JANUARY 20, 2003 INTERNATIONAL OUTLOOK www.businessweek.com

For the past three years, OPEC has done a remarkable job of managing output to keep oil prices around $25 per barrel, which the cartel thinks is the right price to bring in plenty of revenue without killing off world growth. OPEC's key player, Saudi Petroleum & Minerals Minister Ali Al Naimi, has deftly cracked the whip to keep the cartel's motley crew of developing countries in line.

But Naimi thinks the latest spike to about $30 per barrel--prompted by an oil workers strike in Venezuela--is too much of a good thing. The Saudis are now calling for production increases of up to 2 million barrels per day to make up for lost Venezuelan crude and cool prices before they damage the world economy. "We start worrying whenever we see prices go above $30 per barrel," says a gulf OPEC delegate. The cartel will meet on Jan. 12 to discuss output.

Despite the current concern over prices, crises such as the Venezuela debacle and the U.S. standoff with Iraq have generally worked to OPEC's benefit of late, firming up otherwise soft markets. But OPEC's run of good fortune may be about to end. Political and economic forces are building that could put downward pressure on prices. Although analysts say prices could soar to over $40 per barrel if production in Venezuela, Iraq, and some other gulf states is hit at the same time, they could eventually swing back to $15. The policy of post-Saddam Iraq, Russia's ambitions, and fissures between gulf Arabs and OPEC's poorer members would all play a role. "These combined pressures make OPEC's current price-defense policy appear untenable," says Raad Alkadiri, an analyst at PFC Energy in Washington.

Take the case of Nigeria and Algeria--both with rickety regimes and growing economic problems that could strain the cartel. To raise revenue, their governments have struck agreements with Western companies that will lead to an additional 1.5 million bbl. in capacity--a 70% increase over their current quotas. Both are pushing OPEC to boost their production ceilings, which could lead to a clash with the Saudis.

Venezuela, meanwhile, could also turn into an OPEC renegade. The government is losing billions of dollars in the oil workers' strike, aimed at toppling President Hugo Chavez. Either he or a new regime, if he is ousted, may want to produce flat-out once the strike is over. Finally, output from non-OPEC producers such as Russia, Kazakhstan, and various West African countries is likely to grow by 1 million bbl.-per-day annually for the next few years, says PFC Energy. That's almost as high as expected growth in world demand.

But the wild card is Iraq. Saddam's pariah status has helped OPEC's unity by preventing the development of Iraq's oil resources, second only to Saudi Arabia's. Few analysts, though, believe a new regime in need of funds will stick to Iraq's 3 million bbl.-per-day OPEC quota. "Iraq will go ahead in expanding capacity and production irrespective of OPEC," says Fadhil Chalabi, a former Iraqi oil official who is now executive director of London's Center for Global Energy Studies.

The Saudis are watching developments closely. Analysts think Naimi, along with his counterparts in Kuwait and the United Arab Emirates, may open the taps to punish Russia and other producers encroaching on the Saudi market share. Such a move could come when the U.N. lifts sanctions on Iraq. "If there is a price war, it will not stay for more than a year," says the gulf OPEC official. "The marginal fields will disappear, and investment in new fields will go down sharply." One way or another, OPEC is entering a tumultuous phase.

By Stanley Reed in London

ogj.pennnet.com By OGJ editors

WASHINGTON, DC, Jan. 10 -- Depending on the path of world oil prices, imports may supply 65-70% of total US petroleum demand by 2025, up from 55% in 2001, the Energy Information Administration said Thursday.

The agency noted that world oil prices are influenced by many factors, including the ability of members of the Organization of Petroleum Exporting Countries to control their own oil production. Other considerations include economic growth rates among countries and the economic viability of alternative energy sources such as natural gas-to-liquids and oil sands.

By 2025, world oil prices (adjusted to 2001 values) could be $19-33/bbl, a range leading to variations in US dependence on oil imports, EIA said. The agency's predictions were part of its annual snapshot of long-term energy trends.

Consumption Total US energy consumption could vary significantly, depending on the rate of economic growth. EIA projects that the US Gross Domestic Product (GDP) could grow 2.5-3.5%/year during 2001-25. By 2025, energy consumption may be 129-149 quadrillion btu, EIA said. Even with that growth, EIA forecasts that the US will continue to use energy more efficiently.

"This will help to hold the rate of growth in consumption to about 50% of the rate of growth in economic output," EIA officials said.

Gas picture Continued growth in natural gas demand and depletion of conventional natural gas resources in the lower 48 states will mean that future natural gas supplies would likely come from both new domestic and foreign supplies, EIA said. These projects include the Alaskan natural gas pipeline, the Mackenzie Delta pipeline in Canada, and new LNG facilities, both domestic and outside the country, to serve US markets (e.g., Baja California, Mexico or the Bahamas).

EIA assumes that the Alaskan natural gas pipeline will come online in 2021 (excluding consideration of any potential loan guarantees by the federal government that accelerates construction), and that the Mackenzie Delta pipeline will be operational in 2016. Total LNG imports are projected to grow to 1.6 tcf by 2020 and 2.3 tcf by 2025, with facilities online in the Gulf of Mexico region, serving Florida (via the Bahamas), and California (via Baja California, Mexico).

But EIA stressed that the timing and demand for these supplies vary, depending on the rate of technological improvement. If drilling costs, success rates, and finding rates improve at a slower rate than in the reference case, the Alaskan natural gas pipeline and Mackenzie Delta pipeline are projected to come online earlier in 2019 and 2015, respectively. In this scenario, total net LNG imports grow to 2.3 tcf by 2020 and 3.2 tcf by 2025. Conversely, if more-rapid technology improvements hold down natural gas prices longer, it will delay construction of these facilities.

In an EIA scenario with rapid technology improvement, the Alaskan natural gas pipeline would not be economically viable until 2024 and the Mackenzie Delta pipeline would be delayed due to economics until 2020. Net LNG imports would grow more slowly with greater domestic production, and LNG imports would reach 1.2 tcf by 2020 and 2.1 tcf by 2025.

Short-term predictions In a separate analysis, EIA noted that political situations in both Venezuela and Iraq might create price shocks in coming months.

"The combination of a sustained loss of most of Venezuela's exports, risk of increased tensions in the Middle East, and low (US) oil inventories could cause oil prices to spike, at least temporarily, above our base case," EIA said in its monthly short-term outlook published Jan. 8. "If the Venezuelan strike is prolonged and tensions in the Middle East continue, then the chance of a price spike is high. The magnitude of upward price pressure will depend on the duration of supply loss and on the willingness and ability of other suppliers to make up for the shortfall," EIA said.

Although risks remain high for price volatility and an oil price spike, EIA's forecasts for the next few months are more optimistic that the market will be relatively balanced, although the agency admitted its assumptions were "fragile," given the current state of international oil markets.

"We assume that the turmoil in Venezuela is resolved by the end of this month and that Iraq maintains recent export levels and that other producers step up production to keep markets stable, leaving the WTI price near current levels through February," EIA said. "Gradual movement toward full capacity output in Venezuela over the next 3-4 months, coupled with supplementary output from other OPEC countries, should result in a return to gradual price declines through the forecast horizon."

Gasoline predictions As events in Venezuela and Iraq continue to unfold, it appears that pump prices may rise even further in the near term, EIA suggested.

"We currently expect average regular motor gasoline prices to exceed $1.50/gal in February. These would represent year-to-year increases of about 40¢/gal. Our base case assumptions lead us to expect prices near $1.54/gal by mid-spring.

"Additional increases and possible regional price spikes before mid-year would be likely if the Venezuelan situation is not resolved this month, or if conflict arises in Iraq and disrupts oil flows there," EIA said.

The agency also said that refiner margins are expected to strengthen over the next 2 years, as demand for gasoline rises and the cost of producing gasoline increases. That is due in part to the likely substitution of the more costly ethanol for methyl tertiary butyl ether in California in 2004, EIA said.

"Given our base case crude oil price projections, 2003 pump prices for regular gasoline are expected to increase by 16¢/gal on an annual basis to $1.50/gal," Similarly, refiner margins are expected to rebound from their relatively weak levels of last year. In 2004, the annual average pump price is projected to decline by about 5¢/gal, falling in line with the expected decline in crude oil prices. However, because crude oil prices are assumed to decrease by 9¢/gal ($4.20/bbl in 2004), this forecast assumes a continued strengthening of refiner margins, EIA said.

ogj.pennnet.com By OGJ editors

WASHINGTON, DC, Jan. 10 -- Depending on the path of world oil prices, imports may supply 65-70% of total US petroleum demand by 2025, up from 55% in 2001, the Energy Information Administration said Thursday.

The agency noted that world oil prices are influenced by many factors, including the ability of members of the Organization of Petroleum Exporting Countries to control their own oil production. Other considerations include economic growth rates among countries and the economic viability of alternative energy sources such as natural gas-to-liquids and oil sands.

By 2025, world oil prices (adjusted to 2001 values) could be $19-33/bbl, a range leading to variations in US dependence on oil imports, EIA said. The agency's predictions were part of its annual snapshot of long-term energy trends.

Consumption Total US energy consumption could vary significantly, depending on the rate of economic growth. EIA projects that the US Gross Domestic Product (GDP) could grow 2.5-3.5%/year during 2001-25. By 2025, energy consumption may be 129-149 quadrillion btu, EIA said. Even with that growth, EIA forecasts that the US will continue to use energy more efficiently.

"This will help to hold the rate of growth in consumption to about 50% of the rate of growth in economic output," EIA officials said.

Gas picture Continued growth in natural gas demand and depletion of conventional natural gas resources in the lower 48 states will mean that future natural gas supplies would likely come from both new domestic and foreign supplies, EIA said. These projects include the Alaskan natural gas pipeline, the Mackenzie Delta pipeline in Canada, and new LNG facilities, both domestic and outside the country, to serve US markets (e.g., Baja California, Mexico or the Bahamas).

EIA assumes that the Alaskan natural gas pipeline will come online in 2021 (excluding consideration of any potential loan guarantees by the federal government that accelerates construction), and that the Mackenzie Delta pipeline will be operational in 2016. Total LNG imports are projected to grow to 1.6 tcf by 2020 and 2.3 tcf by 2025, with facilities online in the Gulf of Mexico region, serving Florida (via the Bahamas), and California (via Baja California, Mexico).

But EIA stressed that the timing and demand for these supplies vary, depending on the rate of technological improvement. If drilling costs, success rates, and finding rates improve at a slower rate than in the reference case, the Alaskan natural gas pipeline and Mackenzie Delta pipeline are projected to come online earlier in 2019 and 2015, respectively. In this scenario, total net LNG imports grow to 2.3 tcf by 2020 and 3.2 tcf by 2025. Conversely, if more-rapid technology improvements hold down natural gas prices longer, it will delay construction of these facilities.

In an EIA scenario with rapid technology improvement, the Alaskan natural gas pipeline would not be economically viable until 2024 and the Mackenzie Delta pipeline would be delayed due to economics until 2020. Net LNG imports would grow more slowly with greater domestic production, and LNG imports would reach 1.2 tcf by 2020 and 2.1 tcf by 2025.

Short-term predictions In a separate analysis, EIA noted that political situations in both Venezuela and Iraq might create price shocks in coming months.

"The combination of a sustained loss of most of Venezuela's exports, risk of increased tensions in the Middle East, and low (US) oil inventories could cause oil prices to spike, at least temporarily, above our base case," EIA said in its monthly short-term outlook published Jan. 8. "If the Venezuelan strike is prolonged and tensions in the Middle East continue, then the chance of a price spike is high. The magnitude of upward price pressure will depend on the duration of supply loss and on the willingness and ability of other suppliers to make up for the shortfall," EIA said.

Although risks remain high for price volatility and an oil price spike, EIA's forecasts for the next few months are more optimistic that the market will be relatively balanced, although the agency admitted its assumptions were "fragile," given the current state of international oil markets.

"We assume that the turmoil in Venezuela is resolved by the end of this month and that Iraq maintains recent export levels and that other producers step up production to keep markets stable, leaving the WTI price near current levels through February," EIA said. "Gradual movement toward full capacity output in Venezuela over the next 3-4 months, coupled with supplementary output from other OPEC countries, should result in a return to gradual price declines through the forecast horizon."

Gasoline predictions As events in Venezuela and Iraq continue to unfold, it appears that pump prices may rise even further in the near term, EIA suggested.

"We currently expect average regular motor gasoline prices to exceed $1.50/gal in February. These would represent year-to-year increases of about 40¢/gal. Our base case assumptions lead us to expect prices near $1.54/gal by mid-spring.

"Additional increases and possible regional price spikes before mid-year would be likely if the Venezuelan situation is not resolved this month, or if conflict arises in Iraq and disrupts oil flows there," EIA said.

The agency also said that refiner margins are expected to strengthen over the next 2 years, as demand for gasoline rises and the cost of producing gasoline increases. That is due in part to the likely substitution of the more costly ethanol for methyl tertiary butyl ether in California in 2004, EIA said.

"Given our base case crude oil price projections, 2003 pump prices for regular gasoline are expected to increase by 16¢/gal on an annual basis to $1.50/gal," Similarly, refiner margins are expected to rebound from their relatively weak levels of last year. In 2004, the annual average pump price is projected to decline by about 5¢/gal, falling in line with the expected decline in crude oil prices. However, because crude oil prices are assumed to decrease by 9¢/gal ($4.20/bbl in 2004), this forecast assumes a continued strengthening of refiner margins, EIA said.

www.forbes.com Reuters, 01.10.03, 11:01 AM ET

NEW YORK, Jan 10 (Reuters) - NYMEX crude oil futures fell further Friday morning after the West's energy watchdog said it would consider releasing members' petroleum reserves if supplies were cut from both Iraq and Venezuela.

At 10:40 a.m. EST (1540 GMT), NYMEX February crude was down 54 cents at $31.45 a barrel, extending the morning low to $31.35.

The contract rallied nearly 5 percent on Thursday on renewed fears over a possible war with Iraq. U.N. arms inspectors presented an interim report showing they saw gaps in Iraq's arms declaration but as yet have found no 'smoking guns" in their search efforts.

In London, the February Brent crude contract was 34 cents lower at $29.30 a barrel.

The Paris-based International Energy Agency (IEA) said Friday that if supplies from both Iraq and Venezuela were cut, its member industrial nations would consider the emergency release of petroleum reserves.

The group also said it would not wait for a war in Iraq, the possibility of which has been looming large as U.N. arms inspectors search for banned weapons in that nation, before discussing a possible release of oil reserves.

The IEA board will meet next Friday to start determining whether to release reserves. The decision depends on OPEC's surplus and market fundamentals.

The IEA, with 26 members from industrialized nations, is an autonomous agency linked with the Organization for Economic Cooperation and Development (OECD).

The day's losses followed weakness overnight prompted by comments from British Prime Minister Tony Blair, who appeared to push back the deadline for a decision on military action against Iraq.

Blair told his cabinet that a Jan 27 formal progress report on inspections in Iraq should not be regarded as a deadline for a decision on military action.

U.S. Secretary of State Colin Powell also tried to deflect attention from Jan 27. "It is not necessarily a D-day for decision-making," Powell told the Washington Post.

Meanwhile, oil markets have to wait for the decision of an emergency meeting of the Organization of Petroleum Exporting Countries on Sunday to see if it agrees to boost output to help cover deep supply losses from the 40-day-old Venezuelan strike. The Latin American OPEC member is the fifth largest exporter of crude in the world.

OPEC officials have indicated the group is considering raising output by about 1.0 million to 1.5 million barrels per day.

NYMEX February heating oil was down 1.35 cents at 86.15 cents a gallon, moving 85.80 to 87.25 cents.

NYMEX February gasoline was 1.10 cents lower at 86.40 cents a gallon, trading 87.00 to 88.60 cents.

www.forbes.com Reuters, 01.10.03, 10:37 AM ET

LONDON, Jan 10 (Reuters) - War in Iraq, if an oil strike in Venezuela was still running, would be enough for the International Energy Agency to consider releasing strategic reserves, the head of the agency said on Friday.

The IEA's Acting Executive Director William Ramsay told Reuters in an interview that discussions on that possibility could start as early as next Friday, depending on the oil market's response to Sunday's OPEC meeting.

"Iraq and Venezuela both being out would certainly be enough for the IEA to think about an emergency release," said Ramsay. "Whether or not we conclude that it is necessary depends on where we are with surplus OPEC capacity and the timing and the fundamentals on the market."

A six-week-old strike in Venezuela has cut some 2.5 million barrels a day of exports and, with the threat of war, forced prices recently to more than $33 a barrel for U.S. crude.

OPEC meets on Sunday to decide higher production quotas to fill the Venezuelan outage.

"We're quite pleased with them stepping up to the plate," said Ramsay. But only Saudi Arabia and the United Arab Emirates had sufficient capacity to add actual supply, he said.

The Venezuelan strike meant the Paris-based IEA, advisor on energy to 26 industrialised nations, would not need to wait for war to start considering delivering emergency supplies, said Ramsay.

"If OPEC comes out on Sunday with something that satisfies the market that it is providing real incremental barrels then a response outside OPEC may not be needed," he said.

"If the market says on Monday or Tuesday, 'that's not enough', I believe our member countries will have to start chatting."

Ramsay said a scheduled meeting of the IEA governing board on Friday January 17 could consider the issue.

"There could be a process engaged on Friday to take a hard look at it," he said. The meeting's main agenda is to elect an new Executive Director to replace Robert Priddle who retired at end of last year.

Ramsay said some in Washington would prefer any release from the U.S. Strategic Petroleum Reserve to come as part of IEA action. Some U.S. lawmakers have been calling for a sale of SPR oil to stabilise crude prices.

He said: "There's a robust debate in Washington between those who want to be very strategic about the reserves and those who want to put them out there under less rigorous criteria."

"Many of those who are reluctant to use the SPR ask why the SPR should be used as a marginal supplier of barrels to the world. They say: 'it's a global market there should be a global response.'

He said it would make sense if OPEC were to use all its spare capacity before the IEA tapped emergency reserves.

"I think OPEC would have in mind using its capacity. It makes more sense pumping geologic than strategic reserves.

"I would think Saudi Arabia is already clearing the mothballs from some spare capacity so that it doesn't take as long as the 90 days that have been indicated in the past to get that oil onstream," Ramsay said.