www.smh.com.au February 24 2003

Many people expect that a US-led victory over Saddam Hussein will eventually result in a gusher of oil from a liberated Iraq, bringing down petroleum prices. But the recent fate of neighbouring Iran's energy industry suggests a different future - one in which it could be years before new Iraqi oil has any lasting impact on what consumers pay for fuel.

A huge new project called South Pars, on Iran's Persian Gulf coast, attests to the billions of dollars foreign oil companies have invested in Iran since the country launched its "New Dawn" plan in 1991. Tehran aimed to revive its oil industry, ravaged by years of revolution and war with Iraq.

Yet today, Iran can't pump any more crude than a decade ago. The reason: new production has only offset the rapid decline of Iran's other giant fields that have been pumping oil for decades. Attempts to revive the Iraqi industry are likely to face the same knotty problems Iran faces: the glacial pace of negotiations to clinch contracts and the years it then takes to tap large petroleum reservoirs, even as output drops from tired old fields.

"In Iraq, the situation has been disastrous now for 20 years," says Thierry Desmarest, chief executive of France's TotalFinaElf. He expects military operations will further damage Iraqi oil facilities.

Buyers of Iraqi oil already note a decline in the quality of the crude coming from the prized Kirkuk field, an indication output capacity may be waning at the huge reservoir, which has been producing oil for 64 years. Iraq's other major reservoir, the Rumaila field in the south, also has been pumping for decades. A United Nations study of Iraq's oilfields a few years ago painted a grim scene of failing wells and equipment, environmental devastation and rampant safety hazards. Since then, little solid detail has emerged on the fields.

Even with a pro-US government in Baghdad, it might take years for Western oil giants to nail down deals, oil veterans say. Depending on the extent of the damage to Iraq's infrastructure and how long it takes for a stable government to emerge, it could be five years or more before oil from new developments boosts world supplies.

"Taking the Iranian example, it is fair to say that the way forward in Iraq will be much more complex than people imagine," said Julia Nanay, an analyst at Washington consulting firm PFC Energy. Ms Nanay did not estimate how long it would take to resurrect Iraq's oil production potential, because "no one knows what they will find there".

Iran's problems, and what they suggest about conditions in secretive Iraq, are worth considering as oil markets gyrate in anticipation of a US war on Baghdad. Oil supplies from Iraq, which exports about 1.7 million barrels a day under a UN program, are expected to dry up during any conflict.

War fears, coupled with a disruption in supplies from strife-torn Venezuela, have driven up the price of oil by 66 per cent in the year to January.

Iraq and Iran have roughly comparable petroleum reserves and once held identical output quotas as members of the OPEC cartel. The two nations severely damaged each other's industries in a brutal eight-year war that ended in 1988 - and they desperately needed to rebuild.

TotalFinaElf decided in 1990 to plunge in and its experiences since offer a window into both countries' industries.

TotalFinaElf, the lead company in Iran's South Pars project, has kept a foothold in Iraq as well. As Iraq in the mid-1990s sought to loosen the restrictions the UN imposed on its oil exports, Baghdad handed out huge production-sharing contracts to companies from France, Russia and China - three permanent members of the UN Security Council who might act as a counterweight to the US and the UK.

TotalFinaElf initialled non-binding agreements but declined to commit to actually developing the oil, which would have violated UN sanctions. But TotalFinaElf was able to do simulation studies on the fields. This data, company officials say, would enable TotalFinaElf to get the oil flowing about one year earlier than a competitor starting from scratch. Even then, TotalFinaElf reckons it would take it almost four years to start production if it won a contract from a new Iraqi government.

While TotalFinaElf efforts in Iraq were eventually blocked by the West's stand on Saddam's regime, it got a break in Iran, signing up in 1997 to develop part of South Pars.

South Pars is the Iranian part of the world's largest natural-gas field, which is shared with Qatar. The offshore field also contains large amounts of oil. Development of South Pars is such a huge undertaking that Iran has divided it into 30 sections, or phases, with detailed planning done for 15. Each phase will result in gas output equal to a quarter of France's total annual consumption, besides large volumes of oil.

Phase one, a skein of pipes and towers constructed by an Iranian company, is languishing behind schedule. Phases two and three, developed by TotalFinaElf at a cost of about $US2.2 billion ($3.67 billion), are complete.

What TotalFinaElf gets is an oil dividend. Its field produces more than 80,000 barrels a day of a light oil, which Iran will use to pay back TotalFinaElf over seven years. Sources say TotalFinaElf will get a return of about 20 per cent on its investment.

But getting this far has been a slog: it took TotalFinaElf about 12 years to complete its part of South Pars from the time it began exploring a bid in 1990. It will be decades before Iran can complete the entire project.

A clutch of new contracts are in the negotiating stage, including further phases of South Pars. Yet the slow pace of developments already threatens the country's future as an oil superpower. Iranian officials estimate production from their oil reservoirs is declining by 5 per cent annually. Unless offset by new developments, that rate will reduce Iraq's oil-production capacity from 4 million barrels a day to 1.4 million barrels a day by 2020, or about the level of domestic consumption.

To maintain its share of OPEC output and remain the group's second-largest producer after Saudi Arabia, Iranian officials say they will need production capacity of about 7.4 million barrels a day by 2020. To do that, Iran needs to build 6 million barrels a day of new capacity, or as much as the country produced at its peak in the 1970s.

Dow Jones

www.gulf-daily-news.com Sunday-23 February 2003

ABU DHABI: UAE Oil Minister Obaid bin Saif Al Nasseri said yesterday that Opec would act to cover any break in Iraqi supplies if war erupts, but said it was too early to say whether the cartel would suspend its output quotas.

The Organisation of Petroleum Exporting Countries has repeatedly sought to assure jittery oil markets that it stands ready to fill any shortage resulting from an interruption of Iraq's two million barrels per day (bpd) of exports.

"If something drastic happens, then we have to discuss that event and take necessary action," Nasseri told reporters after meeting his Russian counterpart Igor Yusufov in Abu Dhabi. "The producers will carry out their responsibility."

Opec, due to hold a policy meeting on March 11, has raised output limits twice this year to cover for an unexpected strike in Venezuela, with most members - except Saudi Arabia and the UAE - now pushed to full capacity.

A Gulf source said earlier this week that Saudi Arabia would support a temporary suspension of quotas if an attack on Iraq halted supplies from the world's eighth largest exporter.

Opec Secretary-General Alvaro Silva said on Friday that a suspension of the quota system had yet to be discussed. UAE's Al Nasseri also said it was too early to look into this option.

On Friday, Oman and Russia, both oil-producing nations outside the Opec umbrella, called for stability on the world oil market, Oman's official ONA news agency reported.

Russian Energy Minister Igor Yusufov said the two "believe it is important to maintain stability in the oil market," after a two-day visit to Oman.

Meanwhile, Opec chief Silva said world oil reserves were currently sufficient and members will work to avoid any export disruptions to Europe.

"We will co-operate with the energy ministers of the European Union and the European Commission in order to avoid any lack in oil supply," said Silva before the start of a two-day meeting of EU energy ministers in the northern port of Thessaloniki.

Many EU leaders fear a surge in fuel costs could push sagging economies towards recession.

Crude oil prices have risen nearly 20pc since the start of the year to more than $37 a barrel.

• the highest in more than two years.

Greek Development Minister Akis Tsochadzopoulos said the goal "is to safeguard Europe from any negative implications from a war in Iraq."

"We discussed coordination on the world oil market in order to have a fair price for crude," Yusufov added.

The pair also discussed bilateral cooperation on oil and gas and investment opportunities for Russian firms in Oman.

Oman produces nearly 700,000 barrels of crude a day and has some 660 million cubic metres of natural gas reserves.

Crude oil rose in London during Friday amid heightened fears of war against Iraq, then surged sharply on news of a huge blast at a US oil and gas facility off Staten Island in New York.

The reference Brent North Sea crude oil for April delivery rose to as high as 32.35 dollars per barrel, from 31.56 dollars at the previous close.

In New York, a barrel of light sweet crude for April delivery hit a high of 35.95 dollars before settling back slightly to 35.58 dollars, but still up 84 cents from Thursday's close.

www.riyadhdaily.com.sa Sunday - 23 February 2003

OPEC Secretary-General Alvaro Silva said on Saturday the oil exporting cartel would do its best to avert a world oil shortage and secure adequate supplies in the event of a war in Iraq. "We don’t want any scarcity of oil in the world," Silva told Greek state TV NET on the sidelines of an informal meeting of European Union energy ministers in this northern Greek city. "At OPEC we are doing our best to put enough oil in the market. This is our position," he said. The secretary general of the 11-member Organisation of the Petroleum Exporting Countries said OPEC was participating in the ministers’ meeting to share its outlook on the world oil market and stress the need for cooperation. Oil prices have soared 50 percent in three months to $32 per barrel for international benchmark Brent as traders absorb the threat to the two million barrels per day of exports from Iraq, the world’s eighth largest oil exporter. Turning to supply disruptions, Silva said he expected strike-hit Venezuelan oil exports to return to normal. The world’s fifth largest oil exporter was supplying 2.7 million barrels of crude oil daily to world markets before a crippling strike in early December. "In Venezuela’s case, it is a transitory problem, it is going to be solved. OPEC acted quickly to the lack of oil from Venezuela and this one is coming to a normal quota," Silva said. OPEC, due to hold a policy meeting on March 11, has raised output quotas twice this year to cover for the unexpected strike in cartel member Venezuela. Oil traders fear military conflict in Iraq could upset flows from the Middle East, which pumps nearly a third of the world’s crude. OPEC, which has long experience in compensating for volatile exports from Baghdad since the Gulf War, could cover any interruption in Iraqi supplies. But talk of a possible suspension of output quotas was played down on Friday by Silva. On Saturday, he said: "We don’t foresee at this moment any scarcity and high prices. We...are also working for peace." Meanwhile, UAE Oil Minister Obaid bin Saif Al-Nasseri also assured that OPEC would act to cover any break in Iraqi supplies if war erupts, but said it was too early to say whether the cartel would suspend its output quotas. "If something drastic happens, then we have to discuss that event and take necessary action," Nasseri told reporters after meeting his Russian counterpart Igor Yusufov in Abu Dhabi. "The producers will carry out their responsibility." A Gulf source said earlier this week that leading OPEC member Saudi Arabia would support a temporary suspension of quotas if an attack on Iraq halted supplies from the world’s eighth largest exporter. Meanwhile, a Kuwaiti economic expert warned on Saturday of disagreements among OPEC member countries over oil production quotas. Dr Waleed Al-Saif, professor of economics at Kuwait University, told KUNA that a number of OPEC member countries called during cartel’s last meeting for changing their oil quotas. However, the discussion of such a request has been put off to forthcoming meetings. Al-Saif called for a new and more suitable distribution of quotas to be implemented sooner or later, so as to bar any violations of the international organi-zation’s production policies. Al-Saif mentioned that distribution of oil quotas has been always a matter of controversy between OPEC members, asserting the fact that member countries with small populations usually keep bigger oil reserves than others with greater populations.

www.forbes.com Reuters, 02.22.03, 2:17 AM ET

ABU DHABI, Feb 22 (Reuters) - UAE Oil Minister Obaid bin Saif al-Nasseri said on Saturday that OPEC would act to cover any break in Iraqi supplies if war erupts, but said it was too early to say whether the cartel would suspend its output quotas. The Organisation of Petroleum Exporting Countries has repeatedly sought to assure jittery oil markets that it stands ready to fill any shortage resulting from an interruption of Iraq's two million barrels per day (bpd) of exports. "If something drastic happens, then we have to discuss that event and take necessary action," Nasseri told reporters after meeting his Russian counterpart Igor Yusufov in Abu Dhabi. "The producers will carry out their responsibility." OPEC, due to hold a policy meeting on March 11, has raised output limits twice this year to cover for an unexpected strike in Venezuela, with most members -- except Saudi Arabia and the UAE -- now pushed to full capacity. A Gulf source said earlier this week that OPEC kingpin Saudi Arabia would support a temporary suspension of quotas if an attack on Iraq halted supplies from the world's eighth largest exporter. OPEC Secretary General Alvaro Silva said on Friday that a suspension of the quota system had yet to be discussed. UAE's Nasseri also said it was too early to look into this option. "On March 11, we have to review the market situation... and the price," Nasseri said. "Then if we see there is no need to change the ceiling, we will be happy to continue with it." "But if there is a need to change the ceiling, whether to raise or reduce it, then we have to take that action which will help stabilise the market and get a fair price." OPEC agreed last month to raise its output ceiling by 1.5 million bpd to 24.5 million bpd to cover a shortage from strike-bound member Venezuela.

www.washingtonpost.com By Peter Behr Washington Post Staff Writer Saturday, February 22, 2003; Page E01

In the minutes after several million gallons of gasoline exploded over Staten Island yesterday, energy traders in Manhattan began hitting the "buy" button: Get gasoline now. It will cost even more later.

Traders, fuel dealers, importers, refiners and speculators swapped gasoline contracts back and forth yesterday, with a total of 2 billion gallons changing hands on the New York Mercantile Exchange. The wholesale price for delivery in March climbed nearly 5 percent, to $1.01 a gallon.

Yesterday's trading prices will begin showing up at East Coast gasoline pumps in a few weeks or even days, continuing a relentless upward march of prices rooted in both reality and emotion.

For gasoline, heating oil and natural gas, the story is the same: The nation has come to the verge of war in the Persian Gulf with crucial energy inventories at very low levels and traders reacting at hair-trigger speed to any supply disruption.

Around the Washington region, the cost of premium gasoline topped $2 a gallon at some service stations this week -- the highest it has gone in 20 months. Prices for regular gasoline reached a nationwide average of $1.66 a gallon, up 54 cents from a year ago, the Energy Information Administration reported.

At Mahesh Tanna's Exxon Mobil service station in Rosslyn, just outside the District, premium gasoline had been marked up to $2.08 a gallon yesterday and regular was going for $1.76.

Tanna has operated the station for a dozen years -- selling Gulf gasoline, then Chevron brands, now Exxon Mobil. As he sees it, the higher gasoline prices have tracked the rise in crude oil over the past half year, step for step.

"The price depends on the barrel price of the oil. The barrel price is up because of the war situation," Tanna said.

His higher pump prices, triggered by higher fuel costs from Exxon Mobil, haven't deterred many customers, he said. "People know the reason."

The simplest explanation for higher gasoline prices is the worldwide increase in crude oil prices, said John Felmy, policy director of the American Petroleum Institute, an industry lobbying organization. Over the past 10 weeks, oil prices have climbed about 30 cents a gallon. So have average gasoline prices.

Crude oil prices have risen because of concerns about the Iraq crisis and because of declining inventories of oil and fuel products around the world -- and particularly in the United States.

A siege of severe arctic weather has drained heating fuels in this country and Europe. A strike at Venezuelan oil fields that began in December deprived U.S. refiners of 10 percent of their supplies. Deliveries from Venezuela are just starting to recover.

These shocks have hit a cautious worldwide energy industry that has held back on expansion of refineries and drilling projects, particularly following the collapse of oil prices in 2001. With profits and stock prices depressed, most energy companies are reluctant to increase investments at a time of gyrating oil prices and rising exploration costs, analysts said.

It is getting harder and harder to find new oil reserves that can be lifted, refined into gasoline or heating oil and sold at a price that meets companies' profit targets, said Steven Pfeifer, global oil research coordinator at Merrill Lynch. Most companies aren't giving ground on their profit goals.

The result is that oil and fuel inventories -- both in the United States and other major industrial nations -- are at the bottom of normal ranges for the past five years, the EIA reports. "We don't see inventories getting back to normal levels until 2004," Pfeifer said.

"It is a very tightly stretched system," said Doug MacIntyre, a senior market analyst with the federal Energy Information Administration. "It doesn't take too many problems to cause a ripple effect."

When gasoline inventories are full, competition takes over. That is what happened a year ago, and the U.S. price for regular gasoline averaged just $1.13 a gallon from December 2001 to February 2002.

But when inventories are stretched very thin, as they are now, the day-to-day energy prices vibrate according to the strategies and hunches of traders, companies, investors and speculators.

Some industry critics, such as Sen. Carl M. Levin (D-Mich.), think that Congress should consider requiring oil companies to maintain minimum inventory levels, to prevent shortage conditions that lead to price spikes on gasoline and fuel oil. But that proposal is not gathering support.

Some market observers say that energy companies could show more restraint.

"Right now, it's a very speculative market," said Mantill Williams, spokesman for the national AAA organization. Current gasoline prices are the highest for any February on record. "Motorists are paying for that speculation. We've been asking companies to show some restraint in pricing their products and take the consumer into account," he said.

But EIA's MacIntyre replies that for now and the foreseeable future, consumers are stuck with a market where demand is running ahead of supply. "Gasoline stations are going to charge what the market will bear. If another gasoline station in the neighborhood raises prices, they can too," MacIntyre said.

Within two miles of Tanna's Rosslyn station, other stations' prices for regular gasoline fluctuated from $1.59 a gallon to $1.70 depending on location. But all were much higher than a year ago.

The balance won't go the other way until the Iraq crisis is resolved and inventories of oil and fuels are rebuilt, MacIntyre said. When that will happen is just another of the unanswered questions hanging over energy markets and consumers.