economictimes.indiatimes.com PTI[ TUESDAY, MARCH 18, 2003 02:14:13 PM ]

NEW DELHI: A nine per cent increase in the domestic oil prices has been projected in the event of a war in Iraq and the Rs 8,116 crore oil subsidy budgeted for 2003-04 was not adequate enough to bridge the gap, an apex chamber has warned.

"The budgeted oil subsidy of Rs 8,116 crore in 2003-04 is inadequate to fully provide for the increase in the oil prices and a hike of nine per cent in domestic oil price is needed to cover the shortfall," Ficci President A C Muthiah said here last night.

In an interactive session with Forum of Financial Writers on 'Budget and Economic Reforms', he postulated two possible scenarios in the event of war in Iraq, saying the first one would be that war "will be quick and swift, ending in a matter of few days and resulting in moderate increase in the oil prices."

The reasoning for the short war, in Ficci's assessment, he said was that it was due to the vast difference in the military capabilities of the two countries (US and Iraq).

The other possibility of a prolonged war of over three months, which according to him was not a possibility, could push up the average oil prices to around $40 a barrel, thus making a "major negative impact on the Indian economy, especially industry."

The chamber also saw more business potential in Iraq even amidst human sorrows that could accompany after the war with possibility of reconstruction activities.

"What is seen as aftermath of the war is that I see a lot of scope for Indian steel, cement and construction industries and we must get prepared and be ready there," Muthiah said.

Even the Indian engineering industries would have large potential in Iraq, Muthiah said, adding there would be large-scale outsourcing.

Meanwhile, Ficci secretary general Amit Mitra equated the potential that would emerge from Iraq to a situation during the Second World War when the war stimulated demand in the economy internationally, especially in India after the Marshall Plan.

In the present case, Mitra, however, warned "this war does not have the inner dynamics of a large widespread demand pull effect."

However, he found a silverlining amidst the rising oil prices, saying the prices were bound to settle in the range of $23-25 per barrel as had happened during the previous Iraq war.

"Going by the past experience, one can say that increase in oil prices in the recent past, again fuelled by uncertainty, is to a large extent a reflection of the market discounting the war hysteria and assigning a war premium to the oil prices," Mitra said.

The other factors that had exacerbated the situation, according to Mitra, included continuing strike of oil workers in Venezuela and the less than favourable stance adopted by the Oil Producing and Exporting Countries (Opec).

Mitra also warned that even during the short war, the inflation, based on Wholesale Price Index, could go up by 4.5 per cent in 2003-04 as compared to the 3.6 per cent increase in 2002-03.

www.forbes.com Reuters, 03.17.03, 10:50 PM ET (Refiles to reformat)

SINGAPORE, March 18 (Reuters) - Oil prices fell sharply on Tuesday as U.S. President George W. Bush gave Iraqi leader Saddam Hussein 48 hours to leave Iraq or face an invasion.

Analysts said Bush's ultimatum, in a televised address to the American public, firmed up the timing of a possible attack and took away uncertainty in the market, which drove oil close to $40 a barrel in February, a level not seen since the Gulf War.

"Saddam Hussein and his sons must leave Iraq within 48 hours," Bush said. "Their failure to do so will result in military conflict, commenced at a time of our choosing."

U.S. light crude fell to a near six-week low at $33.80 a barrel, down $1.13 cents. London's Brent crude dropped 78 cents to $28.70 a barrel, the lowest level since early January.

"Bush has confirmed that the United States is 48 hours away from starting an invasion and that means that the end of uncertainty for the market is near. No market likes uncertainty," said David Thurtell at Commonwealth Bank in Sydney.

Expectations of a quick allied victory with little chance of major disruptions to crude supplies from other Middle East producers also helped cool oil prices, which gained 60 percent in just over three months from the beginning of December.

"The oil market is working on the basis there will be an overwhelming allied victory. The only surprise in the market is for that (victory) not to happen," said Sydney-based independent oil analyst Simon Games-Thomas.

Selling by speculative investors has driven crude down 10 percent in the last four trading days. Investors want to avoid being caught out by a sudden price slide if Middle East oil flows escape severe disruption.

In the first Gulf War, prices dropped from over $30 to barely $20 when the United States launched its January 1991 offensive as it became clear Iraq would not harm oilfields in Saudi Arabia, the world's biggest oil exporter.

The Middle East supplies about 40 percent of global crude exports.

Analysts warn, however, that the main risk to crude oil remains to the upside if Iraq should destroy its own oilfields or any war is difficult and drawn out.

IRAQI EXPORTS NEAR TO STANDSTILL

An invasion would almost certainly close Iraqi crude output for a period and its southern neighbour, Kuwait, may also be forced to halt pumping at some fields close to its borders with Iraq. Kuwait pumps roughly two million barrels daily.

Iraq's U.N. supervised oil exports, which until recently were running at about two million barrels per day, have already slowed to a trickle with traders unwilling to take a risk on uncertain supplies due to war fears.

U.N. officials said on Monday exports would come to a standstill when U.N. staff are pulled out of the country, which could happen as early as Tuesday.

The OPEC producers' cartel has pledged to meet any supply gap stemming from hostilities, but a prolonged outage of Iraqi or Kuwaiti crude would test the group's spare capacity to the limit.

The United States, the world's biggest oil guzzler, has made preparations to release strategic oil reserves to prevent any interruption to deliveries if needed, said Republican Rep. Billy Tauzin, who is also chairman of the U.S. House Energy and Commerce Committee.

Analysts said confidence had grown that it was unlikely there would be any major supply crunch in the second quarter, which sees a seasonal downturn in oil demand with the end of winter.

"OPEC has been storing crude for some months and there is a significant amount of OPEC crude already on the water heading to western ports. Venezuela production looks to be increasing," said Games-Thomas.

"It looks like there could be a surplus of crude in the short term, if there's no serious damage to oil facilities during the war," he said.

Production in OPEC-member Venezuela, whose oil exports were slashed by an anti-government strike since December 2, continued to recover with government officials putting output near to three million bpd. Rebel oil workers say output is closer to two million bpd.

www.yomiuri.co.jp

=== Use oil reserves wisely

There seems to be no end in sight to the upward trend in world oil prices. Oil futures in New York are hovering above the 35 dollars a barrel mark--the highest level since the Gulf crisis of 1990.

Unusually high oil prices are casting a dark pall on the world's economic outlook.

Both oil producing and consuming countries must strengthen their cooperative ties and do their utmost to stabilize crude oil prices.

At its general meeting last week, the Organization of Petroleum Exporting Countries decided to keep its production quota of 24.5 million barrels a day intact for the April-June quarter, a period of slackening demand.

OPEC also made clear it would implement an extraordinary production increase should the United States and other countries launch military strikes on Iraq and oil prices skyrocket.

In doing so, OPEC countries took the world economy into consideration, although its members failed to agree on temporarily lifting a production quota. Its response can be considered an adult one.

Various factors have conspired recently to jack up oil prices--the tense situation over Iraq, the general strike in Venezuela, and a cold snap in the Northern Hemisphere.

The New York market took the possible decline in the U.S. oil reserve due to the latest OPEC decision seriously and buy-orders prevailed.

=== Widespread economic impact

If crude oil prices keep rising, the U.S. economy will inevitably slow down as private consumption will slacken and businesses will see profits drop due to higher energy costs.

And a U.S. economic contraction will affect not only Japan and other Asian countries but also the oil producing countries.

It was during the Yom Kippur War in 1973 when OPEC launched an oil embargo and triggered the first oil crisis. In the 30 years that have since passed the oil supply-demand situation has changed markedly.

Back then, oil accounted for 74 percent of Japan's primary energy source supply. In fiscal 2001, it accounted for only 49 percent, thanks to the nation's efforts to become less dependent on oil, causing nuclear energy, which accounted for less than 1 percent 30 years ago, to now account for 13 percent of the annual energy supply.

Even if crude oil imports drop markedly, Japan today has oil reserves worth 171 days of net imports, when public- and private-sector reserves are combined.

=== Diversification

On the other hand, the nation's dependency on crude oil imports from the Middle East has risen to 88 percent from 78 percent.

There are also other concerns--not seen during the first oil crisis--that Asian economies such as China, South Korea and Thailand have rapidly increased crude oil imports, while lacking sufficient emergency oil reserves.

Japan's need to further diversify its oil import sources is emerging as a mid- and long-term issue, as it urges its neighbors to expand their oil reserves.

These efforts, however, will not help ease the current high oil prices. The only thing to do, for now, is hope Venezuela's oil production returns to normal, while Saudi Arabia, with its extra production capacity, increases its output.

Oil consuming countries, including Japan, must make effective use of their oil reserves.

It is also a matter of urgency that the nation's nuclear power plants, whose safety has been confirmed through inspections, resume operation.

www.japantoday.com Yasushi Azuma

Despite two oil crises in the 1970s and the 1991 Persian Gulf War, Japan has still not succeeded in alleviating its heavy dependence on the Middle East for its oil imports.

Among developed nations, Japan is one of the poorest in natural resources and imports 86% of its oil from the Middle East.

Following the two oil crises, Japan began trying to change its excessive dependence on the Middle East and succeeded in bringing its dependency ratio down to the 60% level in the 1980s.

But this returned to the 80% level in the 1990s after some countries, such as China and Indonesia which used to export substantial amounts of oil to Japan, became basically oil-importing countries, according to the Ministry of Economy, Trade and Industry (METI).

Oil prices have recently remained high — over $30 a barrel — due to the strikes in Venezuela and continuing tensions over Iraq, and many people fear they will rise even further if the United States and its allies start a war on Iraq.

But how seriously this would hit the world economy remains uncertain.

Tsutomu Toichi, managing director and chief executive economist of the Institute of Energy Economics, has warned of serious consequences if the war is prolonged, and oil fields and shipments in Saudi Arabia and Kuwait are affected by it.

"In such a case, the uncertainty over future oil supplies will grow and oil prices will rise further," Toichi said, adding it is important for Japan and other developed countries to release their oil reserves quickly to stabilize the markets.

"Many Asian countries including China do not have any oil reserves for emergencies. If these countries are hit by a surge in oil prices, Japan will also be indirectly affected," he said.

In order to lower Japan's dependence on the Middle East, METI is focusing on expanding oil imports from Russia through a pipeline from eastern Siberia to Nakhodka along the Sea of Japan.

METI recently sent Iwao Okamoto, director general of the Natural Resources and Energy Agency, to Moscow to lobby Russia to adopt the plan in line with Japan's request.

But there is speculation that Moscow will decide on a project in favor of China rather than Japan.

Russia's Interfax news agency reported last Thursday that the Russian Energy Ministry has decided on a compromise plan, calling for building the China-proposed route first and then adding a branch for supply to Japan.

If Russia adopts the Chinese plan, it will be a blow to METI's strategy of diversifying Japan's oil imports, as it is believed Japan would not be able to secure enough oil supplies under the plan.

Japanese oil companies themselves, meanwhile, have also begun to move to purchase oil from areas other than the Middle East as procurement costs from the region have risen recently.

Nippon Oil Corp., for example, has bought about 12.6 million barrels from regions other than the Middle East, such as West Africa and Russia, since November, and with prices at high levels, many oil-exporting countries are itching to sell to importers, including Japan.

Nevertheless, such moves are seen as only temporary measures to cope with the current Middle East crisis, since these companies believe that conditions for exporting oil from the region will return to being advantageous again, compared with other areas, once the present crisis comes under control.

The recent surge in crude oil prices has already affected Japan, with the cost of various oil-related products, including kerosene and propane gas, moving higher, according to the Oil Information Center.

The average retail price for kerosene rose by 6 yen to 825 yen per 18-liter can as of March 3 from the previous week, while that for propane gas climbed 6 yen to 5,881 yen per 10 cubic meters as of late February from a month earlier, the center said.

The Japanese government is trying to play down fears of a possible energy shortage in the event of a war.

Takeo Hiranuma, head of METI, said last Friday at a press conference, "Securing oil imports and supplies at stable prices will be possible unless the war is prolonged."

Hiranuma said Japan has 171 days worth of oil reserves and is ready to release the supply whenever necessary in accordance with member countries of the International Energy Agency.

If the military conflict ends swiftly, Japan may not suffer much economically.

Regardless of the duration of the war, however, Japan finds it necessary to step up its efforts to diversify oil imports and those of other energy sources to reduce the risks.

March 13, 2003

www.japantoday.com

www.interfax.com 11.03.2003 08:07:00 GMT  

Shanghai. (Interfax-China) - With the Chinese government continuing to encourage Chinese oil companies to "go overseas" in search of new reserves, the China National Offshore Oil Corporation (CNOOC) has announced to Interfax that it has acquired a stake in the Kashagan Field in the north Caspian Sea, off the coast of Kazakhstan.

CNOOC has entered into an agreement with BG International Ltd, a wholly-owned subsidiary of the BG Group, to buy a 8.33% stake in the North Caspian Sea Project, covering 5,600 sq km and including the discoveries at Kashagan, Kalamkas, Kairan and Aktote. The company will pay USD 615 mln for the purchase. Kashagan is thought to be the largest find in thirty years, and could contain as much as 13 bln recoverable barrels of oil. The consortium behind the project also includes ENI-Agip, ConocoPhillips, ExxonMobil, INPEX, Shell and TotalFinaElf.

In the attempt to address China's growing energy supply gap, the Chinese government have urged the large state-owned companies such as CNOOC, Sinopec and CNPC to buy stakes in oil and gas fields abroad. CNOOC already has interests in the Tangguh gas field, while CNPC is involved in projects in Venezuela, Sudan, Oman, Azerbaijan and Kazakhstan. Sinopec, meanwhile, has acquired stakes in fields in Nigeria, among others.