state-owned. He was picked for the kingdom's top energy post in August 1995.

The nation influences prices by deciding how much to pump from its 10.5 million barrels of daily oil capacity, almost as much as that of its next four closest OPEC colleagues.

OPEC has "been acting prudently, and acting so as to ensure security of supply," said Claude Mandil, executive director of the Paris-based International Energy Agency, which was founded to represent the interests of 26 oil-consuming nations after the 1973 Arab oil embargo. "I'm confident they will make no decision that could be harmful to consuming countries."

Keeping oil prices around $25 a barrel has been al-Naimi's goal. He spent his first four years in office lobbying OPEC's second- and third-largest producers, Iran and Venezuela, to see the benefits of compliance with output quotas. The second four years fed off that cooperation.

Prices averaged about $17.50 during his first term and above $25 a barrel since 1999, a boon for states that depend on oil sales for as much as 80 percent of government revenues. Al-Naimi keeps it there by managing the market's expectations.

That's a far cry from November 1985, when oil prices started a plunge from $31.75 to $10 within months as the Saudis opened their taps to stop cheating by OPEC producers. By July 1986, some Persian Gulf crudes traded as low as $7 a barrel.

While OPEC has two regularly scheduled meetings a year, the group has had four in the past four months, and one is planned for June as members seek to anticipate moves in oil prices, rather than react.

The war in Iraq also raised concern of shortages and disruptions to Middle East supplies.

By Saudi Arabian law, oil ministers are limited to two four-year terms, with extensions at the discretion of the king. Al-Naimi said he really doesn't know if he will be out of a job.

"No matter what happens, I will come here personally to bring the press out on a run," he said with a chuckle and stepped up the pace. "Nobody lives forever. OPEC is healthy. It's going to do very well."

<a href=ogj.pennnet.com>Oil & Gas Journal Sam Fletcher Senior Writer

HOUSTON, Apr. 25 -- Energy futures prices were mixed Thursday as ministers of the Organization of Petroleum Exporting Countries meeting in Vienna surprised the market by raising their collective production quota by 900,000 b/d to 25.4 million b/d on June 1, effectively promising to reduce recent overproduction by 2 million b/d.

"The bulk of the 'cuts' needed to balance supply (under OPEC's new quota) and demand in the very short run was provided in late March by OPEC's new shadow member—the coalition forces who 'liberated' Iraq," said Adam Sieminski, industry analyst at Deutsche Bank AG, Germany.

OPEC's decision Thursday was similar to its move last December in simultaneously raising official quotas while reducing actual production. But this time, "OPEC's surprise quota increase unnecessarily confused the market at a time when there is sufficient uncertainty already present, with debate over the return of Iraqi (oil production and export) volumes and concerns over economic recovery and the impact of the SARS (severe acute respiratory syndrome) virus on petroleum demand," said Matthew Warburton, UBS Warburg LLC, New York, in a Friday analysis.

OPEC mistake? Since world oil inventories are now near record lows, OPEC's "mistake" is not as bad as the one it "made in Jakarta in late 1997 when it endorsed overproduction ahead of the Asian (financial) crisis," Warburton said. However, he said, "By its actions, OPEC has partially undermined (its) substantial recovery in credibility achieved over the last 3 years."

Warburton had anticipated "an unofficial OPEC-10 (minus Iraq) production reduction of 1.5 million b/d over the next 2-3 months from current OPEC-10 production levels of 26.2 million b/d and a reaffirmation of the existing 24.5 million b/d quota. This would have had the double benefit of increasing global inventories at a rate marginally above seasonal norms, as well as preparing OPEC for the reintroduction of Iraqi volumes into world markets later this year."

The second half of this year "may well be dominated by demand uncertainties and an interplay of Iraqi (oil production) growth and Saudi (Arabia's) restraint," said Sieminski. He estimates that OPEC production in May and June will average 25.5 million b/d—26 million b/d, including Venezuela's heavy oil—"as the Saudis gradually lower their own output to accommodate whatever exports are managed from Iraq."

Venezuela and Iraq On Thursday, OPEC raised Venezuela's production quota to 2.92 million b/d from 2.82 million b/d previously. Although Venezuelan officials claim the country's oil production has recovered to nearly 3 million b/d following a crippling 63-day general strike, many outside observers doubt if Venezuela's production or exports have rebounded to pre-strike levels.

No production quota was set for Iraq. "Our contacts in Washington suggest that Iraq is unlikely to begin exporting again until the (United Nations administered) oil-for-food program is renewed sometime after its June 3 expiry. The strategy of the US administration appears to be to use the next few weeks to inspect oil facilities, make repairs, get Iraq's refineries working again, and begin establishing a temporary governance structure in the country," Sieminski said.

"Waiting until after June 3 to push for exports is seen as strengthening the US-UK position in the Security Council debate at the UN regarding the administration of Iraq's oil," he said. "OPEC ministers set another meeting for June 11 in Doha, Qatar. In our view, this date ties in nicely with the early June battle shaping up at the UN on Iraqi oil."

Moreover, Sieminski said, "By allowing a quota boost now, the ministers are giving themselves a higher base from which to make cuts (to accommodate Iraqi exports). A 'soft landing' for oil prices looks plausible in our view."

Meanwhile, Chevron Nigeria Ltd., a subsidiary of ChevronTexaco Corp., said that, since Apr. 4, it has gradually increased production in the Escravos area of Nigeria to a plateau of 310,000 b/d and has lifted the force majeure declared a month ago as a result of civil unrest in that area. The company set no timeframe for a return to full production, however.

Futures prices The June contract for benchmark US light, sweet crudes dipped by 1¢ to $26.64/bbl Thursday on the New York Mercantile Exchange, while the July position advanced by 2¢ to $26.35/bbl. Unleaded gasoline for May delivery jumped by 3.12¢ to 87.93¢/gal. Heating oil for the same month was up 2.23¢ to 77.3¢/gal.

The May natural gas contract dropped 9.5¢ to $5.47/Mcf on NYMEX as the US Energy Information Administration reported Thursday the injection of 61 bcf of gas into US underground storage during the week ended Apr. 18. That compares with the withdrawal of 48 bcf of gas the previous week and the injection of 69 bcf during the same period last year. US gas storage now stands at 684 bcf, down 891 bcf from a year ago and 573 bcf less than the 5-year average.

Meanwhile, outages at two US nuclear facilities have resulted in incremental demand for 400 MMcfd of gas since October 2002. Reports of a minor leak at a third unit in South Texas could add another 300 MMcfd of incremental gas demand until that plant is brought back on line in late summer, said Robert S. Morris on Thursday at Banc of America Securities, New York.

Projections for 40 of the largest US gas producers indicate that US gas production dropped by 1.8% during the first quarter of this year, compared with the same period in 2002, said Morris. However, he said, "Companies tend to be optimistic regarding their production outlook, and since we started tracking the largest public producers in early 2000, actual reported results have come in about 0.5%, on average, below initial projections."

Moreover, he said, "Excluding the impact of storm-related shut ins in the Gulf (of Mexico) and price-related voluntary curtailments (of gas production) in the first quarter last year, our models indicate that US natural gas production (during the latest quarter) would have declined nearly 5% (since the first quarter of 2002) and around 1.5% (from the fourth quarter)."

IPE, OPEC prices In London, the June contract for North Sea Brent oil gained 7¢ to $24.33/bbl Thursday on the International Petroleum Exchange. The May natural gas contract lost 1.1¢ to $2.61/Mcf on IPE.

The average price for OPEC's basket of benchmark crudes plunged by $1.17 to $23.97/bbl Thursday.

Contact Sam Fletcher at samf@ogjonline.com

HoustonChronicle.com April 25, 2003, 3:59PM By DARRIN SCHLEGEL

RESOURCES • Graphic: Controlling the flowOPEC members sought to stabilize falling crude prices Thursday by announcing big production cuts while simultaneously -- and surprisingly -- upping output limits.

The move befuddled some analysts, but for one day, at least, it had its desired effect.

Crude prices dropped more than $1 after the agreement was reached in Vienna, Austria, but recovered and closed down only 1 cent.

Nevertheless, the decision didn't erase skepticism about whether the cartel of big oil producers curbed production enough to avert a supply glut.

"I think it's going to soften prices," Deutsche Bank energy analyst Jay Saunders said.

The Organization of the Petroleum Exporting Countries, which supplies a third of the world's oil, said it will monitor its decision and gauge its impact when it meets again June 11.

"We feel we may need another cut in June," OPEC President Abdullah bin Hamad Al-Attiyah told the Associated Press. "We will watch the market very carefully."

OPEC stepped up its production of crude when war in Iraq threatened to disrupt global supplies at a time when inventories were dangerously low. Supplies had been depleted by the near-cutoff of exports from Venezuela because of the general strike there.

Those shortages didn't happen, and the quick end to the fight left a surplus.

In addition, slow worldwide demand has caused prices to drop from nearly $40 a barrel in late February to the $26 range.

That is near the range that OPEC wants to keep prices, having said its stated goal is to remain in the midrange of $22 to $28 per barrel.

But because of the surplus production, which members feared could cause a further price drop, and the resumption of Iraqi oil exports possibly as soon as June, the cartel met in an emergency session Thursday.

The group emerged saying it would trim 2 million barrels per day from its average production estimate of 27.4 million barrels per day in February and March.

But observers weren't completely buying it.

For one thing, the size of the cut seemed inflated because most other estimates pegged its production at 26.2 million barrels per day.

Observers also noted that OPEC lifted output quotas by 900,000 barrels per day, to 25.4 million, in the agreement taking effect June 1.

"They are trying to create the impression that there is a cutback, but in effect it is a very, very small cutback," said Matthew Cordaro, director of the center for management analysis at Long Island University. "It keeps them ahead of the impact that increased Iraqi supplies would have down the line."

OPEC members on Thursday said they want Iraq to remain part of the 11-member group.

Iraq, which stopped exporting oil after U.S.-led forces invaded the country on March 19, was producing 2.5 million barrels per day in February.

Crude oil for June delivery fell 1 cent to $26.64 a barrel Thursday on the New York Mercantile Exchange, the lowest price since Nov. 26. Prices rebounded in the last half hour of trading after plunging as much as 3.9 percent to $25.61.

For now, consumers can expect gasoline prices to remain stable as the busy summer driving season begins, analysts said, meaning they won't rise much, but neither will they decline a lot.

In Houston, motorists are paying an average of $1.47 for a gallon of unleaded gasoline, down from $1.61 a month ago.

The gasoline price index from the Department of Energy predicts a slow decline in fuel prices through the summer as refiners catch up with crude declines.

Bruce Cavella, an oil industry analyst with economic consulting firm Global Insight, said gasoline prices could spike at times in May and June because inventories are lower than usual and demand is fairly robust.

Refiners, however, should be able to replenish stocks in time for peak demand, he said.

"That's important because later on this year it will enable prices to stabilize or be a little bit lower than where they are now," Cavella said.

Unleaded gasoline for May at the New York Mercantile Exchange settled up 3.12 cents at 87.93 cents a gallon.

"For now, it's business as usual, and the oil-consuming nations are benefiting from that," Cordaro said.

<a href=www.zwire.com>ASSOCIATED PRESS April 24, 2003

TALKING IT OVER: President of the OPEC conference and Minister of Energy and Industry Abdullah bin Hamad Al Attiyah from Qatar speaks during a press conference at the OPEC's headquarters in Vienna, on Thursday. (AP Photo) VIENNA, Austria (AP) - Hoping to stabilize weakening crude prices, OPEC members agreed Thursday to cut their current oil output by 2 million barrels a day, or 7 percent.

At the same time, the Organization of Petroleum Exporting Countries took the surprising step of temporarily raising its official output target to 25.4 million barrels, up 900,000 barrels a day from its existing ceiling.

The changes take effect June 1, OPEC President Abdullah bin Hamad Al-Attiyah said.

The group, whose 11 members pump about a third of the world's oil, announced its decision at a chaotic news conference at its headquarters that left some energy analysts bewildered.

The announcement followed three hours of emergency talks that aimed at preventing a further decline in prices. Crude prices have tumbled from almost $40 a barrel for U.S. crude before the Iraq war to about $25 in recent weeks. OPEC feared more declines if it didn't rein in what it saw as an oversupply just as crude demand reached a seasonal low.

The group based its production cut largely on what it said was sluggish global demand during the second quarter. The slowdown has been exacerbated by the outbreak of severe acute respiratory syndrome, which Al-Attiyah said has dampened crude demand by 300,000 barrels a day.

OPEC plans to review its decision when it meets again June 11 in Doha, Qatar.

"We feel we may need another cut in June," Al-Attiyah said, adding: "We will watch the market very carefully. We will see how the market reacts."

The market's initial reaction was to shave about a dollar off the price of a barrel of oil, as traders apparently concluded that OPEC was making more crude available than they had expected. June contracts of U.S. light, sweet crude fell as low as $25.61 a barrel in New York, but ended down 1 cent at $26.64 a barrel. North Sea Brent crude for June delivery settled up 4 cents at $24.30 a barrel in London.

Al-Attiyah argued that OPEC could not begin cutting production in May because member countries had already committed fixed quantities of oil to their customers.

"We cannot pull out of the market," he said.

Several OPEC members had boosted their production before the war, hoping to head off a supply shortage. The rapid end of the conflict has left them facing what they see as a surplus of 2 million barrels a day.

"It is important to reduce oversupply," Venezuela's oil minister Rafael Ramirez told reporters before the hastily arranged talks began. "We have to have more discipline, and it is important to take measures and remove that amount from the market."

If not, OPEC wouldn't be able to maintain its price target of $25 a barrel, he said.

Many energy analysts had expected OPEC to agree to curb production. In the end, the group took the unusual decision of slashing its actual production, which it calculated as 27.4 million barrels a day, including Iraq, while also raising the nominal ceiling for OPEC's 10 members excluding Iraq. OPEC's current target is 24.5 million barrels a day.

The decision means Saudi Arabia, OPEC's most powerful member, would reduce its production by 1 million barrels a day, Al-Attiyah said.

OPEC representatives called Thursday's meeting to reassess the group's output levels as oil began flowing again in Iraq for the first time since the war.

OPEC is ready to welcome Iraq back as a participating member, Al-Attiyah said. Iraq hasn't taken part in the group's production agreements since April 1991, after the first Gulf War.

"I hope Iraq comes back tomorrow," he said, adding later: "We will accommodate Iraq at the right time."

To keep control of oil production, OPEC will eventually need to reintegrate Iraq's future output into the group's overall production. This could be a divisive project that would probably require other members to reduce their own shares of OPEC's output.