The Moscow Times Thursday, Apr. 24, 2003. Page 8 By Christopher Weafer To Our Readers

OPEC member countries meet on Thursday with a view to reducing the current high production levels that, if allowed to persist, threaten a sharp fall in the oil price over the summer months.

On the face of it, it's easy to simply agree to stop cheating on official production quotas to restore supply-demand equilibrium to the market. However, as always with the oil market, it is not that simple and any decision will be based more on political considerations than on economics. At stake is OPEC's future relationship with its major customers (particularly the United States), the balance of power within OPEC itself and the possible reintegration of Iraq into the quota system. In all likelihood, the member countries will issue a vaguely worded statement of intent to comply with the existing quota regime but with a "get out clause" based, for example, on a need for supply to reflect changing demand.

For Russia, the stakes are equally high. Russia has lived very handsomely on the back of OPEC for the past four years, earning some $70 billion more in oil and gas exports than it did in the previous four-year period. If the OPEC-centered price and control structure remains in place, by 2010 Russia's combined corporate cash flows and budget revenues will probably be close to $100 billion annually -- assuming that planned production growth and pipeline capacity increases take place.

However, the time is fast approaching when Russia's "free ride" may come to an end and -- at a minimum -- Russia may have to choose between lending political support to the OPEC structure, which will help ensure a high level of future export revenues, or to side with the consumer countries in exchange for broader economic benefits elsewhere.

OPEC countries are currently supplying about 3 million barrels per day (bpd) in excess of underlying demand. That was a deliberate decision forced by the Saudi-led moderate faction in order to keep the market well-supplied in case of a major supply disruption due to war -- which could have caused a sharp upward price spike with the attendant risk of a political backlash from the United States and EU.

The fact that there has been no such disruption and that U.S. army engineers are now pushing very hard to restore Iraqi exports places OPEC at a critical crossroads. Add to that the fact that last year's surplus production went into building global strategic supplies to historic highs and Thursday's meeting has all the ingredients of being a historic turning point for OPEC.

If member countries cut current production too aggressively, then the oil price will stay above the targeted price average and this will force the United States to accelerate the rehabilitation and extension of Iraqi production while probably keeping Iraq outside the quota system. That could result, in two to four years, in the destruction of OPEC's central role in the global oil market. On the other hand, keeping the present level of over-production in place would suit the consumer countries but could expose the fragile political unity within OPEC and ultimately set it on a course either for radical change or self-destruction. This is especially so given that most OPEC countries are predominantly Islamic and right now none of those regimes wants to risk criticism for being openly too pro-Western.

While member countries clearly have a huge incentive to avoid risking either potentially destructive event, it is by no means certain that they will be able to.

Total world demand for crude oil is 78 million bpd. But, the important number is the residual demand, i.e. the amount of extra oil that net consumer countries require from net exporters. Right now it is 36 million bpd with the biggest residual demand coming from the United States (11.8 million barrels), the EU (8.6 million), Japan (6 million), South East Asia (5.2 million) and China (2 million). OPEC countries supply 75 percent of the total, while Russia supplies 11 percent (or 4 million bpd).

However, if normal oil demand growth resumes, then by 2010 this residual demand will have increased to 70 million bpd (partly due to an expected decline in North American and North Sea production rates) and even if Russia is exporting 7 million bpd by then, OPEC countries will see demand for their oil rise to about 50 million bpd. That will allow OPEC a significantly more powerful position than it occupies even today. And that is the main reason why OPEC must now tread very carefully. Its next moves could be the most decisive in determining whether it survives and if so in what form.

When you cut away all the hype, OPEC, an illegal cartel, owes its existence to the fact that it has in the past been a reliable partner to Western energy consuming countries. Despite the normal price volatility -- mainly influenced by the level of cheating by the more aggressive smaller OPEC countries -- OPEC has been able to guarantee stability of oil supplies within the framework of an agreed long-term average oil price. Both certainty of supply and price are critically important for Western economies that generally remain very vulnerable to both the availability and price of energy.

If the United States decides that OPEC is either no longer willing or able to continue its role as guarantor of supply at a reasonable price, then it now finds itself with the perfect weapon with which to ensure the destruction of the cartel: Iraq. Iraq's current reserve base, which is certainly underestimated due to the lack of modern exploration equipment in the past 20 years, could easily support production of about 6 million bpd. All it would require is cash and know how, both of which the United States has in abundance.

Anybody who thinks that developments will have to wait for UN permission and other legal niceties has only to look at what a determined United States can and has done recently when its national interests are at stake.

Iraqi oil could be a very significant part of the world supply within two or three years if the moderate OPEC countries, such as Saudi Arabia, bow to the pressure from smaller producers including Nigeria, Algeria and Venezuela to slash production now. That would send a clear signal to Washington that the reliable cooperation that has lasted for the past 20 years is now over.

If, on the other hand, Saudi Arabia refuses to bend to the wishes of the more aggressive members and keeps the pumps open (something that will become clear over the summer), the internal pressure, which is already quite high due to a growing quota allocation dispute, could become uncontainable.

Over the past four years, OPEC countries have earned about $1 trillion from supplying global residual demand. That is $300 billion more than they earned in the previous four years. This represents a very significant transfer of capital from Western economies to OPEC producers and is hardly a trend that the United States, EU or Asian economies -- all of which are in need of growth stimuli -- will be happy to see continue, never mind be extended. By 2010, that annual capital transfer could be $550 billion, not a sum that U.S. legislators, who will determine the immediate course of developments in Iraq, will be happy to contemplate going into predominantly Islamic countries.

Normally Russia attends OPEC meetings as a detached observer -- this time, however, the stakes are much higher.

Christopher Weafer, chief strategist at Alfa Bank, contributed this comment to The Moscow Times.

<a href=www.voanews.com>VOANews.com Melanie Sully Vienna 23 Apr 2003, 17:08 UTC

OPEC headquarters, ViennaThe Organization of Petroleum Exporting Countries is holding a special meeting intended to prevent a surprise crash in global oil prices. Also being discussed is who, if anyone, will represent Iraq at the session.

OPEC ministers meet in Vienna on Thursday to decide how best to react to what one source called a dangerous fall in prices on the world market. OPEC's announced aim is to stabilize prices at around $25 per barrel.

Ehsan Ul-Haq, an analyst for PVM Oil Associates in Vienna, says the cartel is considering a cut in production to 24.5 million barrels per day. "But as always it will be Saudi Arabia that will be acting as a swing producer," he said. "They produced more in the past few months; firstly because of problems in Venezuela and then after because of problems in Nigeria and in Iraq and they have been producing more than nine million barrels per day."

Saudi Arabia is being urged by countries such as Indonesia to stick to agreed production limits.

Another problem facing OPEC is how to reintegrate Iraq without destabilizing the market. Iraq is a founding member of the oil cartel, but has been excluded from OPEC's quota export system for the past 11 years because of U.N.-imposed sanctions.

On the eve of OPEC's Thursday session, there still was no indication as to who, if anyone, would attend as Baghdad's representative.

OPEC sources said an invitation to attend the meeting in an observer capacity had gone out to the Iraqi embassy in Vienna. The head of the embassy had attended the last two OPEC meetings.

Meanwhile in Iraq, oil began flowing through that nation's pipelines for the first time since the start of the war. U.S.-led engineers started the flow at a storage facility outside the southern city of Basra.

But hundreds of wells across Iraq remain inactive and could take weeks or even months to come back online.

Time is becoming important. Analysts say Iraq needs to resume oil production to pay for reconstruction costs that could run into billions of dollars.

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

HOUSTON, Apr. 23 -- Energy futures prices tumbled in profit taking Tuesday, ahead of a meeting Thursday of the Organization of Petroleum Exporting Countries at which oil ministers are expected to agree to reduce overproduction by at least 1.5 million b/d, with Saudi Arabia and Kuwait absorbing the bulk of any rollback.

"We expect the outcome of the meeting to be both a reaffirmation of the current 24.5 million b/d quota over the coming months, as well as a renewed commitment to OPEC's price band of $22-28/bbl," said Matthew Warburton, UBS Warburg LLC, New York in a Wednesday report.

"While global inventories could accommodate a less substantial reduction in OPEC volumes given their current low levels, especially in the US, we believe OPEC will undertake a measured reduction in supply of 1.5 million b/d over the next 2-3 months," Warburton said. "Such action...would overcome inherent market skepticism surrounding any reduction in (official) output when (actual) production exceeds quotas and also signal its determination to defend oil prices within its price band."

He said, "Over the last 4 years, the market has continually underestimated the cartel's determination to manage its production to adhere to the OPEC price band of $22-28/bbl (or $24-30/bbl for US benchmark West Texas Intermediate crude), and we believe that to do so now would also be a mistake."

Saudis store production

In March, the 10 active OPEC members, excluding Iraq, produced an estimated 2.5 million b/d above their cumulative quota of 24.5 million b/d.

However, Warburton said, recent tanker tracking data triggered "material downward revisions" in the amount of oil that Saudi Arabia was thought to supply to world markets. "While overall Saudi production had increased to 9.2-9.5 million b/d," he said, "the increased volumes have not been exported but rather produced into domestic storage. Based on the difference of up to 750,000 b/d between production estimates and Saudi supply into world markets, this would imply volumes of 12-24 million bbl have been placed into domestic Saudi storage in March."

By increasing production in conjunction with the US-led invasion of Iraq, the Saudis reassured world markets that they could make up any supply shortages and forestalled the need for US officials to release oil supplies from the Strategic Petroleum Reserve. But by storing that oil in Saudi Arabia instead of shipping it, the Saudis also negated a major increase in tanker rates and avoided paying third-party storage costs, said Warburton.

Iraq's role undecided

Meanwhile, US officials reported Tuesday that US and Iraqi engineers worked together to resume production from 4 wells back in southern Iraq. Other US and Iraqi workers may bring some northern wells back on stream later this week.

The timing for recovery of Iraq's oil production is among the uncertain "supply-side issues" that OPEC ministers are likely to discuss Thursday, said Warburton. "Even though initial supplies (of Iraqi oil) to world markets could be made rapidly available from storage in Ceyhan, Turkey, uncertainties over the legal framework of any such sales or additional production volumes in excess of (Iraq's) internal requirements of 500,000 b/d are likely to complicate OPEC's decision-making at this week's meeting," he said.

Meanwhile, United Nations Sec. Gen. Kofi Annan is agitating for the UN to have a bigger role in rebuilding Iraq, and France is calling for an end of all UN sanctions against that country, including the UN-administered oil-for-aid program.

Venezuela still a factor

Despite repeated claims by Venezuelan government officials that the country's oil production has recovered to November levels after the recent 63-day general strike in that country, Venezuela's current production is estimated at 2.5 million b/d, down from its OPEC quota of 2.82 million b/d.

With refineries in Venezuela resuming operations "primarily to satisfy export opportunities to the US as the driving season commences," said Warburton, "external availability of Venezuelan crude is likely to remain static or even decline temporarily in coming months."

Other OPEC members may be sympathetic to Venezuela's loss of revenue during the long strike, but they're not likely to grant Venezuela's request to set aside its production quota while it makes up that loss, Warburton said. OPEC also is unlikely to grant requests from Algeria and Nigeria for increase in their production quotas.

Unrest in Nigeria

Although recent elections in Nigeria proceeded with less turmoil than some anticipated, Shell Nigeria Exploration & Production Co. Ltd. still is prevented from restarting some 300,000 b/d of oil production previously shut in because of violence, Warburton reported Wednesday. He said Chevron Nigeria Ltd. appears to have restored most of its production previously disrupted in the Warri area of the Niger Delta.

"Given allegations over recent election irregularities, we believe it is conceivable that further civil unrest may emerge once the election process has been completed and the results announced, resulting in further erratic availability," Warburton warned. Delays in production recovery in Iraq, Venezuela, and Nigeria at the same time that other OPEC members are reducing their current overproduction "could further aggravate the already tight global inventory situation and take effect just at the time that OPEC should be increasing production (later this year) ahead of the seasonal uplift in winter demand," he said.

Market prices

The expiring May contract for benchmark US light, sweet crudes fell 96¢ to $29.91/bbl Tuesday on the New York Mercantile Exchange, while the June position lost 84¢ to $27.99/bbl. Unleaded gasoline for May delivery plunged 3.24¢ to 87.74¢/gal. Heating oil for the same month dropped 2.22¢ to 77.86¢/gal.

The May natural gas contract declined by 6.8¢ to $5.65/Mcf on NYMEX. "Although the market retreated, some analysts see bullish signals in the market that point away from the downward trend," Enerfax Daily reported Wednesday. "A cold spell in the Northeast has already started to drive prices higher there. And while cool midweek forecasts have helped support the cash this week, physical prices are still 10¢ under the futures, a factor that could weigh on futures as the May expiration approaches."

In London, the June contract for North Sea Brent oil dropped 42¢ to $25.46/bbl on the International Petroleum Exchange. The May natural gas contract dipped by 2.1¢ to the equivalent of $2.60/Mcf on IPE.

The average price for OPEC's basket of seven benchmark crudes slipped 40¢ to $26.24/bbl Tuesday.

Contact Sam Fletcher at samf@ogjonline.com

By Myra P. Saefong, <a href=cbs.marketwatch.com>CBS.MarketWatch.com Last Update: 10:44 AM ET April 23, 2003

VIENNA (CBS.MW) -- The Organization of Petroleum Exporting Countries is expected to vote on a production cut at its meeting this Thursday, but whether it's a cut in actual production or output quotas remains in question.

"The upcoming OPEC meeting is very tough to call because there are so many unknown variables at this time," said Todd Hultman, president of Dailyfutures.com, a commodity information provider.

OPEC's decision on production, if any, will largely weigh on what it believes will happen with Iraq's oil and that's a pretty risky bet. See Due Diligence on Iraqi oil.

U.S. Central Command has said Iraq's southern oil fields could be pumping 800,000 barrels per day in five to eight weeks, while the northern fields could be at 800,000 barrels per day within one to five weeks. Iraq produced around 2.5 million barrels per day and exported around 2 million barrels per day under sanctions imposed by the United Nations after the 1991 Gulf War.

But some analysts have disputed estimates that Iraqi production could be back online in a matter of weeks. See related story.

Either way, OPEC officials can't afford to ignore the potential oil flow from Iraq, whose proven crude-oil reserves stand at some 112 billion barrels -- second to only Saudi Arabia's 263 billion barrels in proven oil reserves.

"Iraq eventually will have a good influence with OPEC," said Jeff Mokychic, head analyst at Bridgeton Global Investor Services, noting that several OPEC officials have emphasized the need for Iraq to remain a member of the cartel.

That of course begs the question of who will be recognized as the legal representative for Iraq.

Venezuela and Nigeria factor in

And if OPEC's plate wasn't already full enough, it's still working to balance supply and demand in the face of reduced production from Venezuela and Nigeria as the result of political strife.

OPEC President Abdullah bin Hamad al-Attiyah has said the market is oversupplied by around 2 million barrels per day.

OPEC believes part of that glut comes from "the return of much of Venezuela's production on top of the increases in Saudi production," said Thorsten Fischer, an oil economist at Economy.com.

Additionally, Nigerian production, which had been cut by as much as 800,000 barrels a day from 2.2 million barrels at the height of the nation's civil war, is now down by around 300,000 barrels with many oil companies resuming operations.

Remember too, that OPEC members are "notorious for cheating," said Kevin Kerr, a financial analyst at Weiss Research. "Nigeria and Venezuela will be likely to continue to pump oil at full force to catch up with losses due to their respective problems over the last few months, he said.

Taking a guess

Given all the issues OPEC has to deal with, analysts can only guess at what the cartel will do on Thursday.

Economy.com's Fischer expects members to agree to "realign quotas and actual production."

But with Iraq's production coming on quickly and the Energy Department reporting that crude inventories rose 9 million barrels last week, Dailyfutures.com's Hultman predicts OPEC will agree to a 2 million-barrel cut in its official quota of 24.5 million barrels per day, excluding Iraq. See Futures Movers for more.

"You can be sure that their full attention will be on the OPEC basket price in the days ahead and that they will respond quickly with more cuts if crude prices fall near the $22 per barrel lower limit of the target range," he said.

Joshua Sadler, vice president at the energy trading desk at Societe Generale in New York also expects "OPEC to announce its intention to reign in overproduction, currently running about 2 million barrels per day, but not to agree to the quota cut which Iran is advocating."

He warned, however, that investors expecting decisive action at the meeting will likely be disappointed, "triggering a collapse in confidence and prices." Myra P. Saefong is a reporter for CBS.MarketWatch.com in San Francisco.

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April 23, 2003, 8:34AM HoustonChronicle-Associated Press

VIENNA, Austria -- OPEC members must rein in their excess crude production and adhere to agreed output quotas as a first step in tackling the problem of global oversupply, one of the group's oil ministers said today.

Representatives of the Organization of Petroleum Exporting Countries are gathering in Vienna, Austria, for an emergency meeting Thursday to reassess oil production levels in the wake of the war in Iraq. The cartel's president has argued that producers are pumping 2 million barrels a day more than the world needs, and many analysts expect OPEC to agree to cut production.

"I cannot say 2 million or more or less, but obviously there is oversupply in the market," the United Arab Emirates' oil minister, Obaid Al-Nasseri, told reporters at a downtown hotel.

To forestall a potential oil shortage, many OPEC members ramped up their production before the outbreak of fighting in Iraq. Market nervousness triggered a steady rise in crude prices before the war, and producers were able to pocket handsome profits even as they earned plaudits from the United States and other major importers for their efforts to keep supplies flowing.

Now that the war has ended, OPEC, which provides a third of the world's oil, worries that the world is awash in crude just as seasonal demand ebbs to its lowest point. Prices have tumbled, and some group members fear prices may fall further unless they try harder to comply with OPEC's official output target of 24.5 million barrels a day.

The group pumped an average of 26.2 million barrels in March, according to estimates compiled by investment bank J.P. Morgan.

"I think we have to tackle first the compliance," Al-Nasseri said. "Then we shall see if there is a need to cut" the output target itself.

Saudi Arabia's oil minister, Ali Naimi, said one of the factors he and his colleagues would be studying is the impact that severe acute respiratory syndrome, or SARS, is having on oil demand.

"I know that SARS is affecting demand. It's having an effect on everything," he told reporters, referring to the cancellation of airline flights in Asia.

Jet fuel accounts for 8-10 percent of global crude demand.

Nigeria's presidential adviser on petroleum and energy, Rilwanu Lukman, said Tuesday in London he expected OPEC to cut production by 1 million to 1.5 million barrels a day. OPEC President Abdullah bin Hamad Al-Attiyah also has spoken in recent weeks of an oversupply of 2 million barrels a day.

However, some analysts see no need for cuts of this size. Crude inventories in importing countries remain low, and refiners want to build up stocks to more comfortable levels before gasoline demand peaks during the peak summer driving season.

"The cuts in production don't have to be anywhere near as drastic as some of the doomsayers were saying only a few weeks ago," said Raad Alkadiri of The Petroleum Finance Co., a consulting firm based in Washington.

Although demand for oil usually falls in the second quarter, Nigeria and Venezuela are still struggling to restore production after social unrest and a general strike, respectively, disrupted their output.

Whatever OPEC decides to do, it must factor in the eventual resumption of crude exports from Iraq and decide how to reintegrate Iraq into the group's quota system. Iraq is a founding member of OPEC but has not participated in its production agreements since the 1991 Gulf War and the United Nations' subsequent imposition of controls on Iraqi exports.

Analysts and U.S. military planners say Iraq is still at least several weeks away from resuming overseas crude shipments. If OPEC wants to limit overall oil production, it will need to somehow accommodate Iraq's future output.

Al-Nasseri offered no hint of the possible timing.

"Let's wait and see," he said. "Iraq has a long time to go, and we have to wait until the situation is settled there."

Oil futures were trading lower Wednesday, with contracts of U.S. light, sweet crude for June delivery down 22 cents a barrel at $27.77 in electronic trading in New York. U.S. crude futures jumped as high as $39.99 on Feb. 27, before hostilities began in Iraq.

June contracts of North Sea Brent crude were off 20 cents a barrel at $25.26 in London.