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Source: Articles by Dr. Walid Khadduri, from the newspaper
Dar Al-Hayat
Dr. Walid Khadduri is an Editor at Dar Al-Hayat. He was previously
Editor of Middle East Economic Survey (MEES), which he joined
in 1981 after working for seven years as Director of Information and
International Relations at the Organization of Arab Petroleum
Exporting Countries (OAPEC) in Kuwait. He was also a member of
the Political Science Department at Kuwait University (1973-1975)
and prior to that he served as Director of Research at the Institute
for Palestine Studies in Beirut (1970-1973). Mr. Khadduri has
published and lectured extensively on the oil industry and the
Middle East situation. Born in Baghdad, he received a BA in Social
Science Studies from Michigan State University in 1963 and
graduated from The Johns Hopkins University School of Advanced
International Studies (SAIS) in 1972 with a PhD in International
Relations.”(from
http://www.pira.com/ClientServices/GPRSAdvisoryBoard.htm)
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All articles written by Walid Khadduri for his column, “Oil in a
week”, for Dar Al-Hayat
Article: Oil in a Week - Gas in the Eastern Mediterranean: A New
Dimension to the Arab – Israeli Conflict by Walid Khadduri
Sun, 16 January 2011
Gas discoveries in the eastern Mediterranean have sparked controversy. This is particularly
evident from the unfair Israeli conditions placed on the development of the Gaza Marine field
in Palestinian waters for instance, as Israel insists that the gas first be routed to Ashkelon an
then to Gaza, in order for the Hebrew state to deduct the quantities it requires at the prices that
it decides, or to halt/allow gas flow in accordance with Israel’s interim political priorities.
Such conditions have prompted British Gas (BG), and its partners, the Investment Fund of the
Palestinian Authority and the Consolidated Contractors Company (CCC), which together are
developing the Gaza Marine field, to suspend their operations there.
The field was discovered in 2000, 25 kilometers off the coast of Gaza, with estimated gas
reserves of 64 trillion cubic feet. It was planned that gas from this field would fuel the Gaza
power plant, to replace gas imports from Israel.
Disputes increased in January 2009, when the consortium led by the U.S group Noble Energy
and its Israeli partners made large discoveries in the Tamar field, 90 kilometers off the coast
of Haifa. The field is estimated to hold approximately 8.4 trillion cubic feet of gas reserves,
and consists of three blocks. The primary block of the Tamar field currently under
development lies 35 kilometers South of the Lebanese waters. The depth of the wells is
approximately 5500 feet (1677 meters) of water, with a total depth of 16,076 feet. The
consortium signed an agreement with the Israeli power company to supply the latter with
approximately 2.7 billion cubic feet of gas annually over a period of 15 years, starting with
the end of 2012. The overall value of the contract is 10 billion dollars. The Tamar field also
comprises two small blocks that extend into Lebanese territorial waters.
In early June 2010, the consortium led by Noble Energy group and its Israeli partner Delek
Group, announced the discovery of the Leviathan field, which lies 80 kilometers off Haifa
port, in the direction of Cypriot waters and close to Lebanese waters. The field is estimated to
hold 16 trillion cubic feet of gas reserves.
Gas discoveries in Israeli waters have begun to come to their present fruition after four
decades of failing to find hydrocarbons on land, as not even one oil discovery was made there.
The cause of these failures was reliance on local oil companies which had limited experience
in exploration, and the fact that international oil companies have kept their distance from
Israel for fear of Arab boycott.
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However, things changed in the 1990s. As a result of the huge discoveries made in Egyptian
waters, oil companies started a campaign of exploration in the Eastern Mediterranean. Despite
dealing with some record depths in some cases, modern technology has helped tackle this
problem. Furthermore, international oil companies benefited from the Camp David
agreement, and managed to operate in both Israel and Egypt simultaneously, without fearing
the effects of an Arab boycott.
The discovery of the Tamar and Leviathan fields in the last two years has effectively altered
the Israeli energy balance. Currently, Israel completely imports all of its energy sources,
including oil and natural gas, in addition to coal, which it imports and uses widely in power
generation. But now, coal will be replaced by natural gas.
There is a lot of uncertainty surrounding facts about Israeli gas. There is first the issue of the
Northern fields, and the possibility that they extend into Lebanese waters. The problem here
lies in the fact that maritime borders are not demarcated or agreed upon in advance. In the
case of the Tamar field, for example, the primary block is 35 miles south of Lebanese waters,
while two small blocks indeed extend into these waters. Moreover, the maps of some of the
fields in the Southern waters indicate that they may also extend into Palestinian waters. In
addition, drilling and exploration are still in their early stages, especially in the Leviathan
field. For this reason, it is not possible to give a clear estimate of the reserves held by the
fields, and whether they are confirmed or estimated reserves, or how productive they are. It is
also striking that there is a dearth of public information on the quality of the gas- for example
on the water content of the gas. As is known, this factor is extremely important for project
economics.
The information available also betrays an important, albeit expected, trend, namely, the
excessive optimism of local exploration companies, and their approach in estimating reserves,
compared to the conservative announcements made by international companies. For instance,
local companies avoid mentioning the figures on confirmed reserves, or the productivity of
discovered reserves.
Nevertheless, these discoveries have added a new, hitherto unseen dimension to the ArabIsraeli conflict, a fact that can no longer be avoided. This geopolitical dimension is not only
limited to the Israeli-Palestinian or Israeli-Lebanese disputes, as is the situation at present, but
will also encompass several other Arab countries, particularly those that export natural gas,
and especially in the event Israel intends to export to European markets. Indeed, preliminary
contacts in this regard have already started; yet another source of gas was made available for
gas-thirsty Europe, this time one that overlooks the Mediterranean directly, without the need
for pipelines crossing several countries, as it can be exported as liquefied gas.
The current disputes are somewhat old. What is new, however, is the competition over gas
markets.
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Article: Oil in a Week - High Oil Prices: Causes and Responsibilities
Sun, 30 January 2011
Walid Khadduri *
In the past few weeks, oil prices have ranged between 97 and 99 dollars per barrel for the
North Sea Brent, and around 88 and 93 dollars for the light American crude. The data
available indicate that rise in oil prices will continue, and may even increase further.
The causes behind rising prices involve a number of factors, most importantly the industrial
and natural disasters, which prompted production shutdowns almost simultaneously, from
Alaska, Norway and Brent crude in the British North Sea, to coal in Australia as a result of
floods, where coal in power plants worldwide has to be replaced with fuel oil.
Then there is the desire of the industrialized countries to have “suitable” and “encouraging”
prices that would support research and boost tapping into alternative energy sources. This is
largely similar to price hikes in the mid-seventies, which encouraged deep-water production at
the time, such as in the North Sea and elsewhere.
Yet, in addition to these factors, there is also a fundamental trend with significant implications
for oil markets, present and future. It is the increase in demand by about 1.5 to 1.8 percent
(and even 2 percent). This is an important trend with far reaching significance that goes
beyond the present situation. The above mentioned tendency involves continued demand in
industrialized countries, especially the United States, and also, as Saudi Oil Minister Ali alNaimi said last week, a continued increase in demand in emerging Third World countries,
where it will overtake that of industrialized countries in 2013. This increase in demand is
taking place in Asia (China and India), the Middle East (especially in oil producing countries)
and Latin America. This means that demand will increase more in the middle of this decade in
third world countries than in industrialized countries, for the first time in the history of the
global oil industry. However, despite these fundamental increases in demand, and the
responsibility lying on OPEC to meet the challenge of supplying markets with the required
additional quantities of oil, given the relative decline in supplies by non-OPEC states; despite
this, supply and demand remain balanced in the markets. At present, there are no reports of
supply shortages, or of failure by any member state to meet the requirements of their supply
contracts. Al-Naimi said in this regard that OPEC’s surplus production capacity currently
stands at six million barrels per day, including four million barrels produced by Saudi Arabia
this year. This means that OPEC states have surplus production capacities that can secure the
necessary supplies to the markets if needed, and rather quickly.
These are fundamental manifestations in the global oil industry, driving prices to higher
levels. However, they are accompanied by other factors that also drive prices up. For
example, temporary production shutdowns for technical or natural causes leads to an increase
in speculation and forecasts on supply and demand dynamics, which in turn drives prices
further up. In fact, speculations are exacerbated by some of the statements given by some
OPEC officials who say that the organization will not convene to reassess its production
policy, even if prices hit 110 or 120 dollars per barrel. Statements of this kind are deemed
irresponsible, as they give the impression that OPEC member states are unconcerned by
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rapidly increasing oil prices, and that they are not willing to deal with this responsibly, despite
the inherent risk in such rapid price hikes. The fact of the matter is that some OPEC major
producers are dealing with demand increase or decrease through unofficial or non-public
channels, by increasing or reducing production according to circumstances and within the
limits set forth by the production quotas allocated to them and agreed upon within OPEC.
Hikes in the prices of oil and other basic commodities have sparked a debate at senior levels,
especially following the uprisings linked to price rises in many countries, including Arab
countries themselves. In a speech he gave last week, French president Nicolas Sarkozy
warned against this, and underscored the need to curb increases in the prices of basic
commodities, including oil, because of their impact on ‘bread demonstrations’ and their
adverse influence on the global economic growth. He also highlighted the need to place
regulations and restrictions on the price increases of strategic commodities, in line with the
measures that were approved internationally to put an end to exchange rate fluctuations.
Article: Egypt, OPEC and Rising Oil Prices
Sun, 06 February 2011
Walid Khadduri *
There are two essential questions haunting oil markets these days. First of all, there is the
question regarding the repercussions of the unrest in Egypt on these markets. As is customary
during major geopolitical shifts, and as fears surface regarding the emerging situation,
speculators become more active in the futures markets, in anticipation of any disruptions in oil
supplies, thereby pushing prices higher.
The second question involves OPEC’s stance vis-à-vis rising prices. The price of Brent Crude
exceeded the one hundred dollar per barrel mark recently, so the question is, can OPEC
continue asserting that the desired price range is 70 to 80 dollars per barrel, while maintaining
the same production rate, given the inherent contradiction in this stance?
We shall first deal with the second question, on account of its far reaching significance. Oil
prices have been following an upward trend for months now, driven by improved global
economic performance, which helped increase demand in Western industrialized nations, as
well as emerging countries. Prices also rose as a result of the cold snap in the northern
hemisphere, while improved dollar value prompted investors to increase their purchases of
commodities such as gold and oil.
In fact, the price of one barrel of Brent Crude rose by nearly 29 percent last year, averaging
80 dollars throughout, before exceeding 90 dollars at the end of that year. This rise in prices
reflects increased demand for oil. But despite that, OPEC has kept the agreement over
production rates, which was reached in Oran in the autumn of 2008 – i.e. at the start of the
global financial crisis- unchanged. Back then, the organization cut production to avoid
dramatic falls in demand and to safeguard oil prices, which shrank to nearly 30 dollars per
barrel at the time.
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Naturally, there is a different reality in place now, and remarkably so, in comparison to the
one prevalent back in those days. However, OPEC has yet to change its policies and
production agreement in order to curb the rapid increase in oil prices. OPEC ministers and the
organization’s general secretariat, meanwhile, have asserted that the desired price range is 70
to 80 dollars per barrel.
At first glance, there seems to be a fundamental contradiction between the two positions.
Upon examining the bigger picture of the markets, however, different explanations emerge.
On the one hand, we find that some price increases are temporary, like the ones driven by the
cold snap in Europe and the United States, or as a result of temporary shutdowns in Alaska,
Norway, and Great Britain for technical or natural causes.
OPEC’s basic data indicate the existence of a very high level of surplus production capacity in
OPEC member states, which would allow supplies to be rapidly dispatched to the markets in
the event of emergency additional demand. The surplus production capacity of the
organization amounts to approximately six million barrels per day (four million in Saudi
Arabia and two million in the UAE and Kuwait combined). There also is an excess refining
capacity of nearly 15 million barrels per day worldwide, and large commercial oil inventories
in several primary consuming nations.
These data mean that there is no actual shortage in the markets, or any fears regarding supply
shortages in emergency contingencies. However, they also reflect a real risk of price
deterioration at the issuance of any misleading signal, such as pumping additional quantities
of oil, as additional supplies will go to storage instead of going to consumption markets.
This may highlight OPEC’s keenness to maintain reasonable production levels, while
ensuring that hikes in oil prices do not aggravate global inflation levels or jeopardize global
economic growth. These calculations gain extreme importance in light of the developments in
Egypt. The fact that prices rose above one hundred dollar is symbolic, because the price of
Brent Crude was hovering around this level even before protests erupted in Egypt.
There is no question regarding the importance of Egypt’s role in the oil transit trade through
the Suez Canal, the SUMED line, and also the liquefied gas from exporting nations to Europe.
Egypt also plays a key role in oil storage across continents. Therefore, any shutdown or
suspension affecting either sector will lead to increased prices. Meanwhile, the voices that
raise concern regarding the impact of the closure on Suez Canal on prices, know that the canal
is operating normally at present. Hence, fear is not of seeing the canal closed, but instead, it is
of the continued closure of banks in Egypt, where transit fees are transferred to the Egyptian
authorities.
It is plausible to imagine that oil can be transported to Europe for a short while via Cape
Town in South Africa, even though it is a longer journey naturally. The same applies to the
scenario where some of the Western African oil is diverted to European markets while Gulf
countries compensate for African oil in Asian markets. Finally, it is also plausible that oil
inventories in Europe itself will be tapped. Even if the Suez Canal is to be closed down, which
is something difficult to imagine at present, production would continue, and there are readily
available alternatives to provide Europe with the necessary supplies.
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Article: The Implications of Oil Exceeding 100 Dollars
Sun, 13 February 2011
Walid Khadduri
The price of one barrel of North Sea Brent Crude has exceeded the 100 dollars level, amid
indications that prices may continue to rise to higher levels in the foreseeable future, as a
result of large increases in oil demand, beginning with last autumn. This trend is expected to
continue during the current year, in addition to the major political shifts in the Arab world that
are casting their shadow on oil markets.
One important indicator of market shifts is the information published by OPEC’S monthly
‘OPEC Bulletin’ in its latest issue, regarding the production increase by OPEC member states
of about 400 thousand barrels per day, added to the level of 29.72 million barrels per day seen
last January, as the price of one barrel of Brent Crude Oil rose above the 100 dollar level. This
level of output is in fact the highest for OPEC’s members since December 2008.
In this regard, the U.S. Energy Information Administration announced that its forecasts show
that demand for oil will rise during this year above the 90 million barrel level in the fourth
quarter, which is a record figure. Meanwhile, the Commissioner for Energy in the European
Commission has warned against the negative repercussions on the recovery of the European
economy, should oil prices continue to rise above 100 dollars.
Demand for oil has generally increased in 2010, leading prices to increase gradually to
approximately 85-90 dollars instead of 75-85 dollars. The upsurge in prices, which began last
September, can in fact be attributed to the unexpected economic recovery in Western
industrialized countries and to the sustained economic growth witnessed in emerging Asian
countries.
Meanwhile, the youth uprising in Egypt, and the subsequent concerns in the markets that the
Suez Canal and the SUMED line may be shut down, have also recently helped sustain price
increases. But although more than two weeks have elapsed since the start of the Egyptian
uprising, there is no indication that these facilities are being targeted. So far, the flow of oil
through them has not been interrupted. And despite the daily comments regarding the threat of
the canal being closed, the truth is that the average quantities carried through it is about 1.8
million barrels per day, and almost the same quantity is carried through the SUMED line. In
the meantime, there are reports that a sufficient number of tankers is available, to ship around
4 to 5 million barrels per day of crude oil in case the canal is closed, and in case the tankers
have to navigate a longer route from the Arab Gulf to Europe around the African continent.
Furthermore, if the current high levels of production persist, then oil will ultimately find its
way to the markets, but with increased shipping costs of course, and subsequently, increased
prices.
What about the coming months of this year, then?
The information listed above points to a substantial increase in demand, and subsequently,
continued price increases, perhaps even beyond their current levels. Moreover, the Arab
uprisings will continue to impact global oil markets, which will remain cautious and vigilant
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for any new political shifts in the region, in light of the developments in Tunisia and Egypt.
This is of course a new additional factor that will in turn lead to continued increases in prices
Article: Egyptian Gas Exports to Israel
Sun, 20 February 2011
Walid Khadduri *
The issue of exporting Egyptian gas to Israel has been one of controversy in Egyptian circles
ever since the idea was first proposed in the nineties, knowing that it was opposed by many
Egyptian energy experts and opposition parties.
In fact, the objection to exporting gas to Israel revolved around both the principle itself and
the issue of prices. After the Egyptian authorities agreed to export gas, opponents of this move
resorted to Egyptian courts to get an injunction against the execution of the contract. At first,
the court overturned the government’s decision. However, a ruling on appeal has
subsequently permitted the principle behind this export, while taking into account Egypt’s
domestic natural gas requirements, and a sale price that is proportionate relative to global
prices. Then recently, the youths of Egypt’s revolution handed over a petition to military
officials, demanding a halt of gas exports to Israel.
Egypt started exporting gas to Israel back in 2008, acting on a 20 year agreement reached with
the Israeli government in 2005. The agreement stipulates that the East Mediterranean Gas
Company (a private Egyptian-Israeli company) export up to seven billion cubic meters of gas
annually. Initially, the price agreed upon was three to 3.5 dollars per million British thermal
units; however, the price was adjusted to four to 4.5 dollars in August, 2009, when the Israel
Electric Corporation (the primary consumer of the exported gas) approved the adjustment.
In truth, many Israeli politicians initially objected to the reliance on Egyptian gas exports as
well. A wide debate ensued under the government of Ariel Sharon regarding this issue, as
some government officials rejected in the beginning the principle of relying on gas imports
from one single Arab country, or even relying on gas imports from non-Arab countries, but
which transit through an Arab country, citing security concerns, naturally. But prior to the
significant gas discoveries made in Israel recently, the National Infrastructure Minister (who
is responsible for energy affairs) decided to switch the fuel used in power plants from coal to
natural gas for environmental purposes. Since no gas reserves were found until the end of last
decade, the principle of importing gas was adopted, even if exclusively from Egypt in the
beginning. However, lengthy negotiations were also held with Russian and Azerbaijani
companies to obtain additional supplies through Turkey, but all these attempts failed.
The fundamental question here is: What is the legal/political point of reference that governs
Egyptian gas exports to Israel? Is there an international treaty in place, like the Camp David
Treaty, for example? The answer is simply no. The Camp David Treaty, signed in 1979,
stipulated that Egypt provide Israel with crude oil. In the event it is unable to do so, and an
energy shortage ensues in Israel, the United States bears this responsibility and exports oil to
Israel, in Egypt’s place. But the treaty did not mention the issue of gas exports. The reason for
this is simple. In 1979, Egypt was not a gas-exporting country yet, and had ever modest
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reserves of gas at the time. Hence, it is very likely that it was U.S. pressure on Cairo that
pushed Egypt to export gas to Israel, through the free trade agreement between the U.S.,
Egypt and Israel. It also likely that pressure had been exerted by threatening to cut annual
U.S. aid to Egypt.
What benefit does Egypt incur from the agreement? Despite the large gas reserves discovered
in Egypt in the Gulf of Suez, the Western Sahara, the area north of Alexandria and the Nile
Delta on the Mediterranean Sea during the past decade, Egypt continues to witness growing
demand for natural gas for domestic consumption. In parallel, there are many projects to
export Egyptian gas, either as liquefied natural gas to Europe, or as natural gas through the
Arab Gas Pipeline. This pipeline supplies Jordan, Syria and Lebanon, and extends to Turkey
where it is hooked up to the Nabucco pipeline that supplies European markets; this is in
addition to the pipeline extending to Israel of course. In view of these domestic and external
commitments, Egypt has entered negotiations with some Arab countries to supply them with
natural gas and help them fill any supply shortage that they may suffer in the future. In other
words, Egypt did not need to export additional quantities to Israel, especially at prices
significantly lower than the international rates at which gas is currently traded.
Gas prices differ from one region to another. However, it is possible to say that prices in
recent years have ranged between five and seven dollars per million British thermal units, or
seven and nine dollars. As such, the extent of the large amount of the discounts granted by the
Egyptian government to Israel in terms of its gas sales to Israel becomes clear, especially
when the price initially adopted is considered.
However, even the new price is lower than the lowest level of global prices. Adding to the
uncertainty regarding this deal is the fact that it was implemented after Israel insisted on being
supplied with Palestinian gas at quantities that Israel determines, and at discounted prices.
This was rejected by the consortium conducting exploration in the Gaza Marine field, led by
British Gas. Subsequently, Israel decided to prevent the development of the field located in
Palestinian territorial waters throughout the past decade, ever since its discovery in 2000.
This begs the following question: How will the new Egyptian authorities deal with this issue,
and what reaction will Israel and the United States have, should these gas exports be
suspended? This is especially valid given the fact that Israel will continue to somewhat rely
on Egyptian gas imports until early 2013, when production from the Tamar field is set to
begin, production that will meet the requirements of Israeli domestic consumption.
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Article: Producers and Consumers: Divergent Views on Rising Oil
Prices
Sun, 27 February 2011
Walid Khadduri
Producers and consumers expressed conflicting views on the daily rapid rise in oil prices,
which topped 110 dollars and are moving towards the price of 120 dollars per barrel, while
some speculate that they may well exceed the 200 dollar level.
In the assessment of oil producing countries (OPEC), there are a clear policy and objectives
adopted by OPEC. The organization’s priorities thus are, first the balance of supply and
demand, second ensuring adequate oil supplies are delivered to the market to meet
consumption levels, and third, the creation of a surplus production capacity sufficient to meet
any emergency supply shortage, be it for political or industrial causes. Indeed, there is clear
equilibrium in the markets, and no one has yet spoken of any shortages in oil supplies, and for
some time now.
In other words, oil producing countries are managing to fulfill all the sales agreements signed
with international oil companies. Also, there is an additional crude oil production capacity for
OPEC member states that amounts to 5-6 million barrels per day, including 4 million barrels
per day in Saudi Arabia alone, with the rest distributed between Kuwait and the United Arab
Emirates. Oil officials in OPEC countries have also reaffirmed their countries’ readiness to
compensate any shortfall that may occur as a result of a halt in Libyan exports. In truth,
European countries are already being compensated for the lost Libyan oil.
Hence, OPEC and major producers are focusing their attention on providing the necessary
supplies to the markets. In addition to this surplus production capacity which is available to
compensate supply interruptions – as is the case now in Libya -, a strategic inventory of
nearly 2 million barrels per day over six months is present in the Western industrialized
countries that are members of the International Energy Agency. This inventory, as its name
indicates, is intended for emergency situations only, i.e. in the event of an emergency shortage
in supplies. It is only tapped after OPEC’s surplus production capacity is used. In addition,
there are commercial inventories maintained by international oil companies. This means that
there are between 6 and 8 million barrels per day (between OPEC’s surplus production
capacity and the strategic inventories in industrialized countries) available to the markets in
emergency contingencies, whereas Libya’s exports do not exceed 1.5 million barrels per day.
With regard to consuming nations, they only perceive oil through the looking glass of its
prices, and their rapid daily rise. These countries are observing the implications of rising
prices for their economic growth in particular, and that of the global economy in general, for
fear of their repercussion on recovery from the global financial crisis. In other words, the
criticism voiced by the representatives of these nations focus mainly on the issue of prices,
and their adverse economic effects. The primary concern in the financial markets is that oil
prices may exceed the 120 dollar level, as this may lead the world to remain in the limbo of
the global financial crisis, without ever being able to escape it.
OPEC’s stance here is as follows: Prices are determined by global markets and by speculation
allowed by these markets, and thus by the regulations of the countries in which such
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speculation takes place (in the U.S and UK in particular). Therefore, the onus is on these
countries to curb speculation that pushes prices to higher levels rapidly, regardless of the facts
of the markets themselves. Naturally, OPEC is not comfortable with this rapid increase in
prices, given its negative impact on the global economy and subsequently, demand for oil in
the future. OPEC is also well aware that soaring prices are caused by uprisings in Arab
countries. In fact, OPEC’s members have already started to gradually increase production, and
international companies and consuming nations are aware of this.
Hence, current price hikes are the result of legitimate fears in the markets due to the unrest
taking place. However, these fears are not real because it is very possible to compensate
interruptions quickly, and with the same type of crude oil (i.e. the light crude which Libya
produces).
Article: Arab oil Investments In Light of Political Changes
Sun, 06 March 2011
Walid Khadduri *
The Arab Petroleum Investments Corporation (APICORP) issues a most valuable annual
research of the Arab economic and energy investment outlook. The man in charge of
preparing the review is Ali Issaoui, a consultant at APICORP and a senior Arab energy
economist. In fact, APICORP has recently updated the study, which was released at the
beginning of this year, to take into account the important political developments in the Arab
region. Here is a summary of the most salient points mentioned in the report.
The report mentions that growth in the Arab countries was put at 4.2 percent in 2010, i.e. in
the year that immediately followed one of the sharpest financial crises the world has ever
seen. Most Arab countries managed to weather the effects of the global recession, something
that could lead to increased investments. However, social and political upheavals in parts of
the region do not bode well for the prospects of achieving higher growth. The ability of the
Arab world to sustain growth to the levels seen before the recent political crises depends on
these countries maintaining social and political stability. This will be a major challenge,
which will hinge on the capacity of the governments concerned to adopt and implement the
necessary policy reforms to tackle the socio-economic problems facing them. The most
pressing challenge facing Arab governments is the need to address the problem of
unemployment among a rapidly expanding population and also the threat of inflation.
The report also points at an important fact, namely, that the price of crude oil, despite
improvement in the global economy, remained steady within the desired band (of 70-90
dollars per barrel). However, rapid growth in emerging countries has pushed prices to higher
levels, exceeding one hundred dollars per barrel. In truth, the IEA reported that demand for oil
grew by 2.8 million barrels per day in 2010, the strongest annual increase seen since 2004.
This means, according to the report, that industrial and oil producing countries must face their
responsibilities. In other words, regulating agencies in oil consuming countries must dampen
speculative trading in their markets, while OPEC countries must balance supplies with the
ever increasing level of demand.
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Based on the above facts, the value of Arab energy investments can be estimated over the
foreseeable future. This mainly revolves around the increased demand for crude oil, with the
assumption that crude oil prices will fall back to their desired range (70-90 dollars per barrel).
Higher demand will encourage Arab oil-producing countries to bring back in line some of the
projects they had previously shelved or postponed in light of the stifling atmosphere that
prevailed during the global financial crisis, and to slate for development new projects that
were planned in advance.
On this basis, the report expects the number of new energy projects to increase, and for capital
requirements for these projects to reach around 430 billion dollars for the period 2011-15.
These investments will be most probably distributed in accordance with the size of petroleum
reserves in the countries concerned. Thus, investments are expected to be mainly located in
five countries, namely, Saudi Arabia, UAE, Qatar, Algeria and Egypt. The GCC area is
expected to account for two thirds of these investments, and within it, the UAE will witness
more energy investments than Qatar. In Saudi Arabia, potential investment is estimated at 130
billion dollar. In the UAE, potential investment totals 74 billion dollars, while investment in
Qatar is estimated at 70 billion dollars. In Algeria, Sonatrach is anticipated to carry out new
projects, after having gone through a period of a clear investment paralysis in 2010. New
investments are thus estimated at 57 billion dollars. In Egypt, the value of potential
investments amounts to 42 billion dollars, and are expected to remain on track despite current
political turmoil in the country.
The report devoted a special section for investments in the power generation sector, where it
indicated that “as a result of high population growth rates and fast expanding urban and
industrial sectors, many countries in the Arab world have been struggling to meet rapidly
increasing demand for power. However, compared to recent trends, projected demand is
expected to be slightly curbed as a result of current economic contraction. Also, expectation
of gradual phasing out of price subsidies could help rein in excess demand growth.”
Accordingly, the report predicts that power generation capacity will grow at a rate of 7.7% for
the period 2011‐15, resulting in an additional capacity of 80.4 GW over that period. This
means an investment of 92.9 billion dollars, with 60% of that expected to take place in the
GCC, which remains the fastest growing area in the Arab region in terms of power generation
capacity.
The report concludes that “Notwithstanding the ongoing turmoil in parts of the Arab world,
we expect global economic and financial fundamentals [with the ensuing increase in demand
for oil and gas] to continue supporting the resumption of energy investment growth in the
region. The impetus for recovery will be strongest in the GCC area”.
Article: Oil Markets Awaiting the Unknown
Sun, 20 March 2011
Walid Khadduri *
Since the beginning of 2011, oil markets have been facing many sudden questions and
challenges. These started with the increased demand for oil in the United States, the world’s
biggest consumer of oil. Consumption levels there rose despite the fact that prices had soared
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beyond the 75-85 dollars per barrel range, which most OPEC countries called for, to the range
of 90-100 dollars. What was strange is the fact that demand not only rose in emerging Asian
nations, but also in the United States, where demand was poised to fall.
It was assumed, according to past experience and economic theories, i.e. with demand
declining following recessions and price hikes, that the opposite should happen, or in other
words, that prices should fall in light of these facts. But then the major and sudden political
shifts in the Arab world came. However, the events in Tunisia did not cause widespread
concern in the markets, because oil production in this country is limited and is mainly used for
domestic consumption.
Even the young people’s protests in Tahrir Square in Cairo and the strikes in various Egyptian
sectors did not affect the markets too much. The focus instead was on the issue of the passage
of oil tankers through the Suez Canal, the flow of petroleum through the SUMED pipeline,
from the Gulf of Suez to the Mediterranean though the Egyptian territories, and the concern
that oil supplies from the Gulf to Europe might be interrupted. However, it is known that both
the Suez Canal and SUMED continued to be in operation regularly, and no interruptions in
supplies took place. Nevertheless, panic struck in the markets, despite the fact that no actual
halt in supplies happened. As a result, prices soared and speculation increased, but this is an
expected matter in global markets.
Then markets began to be further gripped by fear with the outbreak of revolution in Libya.
Despite the fact that Libyan oil production is set at around 1.7 million barrels per day, or one
to two percent only of global oil output, it is very desirable in the market, especially in
Europe, since it contains a small concentration of sulfur, making it very much in line with
environmental standards in the continent. With the start of bombings targeting oil installations
in Ras Lanuf, some expected prices to rise to the record levels of 2008, due to the possible
shortage of Libyan crude oil exports or petroleum products. However, the difference between
2011 and 2008 lies in the fact that surplus production capacity exists this year, especially in
Saudi Arabia, UAE and Kuwait, with an overall surplus capacity of six million barrels per
day, far exceeding Libya’s production capacity if it should be completely halted.
Saudi Arabia in particular has the ability to compensate the markets with the desirable lowsulfur light oil crude. In addition, there is a surplus refining capacity worldwide. Owing to this
surplus production capacity, and the awareness in the markets that both the political will and
the ability to bring about balance in the markets are present in the major oil producing
countries – with a view to prevent prices from soaring to extremely high levels that would
hurt the global economy and consumers in emerging nations-, prices have been maintained at
reasonable levels under these circumstances, albeit above the 100 dollars per barrel mark.
Yet, the shadow of the unknown still looms over the markets. With the earthquake and
tsunami in Japan, and the radiation leaks there, some have expected that these developments
will have a large impact in the world’s third largest oil consuming country, especially with the
massive disruption in nuclear power generation. However, what actually happened was that
Japan replaced the halted nuclear power generation with liquefied gas imported from
Indonesia and Qatar to generate electricity. It is worth noting that 25 percent of Japan’s
refining capacity has been destroyed as a result of the disaster that struck the country. This
means that Japan will be forced to import petroleum products in lieu of crude oil.
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Nevertheless, as a result of the devastation suffered by the Japanese economy, and the decline
in consumption, production and exports during this difficult period, it is expected that oil
consumption in Japan would shrink.
The markets hence are dealing with many difficult questions at the same time. First of all,
what repercussions will the current unrest and shifts have on the safe arrival of supplies, in a
timely manner? Despite the presence of adequate reserve supplies of crude oil, petroleum
products and liquefied gas, the sudden shift in the sources of these supplies, from one
producer to another, no doubt leaves its mark on global oil markets, and increases speculation
and the ensuing impact, which drives prices upward, even though there is no shortage in
supplies.
Most importantly, the second question involves the uncertain future. What are the
implications of the major political changes taking place in Arab countries and the Middle East
in general on oil markets, especially if more revolutions and uprisings take place and escalate?
Is it possible that these developments will lead to armed conflicts among countries in the
region, and what role will the major powers play in these conflicts? These are questions that
must not be overlooked from now on, and are at the heart of the many questions raised by oil
industry officials. On the other side of this uncertainty, there is another question: What will be
the effects of the worst nuclear catastrophe currently witnessed in the world? The timing of
this disaster takes on major significance for the energy industry in the medium and long term,
more than the near term. Recently, Western industrialized countries managed to restore
confidence among their citizenries regarding the use of nuclear energy in power generation.
However, in the aftermath of the disaster in Japan and the devastation that struck the three
nuclear reactors in Fukushima, Western countries have begun to reconsider their nuclear
policies, especially Germany, which decided to review its previous policy on extending the
lives of ageing nuclear plants. This will translate into significant changes in future energy
investments, and the levels of fuel usage in generating power once more.
Article: Current Trends in Oil Prices
Sun, 17 April 2011
Walid Khadduri *
There is increasing talk about the movement of oil prices in the foreseeable future. For
instance, the International Energy Agency (IEA) predicts that oil prices will fall, because of
the negative impact of high prices on demand.
The most recent monthly report published by the IEA mentions that high prices are already
starting to dent demand, which has started to fall a few months ago. The report argues that
there is a real risk that sustained $100/bbl will prove incompatible with the current pace of
economic recovery.
But what does the current situation look like? OPEC’s most recent report mentions that the
average price of OPEC’s basket of crudes rose for the sixth straight month, reaching $110/bbl
in March, in an increase of about ten dollars compared to February. The report attributed this
to what it called the ‘fear factor’, as a result of the Libyan crisis and the possibility of it
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spreading to other countries in the region, and said that such fears were only exacerbated
further by the tragedy in Japan.
Oil prices have indeed risen throughout these events. U.S. crude oil prices increased and
averaged $103/bbl, even though the U.S. commercial crude oil inventories rose during the
same period. This means that there are adequate oil supplies in the market. Brent crude prices
also rose and averaged above $114/bbl.
Despite the fact that oil supplies from Libya have been disrupted, there is noticeable increase
in output coming from Arabian Gulf countries. Also and despite the Libyan crisis, there was
no news about shortages of oil supplies in any consuming country. In other words, amid the
gush of daily news coming from Libya, being carried around the clock on television, there
were no reports about any shortage or scarcity of supplies in European countries, especially
those to where the majority of Libyan was exported. This means that there were other parties
supplying oil companies with adequate supplies of oils that are similar in characteristics to the
Libyan oil. It is worth noting here the absence of any reports suggesting that there were power
shortages in Europe, especially in Italy and Spain which import Libyan gas. This means that
the concerned companies have managed to obtain alternative fuels to generate electricity, or
even alternative supplies of natural gas.
As regards to the situation of energy supplies in Japan, the IEA mentions in its last newsletter
that preliminary estimates indicate the loss in nuclear energy may be offset by increasing
consumption of petroleum products by about 300 kb/day. However, this figure is subject to
change and correction, in light of the general economic climate in the country, and the speed
with which reconstruction efforts would start. In light of these considerations, it is predicted
that Japan’s final requirements of additional oil imports will amount to 100 to 200 kb/day, a
relatively small amount.
The IEA’s forecasts notwithstanding, other figures by specialized institutions, including the
IEA itself, indicate that demand for oil will increase in 2011 compared to 2010, and that it is
very possible that demand will, for the first time ever, reach an average of 89 mb/day.
Forecasts of this increase range around the figure of 2 mb/day or more.
These figures indicate then, that global demand may very well be growing. So why this talk
about demand decline and a fall in prices? Perhaps the reason lies in the possibility that oil
supplies from countries outside of OPEC may be increasing, especially from Brazil, the U.S.,
Canada, Colombia, China and Russia. The information available indicates that this group of
countries may have approximately pumped an additional 600 kb/day in 2006.
Even in normal circumstances, it is extremely difficult to predict how oil prices will evolve
over time, let alone in current circumstances, amid the continuing wave of uprisings and
revolutions in the Middle East, which do not seem about to end anytime soon. Further, with
the escalation in the sharpness of the political squabble between GCC countries and Iran, it is
very difficult to predict the course of political developments in the region, or their
repercussions. It is therefore odd to see such statements regarding prices at this particular
time. The question then is, do these statements fall under the scope of warning speculators so
that they would reduce their investments in trading oil and other basic commodities? This is
particularly valid because speculations have pushed prices up in a more drastic manner than
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that shown in market fundamentals, such as supply and demand, as speculators took
advantage of the fear factor dominating the markets.
Article: The Repercussions of the Arab Awakening On Oil Policies
Sun, 01 May 2011
Walid Khadduri *
At first glance, oil appears to play a minor role in the Arab uprisings this year. We seldom
saw any oil-related slogans being raised during the protests, as happened in the past.
The public’s focus on oil matters at present revolves first, around the impact of supply
disruptions on global prices, as is happening today because of the Libyan crisis and the ability
of major oil-producing countries (especially Saudi Arabia) to compensate these disruptions
with oils similar to the Libyan oil, in terms of quality and delivery time. And second, the
focus is on the ongoing investigations in Egypt regarding the sale of natural gas to Israel in
return for low prices and huge bribes. However, the most important matter in this regard will
perhaps be the nature of future contracts with international oil companies. The question is,
will the Arab awakening of 2011 induce radical change in the nature of these contracts, and
will they be concluded with greater transparency? Also, will oil revenues be allocated to
fruitful projects and services, in such a way as we shall see more transparent budgets and
learn where oil revenues are going? Furthermore, will the awakenings be able to deal with
these fundamental issues in the Arab economy and society, following the injustice done to the
poor and other marginalized sections of society throughout the past decades, which led,
among other things, to further unemployment among university graduates, and subsequently
to the awakenings of 2011?
Oil prices have risen beyond the desirable range of 75-85 dollars/bbl, and settled above an
average price of 100 dollars/bbl since the beginning of the year. American crude prices have
meanwhile been continuously on the increase for eight consecutive months, which means that
this started since before the Arab awakening. However, these rises in prices recently
coincided with increased concern in the global markets regarding the possibility of supply
disruptions and failure to compensate these, starting with the Egyptian protests, then the
Libyan revolution and the expanding tract of the Arab awakening. Forecasts based on
available data hold that sustained high prices, as is the case at present, i.e. above the 100
dollar/bbl level, and the scenario where oil remains at these levels throughout this year, will
negatively impact the worldwide economy which is trying to recover from the global financial
crisis.
But will oil prices remain high above the 100 dollar/bbl level throughout the year? This
scenario is very probable for two clear reasons: First, the devastation that affected Libyan
production and export facilities. Secondly, the ongoing Arab uprisings which are not showing
any sign of letting up. According to the chairman of the Libyan National Oil Corporation in
Benghazi Wahid Bou Ghasis, production and oil exports from the Masla and Srir fields will
be suspended for at least one month, until the damage from the bombardment is assessed. The
overall output of these two fields was about 400 kbd/day, out of about 1.7 mbd/day of total
Libyan oil production. Thus, oil production from the eastern fields controlled by the rebels
will halt.
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There are pessimistic assumptions spreading among analysts and speculators, especially when
prices rise. However, it is known now, through experience, that markets comprise checks and
balances that prevent pessimistic scenarios from taking place. Here, we are specifically
pointing at the primary role played by Saudi Arabia in achieving balance between supply and
demand in global markets during political crises or natural disasters. Saudi Arabia does so by
closely observing commercial inventories in the major industrialized countries, and actual
increases or decreases in global demand. Of course, this role takes place through Saudi
Aramco and its involvement in various global markets. Perhaps what is even more important
than this is the surplus crude oil production capacity enjoyed by Saudi Arabia, estimated in
normal conditions at 1.5 mbd/day, and recently at 4 mbd/day, which was indeed tapped to
offset the current shortage caused by the Libyan conflict.
There is another oil-related issue that has emerged in the midst of the recent uprisings, and
became an important concern for Arab citizens, which is the sale of Egyptian natural gas to
Israel in return for low prices and massive bribes handed over to senior officials. The
Egyptian youths insisted on getting to the bottom of this matter, and today, official
investigations are taking place regarding this issue.
Nearly two decades ago, Israel attempted to get access to Qatari natural gas. However, the
proposed project failed at the time for many reasons, including Israel’s insistence on receiving
gas at low prices that are less than those gas was traded at in Europe at the time. U.S.
diplomacy supported the Israeli point of view. However, the idea of selling Qatari gas to
Israel at low prices was absolutely rejected by the Qatari petroleum authorities at the time,
and also by the political leadership in the country. The project never saw the light, despite the
media frenzy that surrounded it back then. It is clear now that Israel, after this failure, had to
resort to Egypt to secure natural gas supplies, on terms and following approaches that are
becoming clearer and clearer now.
The most important question for the future then is: What are the implications of the
awakening on the relations between Arab countries and international oil companies,
especially as markets are improving and favoring producers? Will the nature of the contracts
between the two sides be revised? More importantly, will the manner in which oil revenues
are distributed among the citizens change, to become more transparent, and benefit a wider
spectrum of individuals, while corruption is curbed?
The Fluctuations of Oil Prices and Economic Health
Sun, 15 May 2011
Walid Khadduri *
Sharp fluctuations in oil prices were witnessed during the first half of this month. Prices fell
by about 15 percent, or near 17 dollars/bbl, in the first week of May, because of wide scale
and extensive selloff of basic commodities, including oil, pushing prices down to below the
level of one hundred dollar per barrel for a very short period of time. However, soon
thereafter, oil prices rebounded, to resume their rise and reach their previous levels. Then, the
OPEC crude basket price climbed beyond 111 dollars/bbl on May 10. It is likely that the
reason behind these fluctuations is the concern for global economic health following the
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global financial crisis, especially in terms of economic recovery, in light of rising commodity
prices.
As known, the current period is witnessing considerable pressure on light low-sulfur crude,
which Libya had been producing. Moreover, there is shortage in Yemeni oil exports, because
of the bombing that targeted the main pipeline that carries crude oil from Marib to the Red
Sea. Yet, despite these disruptions in supplies, there has been an increased oil production by
non-OPEC oil-producers, estimated at an average of around 600 kbd in 2011, in addition to
the fact that some OPEC countries have been tapping their surplus production capacities to
compensate lost crude oil supplies in the markets. At the same time, projections indicate that
global demand for oil may rise by about 1.4 mbd in 2011, compared to an increase of around
2.1 mbd in 2010. What also helps the high growth of demand is the sustained improvement in
the Chinese economy and the repercussions of the earthquake in Japan.
In addition, it is expected in the foreseeable future that the flooding of the Mississippi River in
the United States would lead to a large shortage in gasoline inventories across the country, at
the same time when demand for gasoline starts to rise with the beginning of summer holidays,
when gasoline consumption reaches its peak, usually between late May and early September
each year. In fact, the flooding of the Mississippi will cause a number of refineries located
along the river in the south of the U.S. to stop working. There are approximately 11 refineries
on the river between New Orleans and Baton Rouge, producing about 13 percent of the total
output of petroleum products in the United States.
It is known that the high prices of gasoline in the United States, which are currently hovering
at very high levels (nearly four dollars a gallon), will in turn lead to higher prices for crude oil
globally, because of the importance of the U.S. to the global markets. Indeed, we find that
prices of gasoline futures rose by about 3.1 percent on May 9, because of the threats posed by
the flooding of the Mississippi on refineries, navigation across the river and railway
transportation.
It is predicted also that prices will be affected, in the near future, by speculations and
statements regarding OPEC’s ministerial meeting on June 8 in Vienna, and by whether the
organization will alter the output ceiling agreed upon at the Oran meeting in the autumn of
2008. This unleashed a string of often contradictory statements, reports and leaks about what
is required of OPEC in terms of output in the next phase. In short, OPEC sources indicate that
despite increasing prices, oil supplies are adequate and balanced, and the best proof of this is
the level of U.S. commercial crude inventories which recently reached around 365 million
barrels, an extremely high level.
OPEC also purports that among the positive indicators of price stability are the surplus
production capacity, the high levels of commercial crude oil inventories, and the decreased
demand for OPEC’s oil.
As regards the consuming countries, there is fear of sustained high prices and their effects on
economic growth in these countries. There are expectations that fluctuations in prices would
continue. Hence, OPEC’s ministerial meeting early next month will constitute an important
milestone in the future march of oil prices.
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Article: Does OPEC Care About the World Economy?
Sun, 22 May 2011
Walid Khadduri
The International Energy Agency’s Governing Board, in an exceptional statement issued on
May 19, has warned OPEC and called on the organization to intervene to protect the world
economy. The statement was released following a regular meeting by the Board. The latter
criticized OPEC’s production policy, and called on it to “urge action from producers that will
help avoid the negative global economic consequences which a further sharp market
tightening could cause”.
The main allegation here is that OPEC member states are attempting to create an artificial and
deliberate shortage in global oil supplies, in order to push prices up, which in turn harm the
world economy. But is there any truth to this claim? The IEA, the advisory arm of the OECD
– i.e. the representative of major industrialized and oil-consuming nations-, is supposed to be
aware more than anyone else of the production levels of OPEC members, owing to its
contacts with consuming nations and the information it regularly receives from international
oil companies.
In this regard, it is advisable to examine the latest report on oil markets, issued by the IEA on
May 12, i.e. a few days before the Governing Board’s statement, to compare the allegations
with the numbers published by the agency.
The report mentions that “Global oil supply dipped by 50 kb/d to 87.5 mb/d in April, with
combined OPEC crude and NGL supply lower by 260 kb/d, while non-OPEC production rose
by 200 kb/d.”
The report attributes the decrease of OPEC supplies to the sharp decrease of Libyan oil
supplies due to the conflict taking place there. It mentioned that despite expectations which
indicated that other OPEC members would increase production to offset shortages in Libyan
oil supplies, OPEC output fell by 1.3 mb/d below its pre-crisis level of 30.04 mb/day in
January.
The report also indicates that the level of commercial inventories of crude oil in OECD
countries (i.e. the Western industrialized countries) “declined by 9.2 mb, to 2643 mb or 58.8
days cover in March. Preliminary data indicate a 29.9 mb increase in commercial OECD
inventories [in March]”.
The report also states that OPEC’s output in January was 30.04 mb/day, 30.08 mb/day in
February, 28.99 mb/day in March, and 28.75 mb/day in April, compared to OPEC’s
production ceiling of 24.85 mb/day, and OPEC’s maximum production capacity of 30.68
mb/day.
This is the latest information issued by the IEA regarding global oil supplies. It indicates that
supplies are adequate, especially as it cites the increase of commercial oil inventories in
March – the last month with definitive information of this kind. So how can there be a
shortage in the markets when international oil companies are stocking more crude oil?
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The information further indicates that OPEC’s output in the first three months of 2011 is 4-5
mbd/day higher than the agreed oil output ceiling. This means that when OPEC members felt
that demand increased or when Libyan oil production was suspended, OPEC members did not
stand idly by and instead took the initiative. They increased their output far beyond the
production quotas agreed upon, in order to avoid any supply shortages.
It is clear that the statement issued by the IEA is a warning directed at OPEC’s Ministerial
Council which will convene on June 8 in Vienna, and a call for an official increase of the
production ceiling to be approved. However, it is doubtful that OPEC will take such a
measure in the present situation, given that any change in the production ceiling would mean
entering a vicious cycle of production quotas and practices normally followed in this regard.
This is usually a cause for major disputes among OPEC members. And this is not to mention
other issues which the forthcoming ministerial meeting will be confronted with, such as the
fact that Mahmoud Ahmadinejad will preside over Iran’s delegation to the meeting, and also
over the ministerial council as Iran holds the current presidency of the organization – and the
ensuing media frenzy. And finally, there is the issue of Libya’s representation in the
conference.
In this regard, the IEA is then overlooking in its report some fundamental causes behind
increasing prices. Here, we are referring to speculation. In truth, a committee of inquiry in the
U.S. Congress is currently making accusations against investment banks and oil companies of
engaging in large-scale speculation, in order to increase their profits. Some companies and
groups who engaged in such activities have actually been named, actions that include
speculation on gasoline prices, which have recently soared in the United States. Congressional
inquiries indicate that the objective of marketing departments in some oil companies is not to
ensure that there are adequate supplies of crude oil for their refineries, or ensure that there are
adequate supplies of gasoline for their petrol stations, but is instead to speculate in order to
increase profits. As a result of these investigations, new rules and regulations on speculation
are expected to be enacted.
It is worth recalling here that the IEA was established in February 1974 with the main
objective of countering OPEC. It is thus unfortunate that we continue to see the remnants of
this policy today, despite the improving relations between the two organizations, and the
regular bilateral and multilateral meetings that bring them together.
The menace in the statement lies in the fact that it overlooked many fundamental issues, in
order to hide the real reasons behind increasing petroleum products prices, and to avoid the
need to address the otherwise real problems. In short, the IEA knows exactly that OPEC’s
policy is to reject artificial shortage of oil supplies in order to increase prices.
Markets in Turmoil Following OPEC Disputes
Sun, 12 June 2011
Walid Khadduri *
There are many implications for the disputes that have marred the ministerial meeting of
OPEC last Wednesday. While differences among OPEC member states are nothing new,
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failure to issue a joint statement after the meeting is a rare instance in the organization’s
history. It is indicative of the divide among member states at this juncture, especially after
many years of accord. It also shows that an era that lasted nearly a decade has ended, an era
where accord and harmony among the member states reigned, and an era during which OPEC
succeeded in overcoming political and oil-related disputes among its members to ultimately
arrive at a unified resolution agreed upon by all members, in the interests of all parties, to
secure reasonable prices and stable markets.
OPEC’s past experience during the outbreak of this kind of disputes shows that a long waiting
period will have to elapse before a settlement is reached. This time, the dispute is taking place
at a politically and economically turbulent period. On the one hand, there is the Arab spring
and the political transformations in the Middle East, and on the other hand, there is a violent
escalation in the criticisms railed by Western industrialized countries against OPEC’s
policies, and repeated calls for increased production levels to meet the increase in global
demand for oil, and to contribute to global economic recovery in the aftermath of the financial
crisis.
So what happened at the ministerial meeting? Saudi Arabia, along with the UAE and Kuwait,
called for increasing OPEC’s output by about 1.5 mb/day beyond the actual production levels
of April, which amounted to 28.8 mb/day. This means that OPEC’s production would
approach the forecasts of OPEC’s General Secretariat regarding demand for the
organization’s crude rising to about 30.5 mb/day in Q4 of this year. The reason behind the call
for this high increase is the ongoing demand growth in China, the Middle East and Japan,
where reconstruction has begun following the devastation caused by the earthquake and
tsunami there.
It is worth mentioning here that OPEC’s production ceiling was cut to about 24.845 mb/day in
the autumn of 2008, during the global financial crisis, to deal with decreased demand and
avoid a downward spiral of prices which had deteriorated from their record level of 147
dollars per barrel to about 30 dollars. However, the organization continued to adopt this
policy of reduced production, even when its actual output in recent months was about 5
mb/day higher than this declared ceiling. In other words, global demand is in actual increase,
and there is an urgent need to modify the old production ceiling approved nearly four years
ago.
However, the problem not only lies in increased demand for oil in recent months, but there is
also the issue of the steady increase of prices, which have reached levels that have started to
harm the economies of many developing nations. People there have begun to complain of
high fuel prices, and many countries are now failing to cover the actual value of oil imports,
not to mention the negative impact of the lack of reasonable growth rate levels in the
industrialized world. There is now also the issue of the Arab spring, and the turmoil caused as
a result in the markets, from the disruptions in Libyan oil supplies to the disruption in Yemeni
oil output recently, as well as the political disputes among OPEC member states themselves.
However, the main contention during the ministerial meeting involved market trends in the
foreseeable future. The question is: Will demand for OPEC crudes continue to grow during
the second half of the year? And what is the extent of this growth? Are the commercial oil
inventory levels in the industrialized countries sufficient to avoid any new supply disruptions?
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The data available to OPEC’s General Secretariat indicates that demand will indeed increase,
and that subsequently, there is a need to increase output to about 30 mb/day. In truth, the GCC
countries cited the General Secretariat’s figures to defend their point of view. However, the
countries which had a different opinion, for many reasons, presented their own information,
which ran contrary to the General Secretariat’s data.
Shortly after the meeting, the Saudi Oil Minister Ali al-Naimi declared that his country will
supply the markets with the required quantities of crude oil, i.e. will not allow any supply
shortages in the markets. However, the problem here is that the more Saudi Arabia increases
its output – it can produce about 12.5 mb/day compared to about 9 mb/day at present -, its
surplus production capacity will decrease. This is an important indicator for the markets. As
such, the decrease in Saudi Arabia’s surplus production capacity raises concern in the markets
regarding the possibility of supply shortages should a certain country halt production,
especially in this critical period in the Middle East, and this in turn would mean higher prices
and increased speculation.
Another reason for the failure [to reach an agreement] is that six new ministers had partaken
in the meeting, as well as the approach of the new Iranian minister in running the meeting,
and the unusual turbulent atmosphere that preceded the meeting, influencing the talks and
discussions among the delegations. However, the question to which the answer remains
unclear concerns the role of political disputes in thwarting an agreement at OPEC. Is the lack
of agreement attributable to Iran’s dispute with the GCC countries? Have OPEC and oil prices
become instruments in the disputes beleaguering the Middle East? There was no clear answer
to this from the oil ministers in Vienna, despite the fact that many media representatives asked
them this question.
What ultimately matters in this issue is this: Will political disputes continue to mar OPEC’s
decisions in the future? The markets were indeed affected by the disputes at OPEC, pushing
the price of Brent crude oil to rise to about 119 dollars per barrel by the end of trading last
week.
The Production of Liquid Petroleum from Natural Gas
Sun, 19 June 2011
Walid Khadduri
After a long period of research and construction of plants for this purpose, the commercial
stage of Gas to Liquid (GTL) – e.g. diesel, kerosene and gas oil- production and marketing
has begun, instead of its exclusive extraction from crude oil. The Royal Dutch Shell Company
has indeed exported the first shipment from the Pearl GTL project in Ras Laffan Industrial
City in the state of Qatar, and the shipment includes gas oil fuels.
The significance of the project lies in the fact that it is producing diesel, gas oil, kerosene,
naphtha and paraffin directly from natural gas, instead of extracting these products from the
refining of crude oil. This means that natural gas has a new scope that had hitherto been
exclusive to crude oil.
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Pearl GTL is a joint venture between the state-owned Qatar Petroleum (QP) and Shell. The
project has a production capacity estimated at 140 kb/day of petroleum products (including 50
kb/day of gas oil), in addition to a production capacity of 120 kb/day of condensates and
natural gas liquids, and 11 million tons annually of liquefied petroleum gas (LPG). Pearl GTL
requires around 1.6 billion cubic feet of natural gas per day to produce these ‘green’ liquids.
Qatar will provide these large quantities of natural gas from the offshore North Field. This is
while the cost of this mega project (the largest of its kind in the world) was about 19 billion
dollars.
One of the advantages of GTL conversion is the fact that ‘green’ petroleum products are
obtained, as they contain very low levels of sulfur dioxide or nitrogen oxide pollutants.
Given the high costs and the limited quantities of these products, it is expected that they will
be initially used by mixing them with other similar traditional products, to improve the quality
of these products, and render them compatible with the strict environmental laws in the
industrialized countries. In other words, the marketing plan for these products involves their
wholesale for the purpose of mixing them with analogous traditional products (i.e. mixing
limited quantities of the new gasoline with the old type, or mixing limited quantities of the
new diesel with the old type). This would help reduce environmental contaminants in old
products. Hence, these ‘green’ products are not expected to be marketed at petrol stations for
the consumers to purchase them directly, and one of the reasons for this is the fact that they
are available in limited quantities, in addition to being very costly.
As such, the advantage for countries with large natural gas reserves lies in the availability of
new possibilities for the use and marketing of natural gas. At present, natural gas is used to
fuel power stations or as feedstock for petrochemical plants, in particular aluminum smelters.
Further, these countries will obtain higher revenues by extracting ‘green’ liquids from natural
gas and selling them, instead of limiting themselves to selling natural gas at lower prices as
fuel for power plants or as feedstock for other types of plants. And as for consuming
countries, petroleum liquids produced from natural gas provide cleaner fuels with less
environmental impact.
The most important challenges facing this industry, meanwhile, lie in the fact that they require
large quantities of natural gas to produce limited quantities of petroleum liquids. This entails a
rapid depletion of gas reserves in the event this type of production is rapidly expanded. In
addition, there is the problem of the high cost of building GTL production plants, and
subsequently the high price of these products.
This begs a question pertaining to the impact these petroleum liquids may have on the oil
industry. In fact, these ‘green’ liquids will prolong the life of petroleum, and render it more
competitive than other alternative energy sources, as they will help provide petroleum
products that are more environmentally friendly in the long run.
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Article: IEA Uses the Strategic Petroleum Reserves to Fight OPEC
Sun, 03 July 2011
Walid Khadduri *
Most OPEC member states have taken the International Energy Agency’s June 23 decision to
release 60 million barrels from the strategic petroleum reserves of the IEA member states, or
the equivalent of 2 mb/d during the present month, to be a provocative act. The IEA seems to
have returned to its old habits, in terms of putting pressure on the markets with a view to
reduce prices in an artificial and deliberate manner.
In truth, such moves have always been a source of concern for OPEC members, ever since
Henry Kissinger called for the establishment of the IEA in 1974. By releasing part of its
strategic reserves, the IEA is attempting to put pressure on prices, irrespective of factors such
as supply and demand. In other words, prices are being prevented from naturally evolving
within the framework of the open and free market. The IEA has intervened by pumping more
crude oil than the markets actually need, with the aim of gradually reducing prices.
This begs the question, why has the IEA made such a decision, at this particular time?
There are many possible and different answers. For one, it is possible that it is an attempt to
reduce prices, in light of the massive increase in gasoline prices in the United States, and their
impact on U.S. public opinion amid the election campaigns, and amid a period of recession in
both the U.S. and Europe. Or, it could be an attempt to reduce prices with the aim of putting
pressure on Iran and reduce its oil revenues, and hence its regional political influence.
Moreover, it could be a reaction to the successful rejection by Iran and other OPEC members
of increasing the production ceiling during OPEC’s last ministerial meeting. It is also possible
that it is an attempt to offset the disruption in the supplies of light Libyan crude oil, while
claiming that other OPEC states did not provide sufficient additional quantities of this type of
crude in a timely manner. It could also be an American attempt to put pressure on major oilproducing countries, because of their support for the Palestinian authority’s bid for Palestinian
statehood next September. Finally, it could be a pre-emptive move to anticipate the spread of
unrest across Arab countries, and the possibility of further disruption in the supplies of crude
oil, as is the case at present in Libya.
No matter what the real reason behind the decision may be, - knowing that it is an American
decision, (since it is widely known that the IEA follows Washington’s dictates in such
strategic issues)- it is clear that its main goal is to try to put pressure on oil prices, and not just
compensate lost Libyan oil supplies. However, this contrasts with two essential issues: First,
the fact that the purpose of strategic reserves is to offset supply shortages, and not to influence
or pressure the prices of crude oil. And second, the information available, particularly that
released by the IEA itself, indicates that adequate –if not surplus- oil reserves are available.
(The IEA’s information indicates that the overall crude oil reserves of its member states
amount to about 4.1 billion barrels of crude oil, of which 1.6 billion are allocated for
emergency contingencies).
This means, in the language of numbers and figures, that there are reserves of imported crude
oil that are sufficient for 146 days (or about five months) and available for the Western
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industrialized, while what is required is the provision of oil reserves to cover 90 days (three
months), according to the regulations of the IEA.
In other words, the crude oil reserves in industrialized countries are more than sufficient at
present, even if the unrest induced by the so-called democratic Arab spring spreads further, or
is set to continue for a longer period of time. Second, if we assume that tapping into the
strategic reserves will be limited to July only, this means that prices will fall during this
month, only to rise again with the start of autumn and then winter. The IEA’s move is thus
short-term and is rather ineffective over the long term.
This was the exact conclusion reached last week by the OPEC Secretary General Abdullah alBadri, who said: I hope this decision will be suspended immediately. We do not find that
there is a valid reason to release this amount of crude oil from the strategic reserves, and I
hope that the IEA will refrain from such actions. In a press conference, he added: It is possible
for prices to rise in the last months of the year, despite the fact that commercial petroleum
reserves have been tapped this month.
What is surprising about the IEA’s decision is the large quantity of additional oil it will pump
in the markets. Most of the data available indicates that OPEC’s overall output this month will
rise to 30.2 mb/d, bearing in mind that the expected rise in the oil output of Saudi Arabia,
Kuwait, and the UAE is estimated at 1.2 mb/d.
It is very likely as well as expected, that the IEA’s decision – along with the dispute at
OPEC’s last ministerial meeting-, will create a big wedge that may last for a while at OPEC.
This is very significant and is not without serious implications, as it may put an end to the
period of harmony and cooperation among oil-producing countries that prevailed in the last
decade. It may also cause the disputes in the Middle East to spread to within OPEC,
influencing its oil decisions.
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