asia.reuters.com Thu March 20, 2003 03:00 AM ET By Tanya Pang

SINGAPORE (Reuters) - Oil prices tumbled by more than $1 to three-month lows on Thursday after the United States began a long-awaited war on oil exporter Iraq, and dealers bet on a swift U.S. victory with little disruption to Middle East crude flows.

The OPEC producers' cartel pledged to fill any gap in supply due to hostilities in the oil-rich Middle East, while the West's energy watchdog, the International Energy Agency (IEA) said it saw no reason to release emergency stocks for the time being.

Hours after U.S. jets began a dawn raid of Baghdad, officials in nearby Saudi Arabia and Kuwait said crude production continued normally, while shippers reported no interruptions to tanker movements.

U.S. light crude CLc1 fell $1.35 to $28.53 a barrel, while London's Brent crude LCOc1 dropped $1.02 to $25.73 a barrel.

"Prices have come down because the uncertainty is gone. The start of the war just means the end of the war is closer," said David Thurtell, commodities strategist at Commonwealth Bank in Sydney.

Geoff Pyne, consultant to Sempra Energy said there were still potential dangers ahead that could cause crude to shoot higher.

"Most obviously, there is a danger that Saddam may blow up the Iraqi oilfields, either as a defensive measure, or to deny them to the United States. Even if this doesn't happen there is a high chance of at least a month of missing Iraqi exports," Pyne said.

The White House in Washington confirmed it had launched a military attack to overthrow Iraqi President Saddam Hussein.

"These are the opening stages of what will be a broad and concerted campaign," President Bush said in a televised address.

Washington says Iraq, which supplies more than four percent of world oil exports, has stocked weapons of mass destruction in violation of U.N. resolutions drawn up after Baghdad invaded Kuwait in August, 1990. Iraq denies this.

SAUDI POISED TO FILL SHORTFALL

A Saudi source said OPEC's leading producer was poised to respond to any oil supply disruptions following the U.S. attack on neighboring Iraq.

"The crude oil is there," the source said, reiterating that the kingdom, the world's biggest oil exporter, has 10.5 million barrels per day (bpd) of production capacity.

"The market is well supplied. What everyone fears is Saddam Hussein burning the oilfields," said the Saudi source. "Events are going to be the dictating factor here."

Riyadh has already ramped up production well beyond nine million bpd before war erupted -- in part to cover outages from strike-hit Venezuela, industry sources say.

Kuwaiti crude output is running at around 2.4 million bpd, and the producer has said it will only close its northern fields bordering Iraq, which pump 400,000 bpd, if necessary.

Kuwait's oil sector is on high alert for any attack from former occupier Iraq, whose departing troops in 1991 torched hundreds of the country's oil wells.

Kuwait, Iran, the United Arab Emirates, Saudi Arabia and Qatar together ship about 15 million bpd of oil through the Gulf.

OPEC TO USE SPARE CAPACITY

The Organization of the Petroleum Exporting Countries immediately pledged to fill any shortfall in world supplies created by the U.S. attack on Iraq, where exports were running at about 1.7 million bpd up to a week ago.

Analysts reckon OPEC has between one million and two million bpd of spare capacity, with many of its members already running at full throttle.

OPEC President Abdullah al-Attiyah of Qatar said he had spoken with members of the 11-strong cartel after the U.S. launched its attack.

"As a result of those consultations, I am herewith reiterating OPEC's resolve to make up for any supply shortfall resulting from developing events," he said in a statement carried on OPEC's official news agency.

"To this end, member countries have pledged to use, in the interim, their available excess capacities to ensure continued supply."

Iraqi exports had ground to a virtual halt after the United Nations evacuated all international staff from Iraq, including those monitoring the country's oil sales under the oil-for-food exchange program.

The Paris-based IEA, the energy watchdog for industrialized nations overseeing four billion barrels of emergency stockpiles, said it saw no reason to dip into strategic reserves for the time being and it as confident OPEC would honor its pledge.

"At the precise hour we speak, I think it is not necessary (to release stocks)," IEA executive director Claude Mandil told Reuters.

"We had a very strong statement from OPEC, which has said they will ensure any shortfall and we are confident they will do their best," he said.

IEA members Japan and South Korea, two of Asia's biggest oil consumers and heavily reliant on Middle East imports, also said they saw no immediate need to release oil reserves.

www.nytimes.com Agence France-Presse By NEELA BANERJEE

As the United States military completed its plans to invade Iraq, disruptions of oil supplies and shipments from the Persian Gulf appeared to have already begun yesterday, industry experts said.

Most notably, exports from Iraq under the United Nations oil-for-food program dwindled to a trickle, a spokesman for the program confirmed, after Kofi Annan, the secretary general, suspended the program within Iraq on Monday. More broadly, some oil tankers scheduled to arrive at other Middle Eastern countries are refusing to enter the Persian Gulf because of security concerns, said Nader Sultan, chief executive of the Kuwait Petroleum Corporation.

"Companies are saying, `Do I send my ships up to the gulf?' " Mr. Sultan said in a phone interview from Kuwait. "And it's not just to Kuwait. Then, the question is up to the captain. Beyond insurance, it's safety, and someone has to make a judgment as to whether it's safe."

He added: "It's already happening, already in the whole of the gulf, there are tankers not going up. Certain shipping companies and certain countries are rethinking that their ships shouldn't come here."

So far, the oil markets have shrugged off concerns that such disruptions could be substantial or last long. At the end of trading on the New York Mercantile Exchange yesterday, oil for May delivery dropped to $29.36 a barrel, while oil for April delivery fell $1.79, to $29.88 a barrel. The price of oil has fallen 21 percent this week on the belief that a war in Iraq will be quick and that there will be little damage to Iraq's oil fields and facilities.

Iraq shipped some of its biggest loads last week, averaging about 1.8 million barrels a day, according to Walid Khadduri, editor in chief of the Middle East Economic Survey and an expert on Iraq's oil industry. But shipments began to shrink considerably by the end of the week, he said.

Now, with the suspension of the oil-for-food program, the loading of oil from the port of Mina al-Bakr, Iraq, on the Persian Gulf has stopped, said Ian Steele, a program spokesman. He said that oil was still flowing from Iraq's northern Kirkuk field to the Turkish port of Ceyhan, where one tanker took on oil Tuesday and another is expected tomorrow.

Oil traders and other industry experts said they expected Iraqi exports to end soon, even from Ceyhan, because the Iraqis would probably shut down most production in preparation for the war. Iraq sends about 35 percent of its oil to the United States, according to PFC Energy, a Washington consulting group, and substantial shipments also go to European oil companies like Eni of Italy and TotalFinaElf of France.

Representatives of the oil industry said the industry would not be badly hurt by the suspension of Iraqi exports because it had already scaled back imports from Iraq over the last year.

A pricing plan for Iraqi oil under the oil-for-food plan proved particularly onerous and discouraged oil sales to many foreigners, oil traders and companies said. Iraq's own decisions throughout the year to increase and decrease exports at will also frustrated buyers. Over the last two months, Iraqi exports have increased as Baghdad compensated for a shortfall of oil from Venezuela because of the general strike there. Still, the growing probability of war over the last few months sent many companies looking elsewhere for more stable oil supplies.

"People have anticipated the possible cutoff of Iraqi oil for months now," said Sara Wachter, a spokeswoman for TotalFinaElf, whose own imports have fallen to "pretty minuscule levels" now from 2.5 million barrels a month in November.

Ms. Wachter said that oil companies operating in OPEC states were producing more oil along with OPEC members, which are producing far above their quotas to make up for the sharp decline in Venezuelan exports and for a possible halt in Iraqi oil. They are also buying up some of the extra OPEC output, she said.

But oil companies buying oil from other Persian Gulf states now face increasingly more expensive insurance rates that are making the journey to that region particularly difficult, industry experts said.

Mr. Sultan of Kuwait Petroleum said that the broad hesitation to bring tankers into the gulf arises from memories of the Iran-Iraq war in the 1980's, when oil tankers were strafed and bombed by the warring sides. He said he thought that this time, as in the first Persian Gulf war, Navy ships might be willing to escort tankers requesting such protection. A spokesman at the Navy Central Command in Bahrain could not be reached for comment.

Moreover, the Persian Gulf countries will be willing to ship the oil themselves to foreign tankers that are reluctant to enter their waters, Mr. Sultan said. "If they're not prepared to come here, we're prepared to take the oil to them," he said. "There won't be a supply disruption. It will be more like a blip in programming. A country like Kuwait, we can make up for a shortfall by delivering oil south of Hormuz. All the logistics are in place. We just need to give the green light to put it all in motion."

Industry experts said that although official Iraqi oil shipments had all but stopped, a chance remained that Iraq could illegally export oil as it has long done, though in far smaller quantities.

Over the last few weeks, oil traders have received reports that five to seven Jordanian-chartered tankers had each loaded about a million barrels of Iraqi crude oil at the Khor al-Amaya port on the Persian Gulf, a transaction and a port outside the purview of the United Nations. The tankers then moved through the gulf without being stopped by the United States-led Multinational Interception Force, which, traders say, routinely searches even small boats.

A spokesman, however, said United States forces do not routinely check ships belonging to allies. He added: "We consider Jordan to be a vital ally in the global war on terrorism."

www.canada.com JAMES STEVENSON
Canadian Press Wednesday, March 19, 2003

CALGARY (CP) - With war being waged half way around the world, perhaps the first impact of the Iraq conflict for most North Americans will be when they pull into their neighbourhood gas stations.

Thursday's attack on Iraq by U.S. and British military forces could put potentially severe upward pressures on the global price of oil. And that directly affects the cost of gasoline, home heating fuel and other sources of energy. Many factors including the length and severity of the war - and whether Iraqi oilfields are destroyed - will dictate how high the price of oil will eventually rise.

In recent weeks traders pushhed crude prices to nearly $40 US a barrel, mirroring levels seen during the Gulf crisis of the early 1990s. But in recent days prices dropped to the low $30s and below amid speculation the war against Iraq will end quickly, with limited disruption to Persian Gulf oil shipments.

At the beginning of the last Gulf war, oil soared to more than $40 US a barrel. Given inflation, that would equate to about $50 US today.

Using the rough calculation that each $1 US rise in the price of crude increased Canadian gasoline prices at the pump by about one cent, $50 oil could send pump prices jumping by 10-13 cents in the short term.

But Vince Lauerman, a global energy strategist with the Canadian Energy Research Institute in Calgary, cautions that the price of oil might react differently during this war.

"It was a pretty soft market going into that last war, but now the market is extremely tight in terms of stocks," said Lauerman.

Tight global oil supplies will indeed be a major factor.

A recent report from the U.S. Energy Department report suggested American inventories were 16 per cent lower than a year ago and nearing a 28-year low.

And even though Iraq produces only about three per cent of world supply, it is now an open question as to whether the Organization of Petroleum Exporting Countries has enough spare capacity to make up for Iraqi production, let alone other potential disruptions from neighbouring states like Kuwait.

Though non-OPEC countries like Russia and Canada have been increasing their oil production yearly, Lauerman says they generally have no spare capacity and no way to turn on the taps harder at times of need.

Suncor Energy, one of the main producers in Canada's oilsands in northern Alberta, agrees.

"We are at production capacity at over 200,000 barrels per day," says spokeswoman Darlene Crowell recently. "We're not like a conventional oil producer who can ramp up more wells in a heightened environment."

Angus McPhail, an analyst at ING Financial Markets in Edinburgh, Scotland, says he believes markets would be awash in crude after a swift war, particularly if Venezuela continues to recover from an oil industry strike and other members of the Organization of Petroleum Exporting Countries keep breaking their output quotas. For the second half of the year, ING Financial Markets foresees an average Brent crude price of $18.50 US a barrel.

"We are adamant that oil prices will fall," McPhail said.

Chris Heggtveit, a federal Finance Department official, says there are too many variables that could come into play to determine the economic cost of the war and high oil prices.

Not only are complex Middle East geopolitical issues at play, but also other events such as Venezuela's ability to ramp up oil production again after months of internal strife that saw the world's third-largest producer at a standstill.

Still, Heggtveit says Canada should be in a better position than most countries to weather any economic storm.

"It's important to note that Canada's economy would be buffered against serious economic shocks by a number of factors."

Firstly, Canada's in a better financial position right now than any of the G-7 group of industrialized nations.

Also, because Canada is a net exporter of oil, there will be some offsetting benefits to very high oil prices. The oilpatch will revel in extremely high profits, but federal and provincial governments will also see an bump-up in royalty payments.

As well, Canada is a member of the International Energy Agency, which is a group of 25 countries formed during the energy crisis of the 1970s.

Net oil importing countries in the IEA are required to keep oil stocks of at least 90 days supply and the group has said publicly that it is poised and ready to put additional oil on the market to control price spikes in the event of an Iraq war.

The question really becomes, how long will a spike in oil prices last?

Craig Alexander, a senior economist with the Toronto Dominion Bank, says the price of oil will fall quickly if U.S. military might becomes apparent.

"The financial markets, if they start to see signs that we are getting a very quick military campaign, will immediately start to price in lower prices for crude oil," he said.

And while the political ramifications of war in Iraq will likely last a long time, oil markets will likely rebound a lot quicker.

"Iraq will remain in the headlines and news long after the military conflict is over," said Alexander. "But those developments are unlikely to be weighing on the price of crude."

"Once the risk of Iraq affecting its neighbour countries diminishes, and once we know for certain what happens to the Iraqi oilfields, at that point the market will begin looking beyond the conflict."

As such, the TD Bank is expecting Canada's economic growth to be a roaring four per cent in the second half of this year.

That forecast assumes that the price of oil will be declining substantially and the geopolitical situation becomes a lot more certain than it has been in the past several months.

www.upi.com By Sam Vaknin UPI Senior Business Correspondent From the Business & Economics Desk Published 3/19/2003 2:22 PM

SKOPJE, Macedonia, March 19 (UPI) -- If the looming war was all about oil, Iraq would be invaded by the European Union, or Japan -- whose dependence on Middle Eastern oil is far greater than that of the United States. The United States would probably have taken over Venezuela, a much larger and proximate supplier with its own emerging tyrant to boot.

At any rate, the United Sates refrained from occupying Iraq when it easily could have, in 1991. Why the current American determination to conquer the desert country and subject it to direct rule, at least initially?

There is another explanation, insist keen-eyed analysts.

Sept. 11 shredded the American sense of invulnerability. That the hijackers were all citizens of ostensible allies -- such as Egypt and Saudi Arabia -- exposed the tenuous and ephemeral status of U.S. forces in the Gulf. So, is the war about transporting American military presence from increasingly hostile Saudis to soon-to-be subjugated Iraqis?

But this is a tautology. If America's reliance on Middle Eastern oil is non-existent, why would it want to risk lives and squander resources in the region at all? Why would it drive up the price of oil it consumes with its belligerent talk and coalition-building? Why would it fritter away the unprecedented up-swell of goodwill that followed the atrocities in September 2001?

Back to oil. According to British Petroleum's Statistical Review of World Energy 2002, the United States voraciously -- and wastefully -- consumes one of every four barrels extracted worldwide. It imports about three-fifths of its needs. In less than 11 years' time, its reserves depleted, it will be forced to import all of its soaring requirements.

Middle Eastern oil accounts for one-quarter of U.S. imports, Iraqi crude for less than one-tenth. A back of the envelope calculation reveals that Iraq quenches less than 6 percent of America's Black Gold cravings.

Compared with Canada (15 percent of American oil imports), or Mexico (12 percent) Iraq is a minor supplier. Furthermore, the current oil production of the United States is merely 23 percent of its 1985 peak -- about 2.4 million barrels per day, a 50-year nadir.

During the first 11 months of 2002, the United States imported an average of 9,000 bpd from Iraq. In January 2003, with Venezuela in disarray, approximately 1.2 million bpd of Iraqi oil went to the Americas, up from 910,000 bpd in December 2002 and 515,000 bpd in November.

It would seem that $200 billion -- the costs of war and post-bellum reconstruction -- would be better spent on America's domestic oil industry. Securing the flow of Iraqi crude is simply too insignificant to warrant such an exertion.

Much is made of Iraq's known oil reserves, pegged by the U.S. Department of Energy at 112 billion barrels, or five times the United States' -- not to mention its 110 trillion cubic feet of natural gas.

Even at 3 million bpd -- said to be the realistically immediate target of the occupying forces and almost 50 percent above the current level -- this subterranean stash stands to last for more than a century.

Add to that the proven reserves of its neighbors -- Kuwait, Saudi Arabia, the United Arab Emirates -- and there is no question that the oil industries of these countries will far outlive their competitors'. Couldn't this be what the rapacious Americans are after? -- wonder genteel French and Russian oilmen.

After all, British and American companies controlled three-quarters of Iraq's mineral wealth until 1972 when nationalization denuded them.

Alas, this "explanation" equally deflates upon closer inspection. Known -- or imagined -- reserves require investments in exploration, development and drilling. Nine-tenths of Iraq's soil is unexplored, including up to 100 billion barrels of deep oil-bearing formations located mainly in the vast western Desert. Of the 73 fields discovered, only 15 have been developed.

Iraqi Oil Minister Amir Rashid admitted in early 2002 that only 24 Iraqi oil fields were producing.

The country has almost no deep wells, unlike Iran, where they abound. The cost of production is around $1.00 to $1.50 per barrel, one-tenth the cost elsewhere.

Texas boasts 1 million drilled wells, Iraq barely has 2,000.

The Department of Energy's report about Iraq concludes: "Iraq generally has not had access to the latest, state-of-the-art oil industry technology (i.e., 3D seismic surveys), sufficient spare parts, and investment in general throughout most of the 1990s."

It has reportedly been utilizing questionable engineering techniques such as over-pumping, water injection and old technology to maintain production.

The quality of Iraqi oil deteriorated considerably in the past decade. Its average American Petroleum Institute gravity declined by more than 10 percent, its water cut (intrusion of water into oil reservoirs) increased and its sulfur content shot up by one-third. Iraq's oilfields date back to the 1920s and 1930s and were subjected to abusive methods of extraction. Thus, if torched during a Gotterdammerung, they might well be abandoned altogether.

According to a report published by the United Nations two years ago, Iraqi oil production is poised to fall off a cliff unless billions are invested in addressing technical and infrastructure problems. Even chaotic Iraq forks out $1.2 billion annually on repairing oil facilities.

-0- Part 2 of this analysis will run Thursday. Send your comments to svaknin@upi.com

sg.biz.yahoo.com Thursday March 20, 2:29 AM

LONDON (Dow Jones)--Total output in February from the Organization of Petroleum Exporting Countries including Iraq increased 1.5 million barrels a day from January to 27.10 million b/d, OPEC said in its monthly oil market report.

Output from the OPEC-10, which excludes Iraq - whose exports were controlled by the U.N. - was up in February from the previous month, by 1.52 million b/d to 24.662 million b/d, the report said.

At an emergency meeting in January, the group increased its output ceiling 1.5 million b/d to 24.5 million b/d to cover oil lost due to a general strike in Venezuela.

In February, the bulk of the production increase came from OPEC kingpin Saudi Arabia which produced 8.793 million b/d - a 362,000 b/d hike from the previous month.

Saudi output is believed to be even higher now.

The International Energy Agency estimated Saudi Arabia's output was at 9.2 million b/d in early March - in line with the Kingdom's repeated pledges to keep customers well-supplied in the event of any disruption to Iraqi oil exports during a war.

Venezuelan output was also up in February by 881,000 b/d to 1.475 million b/d, the report said.

Industry sources say that Venezuelan production is unlikely to go much higher than 2.5 million b/d due to damage to fields during the strike. Venezuela was producing around 3 million b/d before the industrial action.