Melanie Sully Vienna 10 Mar 2003, 18:29 UTC

OPEC headquarters, ViennaMembers of the Organization of Petroleum Exporting Countries meeting Tuesday in Vienna are expected to work on contingency plans for how to respond to a war against Iraq.

The 11 members of OPEC are to consider suspending quotas and expanding production to compensate for any shortfall caused by military action against Iraq.

Saudi Arabia is already pumping above official production quotas, and says it has spare capacity if supplies are disrupted.

The United Arab Emirates said, however, that it would be difficult for OPEC to cover any oil shortage, since it is already producing at about full capacity.

The Indonesian delegation is opposed to any increase in production quotas.

Venezuela has not fully recovered from unrest that crippled its oil industry. And the loss of Iraq's crude exports would remove about two million barrels per day from the world market.

Analyst Helmut Pfeffer from the Raiffeisen Zentralbank in Vienna says that global production is already stretched.

"There are not too many countries that can deliver more than they are delivering now, neither OPEC countries nor non-OPEC countries," he said. "And one country that we've been relying on as a spare supplier is Russia. But its problem is of limited export capacity from its pipeline system. So there is not so much oil they can deliver, like pressing a button."

OPEC ministers agreed two months ago to increase production targets by 6.5 percent to 24.5 million barrels per day.

The cartel has a target price range of between $22-28 per barrel. But oil prices have soared to post-Gulf war record levels of almost $40 per barrel.

news.bbc.co.uk Andrew Walker BBC economics correspondent

Iraq supplies only 3% of the world's oil

As energy ministers and officials from the 11 member states of the oil producers' organisation OPEC gather in Vienna on Tuesday, uppermost in their minds will be the prospect of a war against one of their number - Iraq.

Many of them hope it won't happen, but if it does, the question for OPEC will be how to respond to the inevitable disruptions to the global oil market.

But the mere prospect of disruption to deliveries is already making its mark.

The current level of oil prices - at well over $30 a barrel - owes a great deal to the war talk.

Interrupted

The assumption in the markets is that at a minimum, if and when the fighting starts, Iraqi exports will cease completely for the duration, taking about 2 million barrels - about 2.5% of world daily consumption - straight off the market.

It's also likely that some production in neighbouring Kuwait would be stopped as a safety precaution - perhaps another 500-700,000 barrels a day, according to Julian Lee, a senior analyst at the Centre for Global Energy Studies in London.

On top of that come the fears that there might conceivably be missiles fired by the Iraqi military at oilfields in other Gulf states, or terrorist attacks on tankers in the Straits of Hormuz, the only shipping route out of the Gulf.

Most observers don't think it at all likely; but the risk can't be discounted altogether.

Keep pumping

But if some degree of disruption is a near-certainty, and wider disturbances at least worth planning for, what will OPEC do?

Mahathir says oil should once again be a weapon

The days of oil being used as a political weapon - as it was in the mid-1970s - seem to be well and truly gone, and attempts by Mahathir Mohammed, Prime Minister of small producer and non-Opec member Malaysia, to resuscitate the mood of the Oil Shocks foundered.

Just the opposite: officials from leading OPEC countries have repeatedly said they will respond to real shortages in supply, whatever the reason.

The current President of OPEC, Abdullah al Attiyah, who is also the Energy Minster of Qatar, said in a recent BBC interview that the organisation would try to keep supply and demand in balance.

OPEC countries have already this year boosted output in response to the problems of one of their own members - Venezuela, where production was severely affected by a strike.

And it seems likely they will do what they can to compensate for any disruptions caused by a war. Indeed some analysts, including Raad Alkadiri of the Washington consultants PFC Energy, say that OPEC members have already started.

Spike

Whether they can offset the losses fully is another question.

Much depends on Venezuela, whose production levels - if the government's version of events can be relied upon - should allow Opec to cope, says Julian Lee.

Assuming that disruption is limited to Iraq and part of Kuwait, the price of oil would probably spike upwards at the start of a conflict, perhaps to over $40, but would come down soon if an early US victory seemed assured.

But if the disruption is much wider and if Venezuelan output remains low, then Julian Lee says Opec could not fill the gap - and it would be hard to see an upper limit to prices.

Some observers have warned that a level as high as $80-100 is possible: a level similar in real terms to the highs of the early 1980s, reached in the wake of the Islamic Revolution in Iran and the start of the Iran/Iraq war.

The one voice of dissent has been Iran, whose Petroleum Minister Bijan Zanganeh has been reported as saying that Iran will back politically motivated decisions and that Opec should not adopt any policy that implies support for a US military assault against an Opec member state.

The picture is confused further by the Petroleum Minister of the United Arab Emirates, Obaid bin Saif al-Nasseri who is reported to have said that there is very little spare capacity.

Reserves

What OPEC won't do, though, is respond to price rises caused by what Mr al Attiyah calls speculation.

Opec sees problems keeping tanks full if war spreads

Even now, the price now includes an element called a war premium which reflects the possibility of supply disruptions and, according to Raad Alkadiri, is in the region of $5 a barrel.

The rich oil consuming countries have another safety net - government controlled reserves of crude oil, available for emergencies.

Julian Lee says they have around 1.2 billion barrels that they could use at 12 million a day for a month in the event of any disruption, which is almost as much as comes out of the entire Gulf region.

The economic stakes are high, however.

Oil prices were a key factor in the global recessions of 1975, 1981 and 1991.

2001 was also a very weak year for the global economy - some economists count it as a recession - and again oil prices were part of the story.

Already the prospect of a war has done economic damage through its effects on business and consumer confidence, on stock markets and the oil price.

Most economists think the crisis probably won't cause another world recession, as long as it ends reasonably quickly. But the risk, they warn, undoubtedly remains.

sg.biz.yahoo.com Tuesday March 11, 1:25 AM By Fred Pals Of DOW JONES NEWSWIRES

VIENNA (Dow Jones)--How much oil is Venezuela pumping? And how much spare capacity does it have?

OPEC ministers want to know, because the numbers could be essential in preparing any contingency plan for dealing with a supply disruption when the war in Iraq starts.

Delegates from the members states of the Organization of Petroleum Exporting Countries are, of course, hearing numbers.

Venezuela's Oil Minister Rafael Ramirez publicly says that output of state-owned Petroleos de Venezuela (E.PVZ), or PdVSA, is at 2.65 million barrels a day, and that Venezuela will reach its OPEC output target of 2.819 million b/d by the end of the month. In the event of an Iraq war, the country could push output to around 3.5 million b/d by sometime in April.

But given the crippling impact of the two-month oil strike on PdVSA, Ramirez's figures are hardly credible, some OPEC sources say. During the strike, PdVSA's production dropped to as low as 150,000 b/d from the usual level of 3 million b/d as key staff walked off their jobs. A total of around 35,000 workers abandoned offices and oil fields in an effort to force Venezuela's President Hugo Chavez to resign.

"It's hard to believe Venezuela got back to those levels that soon and that they will hit their OPEC target by the end of this month," one senior OPEC delegate said. "It is just too good to be true. We estimate it stands at around 1.5 million b/d and they may get to 2 million within a month or so."

Spare Capacity Key To OPEC War Response

Although OPEC ministers are expected to leave the formal output ceiling of 24.5 million b/d unchanged at their meeting here Tuesday, they are eager to deliver the message that they'll pump as much as is needed to cool sizzling world oil prices.

But among market watchers there are serious doubts over the amount of spare capacity OPEC can call on if Iraqi exports - in excess of 1.7 million b/d - go offline. And if the war drags on or escalates, further supply disruption in the region is likely.

Only Saudi Arabia is seen capable of adding significant oil, with a little more than 1 million b/d of spare capacity. But that would leave the OPEC kingpin producing at full throttle, and producers prefer to leave at least 10% of total capacity idle in order to continue maintenance operations.

For Venezuela's part, secondary sources see current production at 1.8 million b/d, while average production in March is seen at 1.7 million b/d. Output level over the month of February stood at around 1.5 million b/d and will reach 1.8 million b/d, according to the U.S. Energy Information Administration department. The International Energy Agency, or IEA, has estimated a permanent loss in potential output capacity of 400,000 b/d.

Most analysts agree Venezuela won't get back to its pre-strike level of 3 million b/d anytime soon because of the loss of human capital and the multibillion dollar loss in oil revenue.

"It's difficult to determine the exact production level, but I'm not buying production is over two million b/d given the impact the strike had on PdVSA," Jan Stuart, energy analyst at ABN AMRO in New York, said. "The only thing OPEC can do in this matter is just send out the message that they will do anything they can to ease prices."

Analysts say PdVSA will struggle to reach the 2 million b/d production level. After focusing on fields that don't require much added pressure to get the oil flowing, PdVSA will face difficulties as mature oil fields are more labor- and capital-intensive.

While it's not clear whether Ramirez holds up the 2.65 b/d production level in private bilaterals with his OPEC colleagues, Venezuela isn't likely to give its real and potential output levels as market share needs to be guaranteed, even if it is only on paper. During January's oil output agreement - in the midst of Venezuela's crisis - Ramirez and PdVSA president Ali Rodriguez fought hard to get an OPEC guarantee its market share would be respected.

Meanwhile, even though the current emphasis is on the possible lack of spare capacity among OPEC members in the case of a severe disruption, fears of a sharp drop in oil prices are also embedded in OPEC minds. And that could a create a different set of problems for Chavez.

By the time Venezuela comes close to its 2002 output level of 2.5 million b/d, the Iraqi war may be over and the joy of reaping additional oil revenue from high prices could be gone with it.

OPEC members might then be forced to rein in production to avoid a serious price crash - and that could leave Venezuela's fragile fiscal state of affairs even more vulnerable.

The economy is seen contracting by 15%-20% while the fiscal deficit is seen 8%-10% of gross domestic product. Venezuela's oil revenues account for half the government's income, 80% of exports and a third of GDP.

-By Fred Pals, Dow Jones Newswires; 0043-664-544-6846; fred.pals@dowjones.com

biz.yahoo.com Reuters Monday March 10, 4:33 pm ET

NEW YORK (Reuters) - World oil prices dipped on Monday as the United States and Britain struggled to convince wavering nations to back a United Nations resolution that would pave the way for war on Iraq.

Prices fell despite signs that the OPEC (News - Websites)oil producer cartel, which meets on Tuesday, was backing away from plans to suspend formal limits on oil production should the United States attack Iraq.

U.S. light crude (CLc1) slipped 51 cents to $37.27 a barrel, below its recent peak of $39.99. Oil prices set a record high of $41.15 a barrel during the 1990-91 Gulf crisis.

London benchmark Brent (LCOJ3) for April fell 35 cents to $33.69 a barrel, below a session high of $34.55, its highest level since November 2000.

Oil prices are up 20 percent this year on concerns that a war in Iraq could upset oil supplies from the Middle East.

A draft U.N. resolution proposed by the United States and Britain has set a deadline of March 17 for Iraq to satisfy all Security Council resolutions that it was cooperating fully with disarmament demands, or face war.

A vote could come as soon as Tuesday. The United States and Britain stepped up efforts to win support for the declaration while veto-wielding members France, Russia and China are opposed to military action.

U.S. officials said on Monday that Iraq appears to have placed explosives at the Kirkuk oil fields in northern Iraq to destroy them if a U.S. invasion occurred. An Iraqi oil ministry official later denied the claim.

MORE SERIOUS

The prospect of disruption of Middle East oil supplies in the event of war is all the more serious in that it follows a strike that has crippled Venezuela's oil industry.

The Venezuelan stoppage and strong heating demand due to a severe northern winter have helped to reduce stocks in the United States, the world's biggest oil consumer, to the lowest levels since the Arab oil embargo of the mid-1970s.

OPEC powers Saudi Arabia and Kuwait had hoped to find backing at a Tuesday meeting of the Organization of the Petroleum Exporting Countries to set aside production quotas if war prevented Iraqi deliveries.

Fellow OPEC member Iran condemned the plan. "Iran will not back politically motivated decisions," said Iranian Oil Minister Bijan Zanganeh. OPEC should not adopt any policy that implies support for a "U.S. military assault against one of OPEC's member states," he said.

Iran and others also fear a seasonal fall in demand in the second quarter could coincide with the end of a short war and send prices spiraling lower.

Saudi Arabia -- which holds the majority of OPEC's spare capacity -- is trying to convince the United States and other importers that OPEC can compensate for war stoppages without the need for a coordinated release from emergency stockpiles in consumer countries.

U.S. Energy Secretary Spencer Abraham said the United States was prepared to release crude from emergency reserves in the event of supply disruption, but a decision to release stocks would be made only in the event of a supply emergency.

Behind the scenes, Saudi Arabia has made clear that it is prepared to pump at maximum levels, with or without OPEC backing. Riyadh has lifted output sharply in recent weeks and is now pumping more than 9 million barrels daily of its 10.5 million bpd capacity.

sg.biz.yahoo.com Tuesday March 11, 12:00 AM

VIENNA (Dow Jones)--Venezuela is currently producing 2.65 million barrels a day of crude oil, and will be back at normal production levels by the end of the month, Oil Minister Rafael Ramirez said Monday.

Ramirez said Venezuela has the capacity to produce as much as 3.5 million b/d, though it will stick to its OPEC production quota of 2.82 million b/d.

Ramirez, who spoke to reporters ahead of a meeting of the Organization of Petroleum Exporting Countries here Tuesday, said Venezuela's refining capacity for gasoline and other refined products would be back to normal within 10 days.

Venezuela's oil industry was brought to a near standstill earlier this year because of a nationwide general strike.

-By Simeon Kerr, Dow Jones Newswires; simeon.kerr@dowjones.com