<a href=www.menafn.com>More Middle East Economic Survey - 24/03/2003

With favorable political and financial conditions, post-Saddam Iraq could become a supergiant oil producer, according to Fadhil Chalabi, Executive Director of London's Centre for Global Energy Studies (CGES). Speaking at the CGES seminar A New World Oil Market Structure: Developments in Iraq, Venezuela and US Oil Policies in London on 14 March, Dr Chalabi, a former OPEC Deputy Secretary-General and Under-Secretary of the Iraqi Ministry of Oil, said that Iraq's officially quoted oil reserves base of 112bn barrels would enable the country's production capacity to be built up over six to eight years to a total 8mn b/d. (For text, see D-Section) "However," he added, "there is lots of oil still to be discovered in Iraq. A recent CGES/Petrolog study says that yet-to-be-discovered reserves could amount to 200bn barrels, which would be in addition to the 112bn barrels of discovered oil. If we believe what the IEA, EIA and OPEC forecast for worldwide oil demand, this additional oil will be badly needed. According to these forecasts, the world will need by 2020 an additional 44mn b/d in the EIA's opinion, an extra 31mn b/d in the view of OPEC, and about 28mn b/d more in the IEA's reference case. This would be no problem for OPEC, so long as there was enough demand to absorb all the increases in supply that are possible from Iraq, Saudi Arabia, Nigeria, Russia and others." Proving up of the undiscovered resources would enable Iraqi production to be raised as high as 10mn b/d, he added. Assessing the potential impact of growing Iraqi production capacity on world oil markets typically requires a study of supply/demand forecasts. Dr Chalabi warned that these have generally been over-optimistic in the past: "What is better is to examine trends in the world oil industry and in politics. Over the last 10 years the rate of growth of oil demand has been 1.3% a year, but over the last five years this has fallen to 0.8% a year." He noted that IEA, EIA and OPEC long-term forecasts put anticipated oil demand growth at about 2.8% a year: "But these forecast growth rates cannot be sustained. The best that can be expected in the future is 0.8% a year." Among reasons for declining demand growth rates, Dr Chalabi listed environmental programs calling for energy conservation and reduced carbon dioxide emissions as well as investment in alternative energies, technological progress reducing consumption in transport and industry, increased taxation of oil products, the prospect for lower growth rates in the world economy and an increasing trend for industrialized countries to invest in less energy-intensive sectors such as services and hi-tech industry. "All these indicators," he said, "suggest that the world economy will grow at a lower rate than before, with the result that less oil is needed." Dr Chalabi warned that there were grounds for fears that conditions of weak demand and increasing supplies would make Iraq's potentially huge incremental capacity a negative factor for the oil market. Rapid development of Iraqi capacity could lead to lower oil prices and even an over-supply of oil, in which case OPEC would find itself unable to stabilize the market or control price movements: "To maintain the $25/B OPEC Basket target price in such conditions, either Iraq would not have to increase capacity or Saudi Arabia should not expand production, which it cannot do because of its financial constraints." OPEC's oil price policy has helped to shift investment from traditional low cost exploration and production areas such as the Middle East into high cost areas, he noted: "The amount of production outside OPEC and the FSU grew from 16mn b/d in 1974 to 31.7mn b/d in 2002, whereas OPEC production fell from a peak of 31.4mn b/d in 1974 to 25.2mn b/d in 2002." Dr Chalabi continued: "Lower prices resulting from additional Iraqi oil could help to create a shift in emphasis from high cost areas to low cost areas. But this would depend not only on prices but also on a restructuring of the Middle East industry. State ownership is also behind the shrinking of development in traditional areas to areas outside OPEC." One spur to Iraqi capacity growth could be increasing emphasis in government policies on oil supply security: "Since 11 September there have been growing concerns about supplies from the Middle East. Now Saudi Arabian oil is the pillar of the world market: 20% of total oil trades comprise Saudi Arabian exports, and production is more than 9mn b/d. If anything happened to Saudi oil, there would be great oil market disruption." Dr Chalabi said that Iraqi oil was important as the only alternative source of oil reserves of sufficient magnitude to compare with Saudi Arabia's, and that increased Iraqi production capacity could be seen as establishing a more stabilized and secure system of supplies. "The isolation of the Iraqi oil industry has led to shrinkage," Dr Chalabi said, "but allowing equity participation to international oil companies would help the reintegration. Without this, the numbers I have mentioned cannot be realized and the economic problems cannot be solved." He estimated that before capacity could be expanded, an investment of $5-6bn would be required to rehabilitate Iraq's war-damaged oil industry, with a lead time of at least two years. This would not be possible through the use of the government's already sparse finances. At the same time, the production sharing agreements negotiated with international oil companies during the mid-90s would not be conducive to expanding capacity, since the investors would not be entitled to equity oil and there would be a cap on returns. Dr Chalabi concluded that an ambitious program of capacity expansion would not be achieved easily in Iraq: "It would require political stability and the existence of a credible government, along with reforms to the oil industry with a view to higher rates of growth and contributing to solving the economic problems of Iraq. This can only be done if a new structure for the oil industry in Iraq is created. Iraq has politically always been against the presence of international oil companies, but in order to secure capital, good management and good market outlets, Iraq would have to allow the participation of foreign oil companies. Iraq would have to be realistic, and allow at least partial privatization." He recommended the creation of an independent Iraqi oil company, supervised by government but self-managed. Importantly, a 25-40% privatization through the sale of shares in stock markets would enable the Iraqi industry to be managed jointly by international companies and Iraqi nationals, some representing the government, giving Iraq a majority share in decision-making. This radical reform in the structure of the oil industry in Iraq would need a thorough study by experts in legal and financial affairs, and it could take time before clear-cut measures are taken, Dr Chalabi noted. He drew a parallel to the case of Statoil of Norway, which was first 100% owned by the Norwegian Government and is now 20% privatized, a share which could be increased in the future. He added: "It is also worth studying the case of the Russian oil industry after the collapse of communism and the conversion of the oil industry into the private sector. In fact, the present privatized Russian industry has achieved progress for expansion in the industry. However, this kind of radical reform may face particular resistance in Iraq, especially by the older generation, which may still be attracted by outdated concepts of oil nationalization."

<a href=www.gulf-news.com>Read on... Abu Dhabi |By A Staff Reporter | 24-03-2003 Print friendly format | Email to Friend

The U.S.-led war on Iraq could cost the global economy more than $1 trillion in indirect losses and Opec is set to reel under low oil prices once the war is over and Iraq returns to the market in full force, according to an official study.

Citing independent western estimates, the study by the Zayed Centre for Coordination and Follow-up said rebuilding costs in Iraq alone could exceed $120 billion while severe losses are expected to result from global stock market turbulence, a decline in the value of the U.S. dollar, a possible trade war between the U.S. and Europe and a sharp drop in global investment because of an expected surge in terrorist acts.

Once the war is over, Iraq could start pumping crude oil at maximum capacity after the removal of the UN sanctions and this will depress prices and consequently the income of Opec, the study said.

"Iraq's return to the market will be at the expense of other Opec members, mainly Saudi Arabia, Venezuela and other key producers as they have to cut output to give way to additional Iraqi supplies.

"Given the slow growth in demand because of the slackening global economy due to the Iraq war, prices will sharply decline and this will put further pressure on other members to cut output. A fresh price war among producers is not ruled out because the Opec might be forced to change its policy of defending prices to defending its market share."

<a href=www.upi.com>Source By Hil Anderson UPI Chief Energy Correspondent From the National Desk Published 3/23/2003 9:51 PM

LOS ANGELES, March 23 (UPI) -- A flare-up of simmering ethnic violence in Nigeria could soon replace the war in Iraq as the major cause of anxiety for oil traders, who return to work Monday after seeing world crude prices plummet at the end of last week.

ChevronTexaco said Sunday that it had joined the French oil major TotalFinaElf in evacuating personnel and shutting down some operations in the Niger Delta region of the African nation, which has become a leading supplier of crude to the United States.

"The safety of people is our absolute priority and is the reason for our decision to shut in production and relocate our people and community members displaced by the crisis to safe locations," said Jay Pryor, managing director of the Chevron Nigeria Ltd., subsidiary. "While we do not believe the unrest is directed toward CNL people or assets, we do not consider it safe for our people to remain in the Western Niger Delta, given the current situation."

The news from western Africa came after a wildly bearish week that saw front-month crude fall from dizzying heights of near $40 per barrel to Friday's $26.30 settlement price on the New York Mercantile Exchange.

Meanwhile, some price firming was seen on the Singapore exchange late Sunday as Asian traders apparently reacted to the weekend's sharper fighting in Iraq.

ChevronTexaco said it had shut down daily production capacity of 44,000 barrels of oil and 285 million cubic feet of natural gas as well as the Escravos tanker-loading terminal.

Nigeria, an OPEC member and the fifth-largest supplier of crude to the United States, has recently seen an upsurge in fighting among government troops and the two major ethnic groups in the delta region. That region accounts for much of the country's 2 million barrels per day of crude production. Nigeria also supplies oil to India as well as nations in Europe and Asia.

Both ChevronTexaco and TotalFinaElf have declared a "force majeure" for scheduled March deliveries of crude, which means the companies won't guarantee their contracted deliveries will be made on schedule. Such declarations often force oil traders to find replacement supplies on the volatile spot market, where buyers often find that the price is well above the going rate.

The trading period for April crude futures has already expired on the world's major commodities exchanges, although May prices could become more unpredictable as traders calculate the impact the lost Nigerian production will have on oil supplies in the industrialized world.

Crude markets soared in recent months after labor and political strife derailed Venezuela's state oil company, and the United States and Britain began gearing up for what last week became a full-scale invasion of Iraq.

Futures prices tumbled last week after traders decided that the war would be a relatively quick one with little disruption to oil exports from other Persian Gulf producers.

"There is no shortfall in oil production," OPEC Chairman Abdullah bin Hamad al-Atiyyah told an audience in Qatar Sunday.

"OPEC has the capacity to augment production to meet any scarcity in the markets."

According to a Qatari media report monitored by the British Broadcasting Corp., the chairman said that the 3 million bpd that had been lost due to cutbacks in Venezuela and Iraq had been restored, and the cartel saw no need for any immediate increases in production.

"This is a positive development since it has reduced the pressure on world markets and has created a surplus and thus achieved a significant reduction in prices," he added, without addressing the problems in Nigeria. "There is no reason for any anxiety. We do not draw our plans on the basis of fear and anxiety but on the basis of supply and demand in the markets."

Iraq's limited crude exports under the United Nations' oil-for-food program have been suspended, although it appears that Iraq will be able to get back into the market relatively quickly once the Anglo-American invasion comes to a close.

Previous fears that Baghdad would carry out a scorched-earth campaign in its oilfields were on the wane during the weekend after reports from the field found only a handful of wells in the south had actually been torched.

"We have in fact saved the southern oil fields for the Iraqi people, and that's a very good thing, and it was a big risk," Defense Secretary Donald Rumsfeld told NBC's "Meet the Press."

"There are only some 10 out of 500-plus oil wells that are still burning and we have people coming in tomorrow and the next day to repair them."

The BBC reported that a statement from the Baghdad government published in an Iraqi newspaper Sunday heatedly denied the Iraqis were torching their own oil facilities and said: "What is burning in that area is no more than artificial trenches filled with oil to be used as obvious methods of defense."

Iraqi forces were slowly being pushed out of the areas around Basra and Umm Qasar on Sunday, giving the allies virtual control over the region's oil infrastructure, harbors and a refinery with a capacity to process 140,000 bpd of crude.

Read more... Monday March 24, 11:12 AM Contact Us: Bombay 91 22 2288 4212-18, New Delhi 91 11 2307 4020; kindly email your feedback to DJN.IN@dowjones.com

0842 [Dow Jones] MSNBC TV quotes unnamed U.S. military officials as saying special operations teams and units of CIA are in Baghdad; officials hint recent explosions there (with no air raid sirens or indications of U.S. aircraft overhead) may have been work of Iraqi resistance groups, possibly working with U.S. forces. Unclear if this is just U.S. disinformation, but it may help sustain markets' hopes for quick U.S. victory. (AXT)

0838 [Dow Jones] U.S. officials say U.S. troops have found suspected "chemical factory" in south Iraq, but don't confirm whether it's actually believed to be chemical weapons facility as Fox TV reported earlier. If U.S. can prove Iraq had major WMD projects, it will greatly help to justify U.S. decision to go to war in court of world opinion, and reduce negative geopolitical fallout from war - so positive for USD and equities. (AXT)

0836 [Dow Jones] It became clear at weekend that one key war aim - securing Iraq's oilfields intact - has been mostly achieved. Key parts of southern fields and major export terminals on Gulf have been taken; northern fields not yet fully in U.S. hands but appear so far to have avoided damage; U.S. official said Saturday only 9 of Iraq's 500+ fields have been sabotaged. This removes one big fear of markets, even though fall of Baghdad may be days or weeks away. (AXT)

0834 [Dow Jones] WALL STREET: Stocks soared Friday, with DJIA going into positive territory for year on news of heavy bombardment of Baghdad; DJIA +2.8%, Nasdaq +1.3%, Philly semicon index +2.2% in heavy trade, with DJIA +8.4% for week, biggest weekly gain since October 1982. Players took cues too from reports suggesting Saddam Hussein may have been killed in initial air strike, though later reports cast doubt on this; airline, tourism stocks fared well with Southwest Airlines +7.3%, Walt Disney +9.3% on hopes a short war would ease concerns about tourism. Some analysts say this just relief rally, others though say gains have legs; "just as it wasn't smart to buy on the dips through the bear market, it's not wise to sell this rally," says one. EDS +12% after ousting CEO Thursday, Micron +11% despite 2Q loss as sales surged; but Intuit slid 24% on FY earnings warning. Intuit remained active after-hours, down another 1%.(RXM)

0830 [Dow Jones] OUTLOOK: 0900 RBI to release money market data for Saturday, Mumbai; 1000 Start of 2-day Gas Summit, organized by FICCI, Mumbai; 1200 RBI to announce results of 1-day repo and reverse repo auctions, Mumbai; 1200 Kotak Mahindra to hold media conference on its conversion to a bank, Mumbai;

Syngenta India to report FY02 results.(DJ Team)

<a href=www.thestar.com>Analysts cite falling production costs as attraction of Canadian oil sands Mar. 22, 2003. 10:23 AM RICK WESTHEAD BUSINESS REPORTER

Bitumen once was carried out of open-pit mines by conveyors but now huge trucks at Syncrude's North Mine carry it to upgraders, where it is refined into synthetic oil.

The U.S.-led war in Iraq might help accelerate Canada's oil- sands industry.

Oil analysts and executives say the conflict likely will ramp up decades-old U.S. efforts to become less reliant on fuel from the Persian Gulf, and more dependent on Canada, which is politically stable and has a vast supply of the substance used to produce synthetic oil.

"The U.S. is seen as the enemy by many Arab countries and though there was nothing good about 9/11, it crystallized the value of a safe supply source," said Eric Newell, chairman of Syncrude Ltd., the largest producer of oil from the oil sands. "The size of the field is just vast. It's comparable to Saudi Arabia."

Twenty years ago, oil companies such as Suncor Energy Inc. and Syncrude Canada Ltd. began extracting bitumen — a tar-like substance with the consistency of molasses — and processing it into synthetic oil. Now, the companies that own the projects blanketing much of northeast Alberta are poised to bolster profits, thanks to lower refining and exploration costs, assured delivery by pipelines and the declining conventional North American oil industry.

"If the U.S. wants Canada to produce more oil, it's going to come from bitumen," said Ray Cej, the former chairman of the World Petroleum Congress. "All the other areas are on the decline."

At least three-quarters of the known supplies of conventional oil in Western Canada already have been taken out of the ground, while about half the natural gas reserves have been siphoned. More than 90 per cent of the bitumen, however, is waiting to be extracted, said Brian Prokop, an oil analyst with Peters & Co. in Calgary.

Moreover, U.S. President George W. Bush failed this week to open Alaska's Arctic National Wildlife Refuge to oil drilling when the Senate quashed the proposal, a defeat that may spur U.S. interest in Canada's synthetic oil.

"Reliable sources from Canada remain an important element in U.S. energy security," said U.S. Senator Jeff Bingaman, the top Democrat on the Senate energy and natural resources committee. "As conventional reserves are depleted, synthetic crude will become an increasingly important source."

This year, oil companies in Alberta are expected to produce 1 million barrels of bitumen a day, up from 825,000 a year ago, according to a TD Securities report. Within five years, the output is expected to more than double to 2.3 million barrels, which would still need to be upgraded to synthetic oil before it could be transported to U.S. customers through pipelines. Currently, 1 million barrels of bitumen can be upgraded into about 860,000 barrels of synthetic oil.

There's no shortage of bitumen, which was once used by some Native Canadians to seal birch-bark canoes. Under current technologies, which include open-pit mining and the use of steam to extract bitumen from deeper mines, more than 300 billion barrels are expected to be recoverable, according to the Alberta Energy & Utilities Board. By comparison, Saudi Arabia's current proven conventional oil reserves are estimated to be 260 billion barrels.

For Canadian refiners to compete in Texas's oil belt, they'll need to extend the existing arbitrage point of their pipelines about 800 kilometres south to Cushing, Okla., from Wood Bridge, Ill., said Reed Williams, executive vice-president of refining and marketing with Frontier Oil Corp. in Houston.

"Their biggest obstacle is keeping prices competitive and getting their supply further south," said Williams, whose company in January started a five-year agreement to buy heavy oil from Baytex Energy Ltd.

The United States has been trying to wean itself from Persian Gulf oil since at least 1973, when former president Richard Nixon said the country would stop importing oil by 1980. In 1979, president Jimmy Carter renewed the pledge, vowing oil imports wouldn't rise.

Carter turned down the heat in the White House and wore a sweater to underscore his resolve.

No administration has been successful because they "don't have the political will to sustain the policy and say to customers, `you can't buy the cheap oil from the Gulf, you have to buy this more expensive stuff,'" said William Hogan, a Ford administration energy official who's now a professor at Harvard University's Kennedy School of Government.

Another challenge may rest in limiting the costs of production tied to Canada's ratification of the Kyoto Protocol on climate change, which allows government agencies to force oil and gas producers and car makers to lower pollution levels.

Already, Petro-Canada has said its $5.2 billion oil-sands development may be in jeopardy because of the treaty, and Koch Industries Inc., the second-largest private company in the United States, halted construction on a $3.3 billion oil-sands mine led by TrueNorth Energy, its Canadian unit.

But U.S. companies remain interested in Canadian suppliers because oil prices have been competitive and Canada is "as safe a supplier as you're going to find," said Williams of Frontier Oil.

U.S. investors now are turning their attention to Canadian oil- sands refiners.

Suncor, for instance, was featured twice on U.S. business cable television network CNBC last month, while Business Week and Forbes magazines have written company profiles recently. Time magazine is working on a story about the oil sands for an upcoming issue.

Production costs continue to fall said Darlene Crowell, a Suncor spokesperson who said the company has received about 80 calls from interested U.S. investors the past month, double the typical number.

While Suncor shares have fallen 14 per cent during the past year, they have climbed 32 per cent over the past three years.

The shares of other companies with interests in the oil sands have enjoyed similar gains over the last 36 months: Canadian Natural Resources Ltd. is up 21 per cent, Imperial Oil Ltd. rose 30 per cent and EnCana Corp. rose 19 per cent.

The S&P/TSX Energy Index has skyrocketed 49 per cent since 2000. During the same period, the broader S&P/TSX composite index has fallen 13 per cent.

To be sure, Canada isn't the only major source of fuel in the Western Hemisphere. A year ago, the United States, which imports about 60 per cent of the 19 million barrels it consumes daily, imported 23.5 per cent of its oil from the Persian Gulf, down from 27.8 per cent in 1977, as it turned to suppliers in Venezuela, Mexico and Brazil, as well as Canada.

In January, Canada exported an average 1.6 million barrels of crude oil per day into the United States, trailing only Saudi Arabia (1.8 million), according to the U.S. energy department.

The process of upgrading bitumen has been streamlined since 1920, when Alberta scientist Karl Clark first shovelled oil sand into his washing machine and mixed it with hot water and caustic soda, which allowed the bitumen to rise to the surface.

When the first bitumen mine opened in Alberta in 1967, large draglines, which were expensive to maintain, were used to scoop the oil sands on to conveyor belts that carried it to machines where the bitumen was separated from the sand using hot water.

Now, cheaper trucks and shovels are used in most open-pit mines. To reach deeper deposits, steam is injected into wells, making extraction possible.

For years, investors were skeptical about whether the developing the oil sands would be profitable because of the high costs of upgrading and refining. Syncrude's Newell said the industry has invested about $24 billion since 1996 alone.

"It's not an investment for the faint of heart," he said, "but it's one where we're fighting a lot of myths. It's actually become quite profitable."

While it cost more than $30 in the 1970s to refine each barrel of synthetic oil, it now costs about $13 and within the next three years, that cost might drop to $8 a barrel, said Real Doucet, senior vice-president of oil sands with Canadian Natural in Fort McMurray, Alberta.

"The technology is improving, making the oil sands more economical," said Doucet, whose company ships about 400,000 barrels of oil a day to the United States, of which 100,000 is synthetic crude.

One way Canadian Natural Resources and others cut costs is by re-using hot water. In older facilities, millions of gallons of hot water were returned to ponds after being used to separate bitumen from sand. Now, most of that hot water is kept in the refinery, eliminating the need to re-heat it.

Oil closed yesterday at $26.91 (U.S.) a barrel in New York and prices are expected to remain above $20 (U.S.) for at least the next decade.

Even though they may dip if the U.S. topples Saddam Hussein's government, the oil-sands business probably will turn a profit as long as prices don't fall below $17 (U.S.) a barrel, Prokop said.

That's unlikely to happen, Canadian oil executives said, because energy supplies are much lower than they were after the first Gulf War, thanks in part to oil workers striking in Venezuela, and production cuts in Nigeria, another large producer.