The recent drop in crude oil prices has intensified calls in the Middle East for production restraint and market stability.
But two problems were evident earlier this month at the Middle East Petroleum and Gas Conference in Bahrain: Production restraint remains elusive, and "stability" means different things to different market players.
Oil officials from Kuwait, Iran, Oman, and Bahrain called for cooperation among producers and between oil buyers and sellers, saying that low oil prices threaten investments in productive capacity and therefore future supply.
Some voiced common regional suspicions. "No matter what producers do," said Kuwaiti Minister of Oil Ali Ahmad al Baghli, "the speculators always find an excuse to forecast lower oil prices."
But London consultant Joe Roeber urged producing countries to abandon their wariness of trading and markets, a trait he attributed to fear of losing control.
"This is complete illusion," he said. "Nobody has control. The market is sovereign."
Several speakers urged oil exporters to become more active in markets as a way, of dealing with price volatility at a time when they face great investment needs.
Others traced prospects in two regions that will strongly influence demand for oil from the Organization of Petroleum Exporting Countries: the former Soviet Union (FSU) and China.
INVESTMENT THREATENED
Al Baghli of Kuwait and Mostafa Khoee, managing director of Iranian Offshore Oil Co., hinted their countries may, cut investments in oil productive capacity in response to the price slump.
Kuwait Petroleum Co., said Al-Baghli, "will have to reexamine its capital and exploration spending plans for 1994."
Al Baghli previously said Kuwait's government will cut its budget by 20% from 1993 spending levels in light of sagging oil prices (OGJ, Jan. 10, Newsletter).
Khoee disputed reports that negotiations on foreign participation in Iranian exploration and development are moving slowly and pointed out that National Iranian Oil Co., of which he is a director, is constitutionally prohibited from granting equity participation in oil and gas fields.
"In the upstream sector, we have conducted talks with many firms, and there is no impediment in our path," he said.
Iran, isolationist since the Islamic revolution of 1978 79, began talking about reopening its upstream projects to foreign capital in 1991.
It and other OPEC members no longer can depend on government financing for oil industry projects because governments have deficits in their external accounts, said Peter J. de Roos, chief executive officer of Saudi International Bank, London. Yet in the next 6 7 years, capital requirements in the Middle East and North Africa will total $70 110 billion, he said. Members of the Gulf Cooperation Council countries on the Persian Gulf other than Iran and Iraq - will account for $50 90 billion of the total.
GCC deficits are high but not out of control, de Roos said.
"I am confident that economically viable projects will be financed," he said. But "the days of single source financing are gone."
Khoee said Iran's spending plans target productive capacity of 5 million b/d, 4.5 million b/d sustainable, and maintenance at that level for 5 years. But that may change.
"The outlook for oil prices does not justify further capacity expansion for us right now." And that, Khoee said, threatens future supply.
Kuwait's al Baghli made a similar point, saying stability of supply and price is better in the long term for consuming countries than the price volatility, of recent years.
"We in OPEC are ready to cut production," he said, "but only if other producers outside OPEC are prepared to join us."
NON-OPEC EFFORT
Said Bin Ahmed Al Shanfari, minister of petroleum and minerals of Oman, reported on his recent tour of non OPEC producers in quest of production restraint. His travels were to continue after the meeting.
"Very positive responses have come from among others Egypt, Yemen, Syria, Russia, Angola, Malaysia, and Brunei," he said, providing no details about promises of production cuts. Large consuming nations with production were not as eager to cut, he added.
British officials told him their country gains from low oil prices and so isn't inclined to enforce production restraint.
The Oman oil minister said he toured the countries it the request of the GCC. His economic advisor, Herman Franssen, pointed out that most of the 38.8 million b/d of oil and gas liquids production outside OPEC isn't subject to trimming.
Industrial nations of the Organisation for Economic Cooperation and Development benefit from low oil prices and thus have no incentive to cut their production, which totals 16.7 million b/d. Of about 22.2 million b/d remaining, 4.4 million b/d comes from net importers similarly disinclined to cut production for the sake of higher prices.
The remainder, 17.8 million b/d, includes 2.1 million b/d from 30 small producers that would be impossible to coordinate. That leaves 15.7 million b/d, of which 6.5 million b/d is traded internationally.
Adding the exported volume to Russia's exports of 2.2 million b/d gives the amount Franssen considers the basis for non OPEC production cuts: 8.7 million b/d.
ADVICE TO OPEC
OPEC members received no shortage of advice on coping with price volatility, most of it having to do with greater participation in oil trading activities.
Roeber, for example, said one of the gulf producers should allow its crude to function as a pricing benchmark, or marker.
"The need is desperate," he said, pointing out that light, sweet crudes are the world's markers even though more than 60% of the world's crudes are neither sweet nor light. This enables traders to profit from crude value differentials to the detriment of heavy crude producers.
Marshall Thomas, senior vice president of PVM Oil Consultants Inc., said producers should increase their market activity to break a lock created by term contracts with formula pricing provisions.
"With term contract pricing formulas effectively and automatically linked to the spot markets via formulas, the situation is not all that dissimilar to netbacks," he said. Netback pricing helped prices skid during 1985 86 by guaranteeing refining margins and encouraging companies to buy crude without regard to price results.
Marshall said producers should find ways besides term contracts with formula pricing to sell crude.
"If producers don't like the speculators' influence, they must be ready to join the fury and participate in the crude markets with their barrels and their dollars."
Other advice to Middle East OPEC members came from a Middle Eastern source. Mohammed Saleh Shaikh Ali, chief executive of Bahrain National Oil Co., said producers in the region should build the refining capacity that will be needed somewhere in the world to meet anticipated increases in oil demand. They also should invest in very large product carriers to replace aging crude carriers.
Shaikh Ali said the current dislocation of crude reserves and refining capacity aggravates market instability. And capacity, additions are unlikely in traditional refining centers close to product markets.
He said new refining capacity costs $12,000/b/d about twice what new production costs. But the refiner receives proportionally much less of the wholesale oil price than the producer does, with governments in many consuming countries squeezing the refining margin further with taxes at the retail end.
"It is obvious that only these governments and producers of oil could generate the cash necessary for reinvestment in refining capacity," Shaikh Ali said.
CHINA, FSU WILD CARDS
Events in China and the FSU will be crucial to demand for OPEC oil but remain unpredictable.
Lucian Pugliaresi, president of LPI Consulting Inc., said that with rapid economic reform the FSU could be exporting nearly 5 million b/d by 2005 and thus be a major competitor.
Despite the assumed growth, which normally would raise demand and reduce exports, exports would climb because of rising production and exercise of what Pugliaresi called an "enormous capacity to reduce consumption" in the FSU.
By contrast, rapid political and economic decline would turn the FSU into a net importer of oil by 2000.
In the, Asia Pacific region, the outlook is more certain: solid demand growth, with China the main force.
The region's need for oil from elsewhere will grow from 7.8 million b/d in 1992 to 9.7 million b/d in 1995 and 13.2 million b/d in 2000, said Fereidun Fesharaki, director of the program on resources at East West Center, Honolulu.
The amount from the Middle East will grow to 12.2 million b/d of crude and products in 2000 from 6.8 million b/d at present.
Fast growing China, he said, will be a major oil importer by 2000. Its imports of Middle Eastern crude will climb from 135,000 b/d in 1992 to more than 1 million b/d in 2000.
