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Financial Times: Plan to cut Opec supply will come

By Carola Hoyos in Doha

Published: October 20 2006 03:00 | Last updated: October 20 2006 03:00

In fashion, every few seasons, brown is the new black. In life, 40 has become the new 30. For Opec, $60 a barrel is the new $30.

That became clear for the first time when Ali Naimi, Saudi Arabia’s oil minister and perhaps the most influential man in the sector, yesterday revealed the kingdom’s resolve not to let international oil prices – which are at about $60 a barrel – slip any further.

Until four years ago Opec, whose 11 members rely on oil revenues for almost their entire budget, was quite content with international oil prices at $30 a barrel. But, as prices have risen, so has the countries’ spending.

All the countries have become increasingly addicted to their new-found oil wealth. Saudi Arabia, which got by on $15 a barrel oil in the mid 1990s, now needs at least $38 a barrel to meet its current pace of spending, which grows 20 per cent annually, according to Samba, a Riyadh-based bank. By 2010, analysts estimate, the price tag of the kingdom’s generous social policies and lavish upkeep of the royal family will need to be funded by $65-a-barrel oil prices.

On the other side of the globe, the social programmes Hugo Chávez, Venezuela’s president, has promoted as he has vied for the role of South America’s populist leader have come at a cost and Caracas is becoming increasingly dependent on its oil revenue and is therefore also more of a price hawk.

Meanwhile Iran has managed to push its nuclear programme despite opposition from the rest of the world precisely because of the increased potency of its oil weapon. A world of cheap and easily available oil would put a serious dent in its negotiating power.

But Opec’s ambition to cut its supplies also comes at a cost, particularly for countries such as Saudi Arabia, which have heavily invested their petrodollars into building up their oil sectors.

Libya, the United Arab Emirates, Nigeria and Algeria have courted international energy groups to help them boost production. Venezuela, Indonesia, Qatar and Iran also have international oil companies working in their fields.

These members of Opec will now have to tell the likes of Europe’s Royal Dutch Shell, BP, Total, Repsol and the US’s ExxonMobil and ChevronTexaco to reduce the output from their fields and forgo revenue. How much each company will have to sacrifice will depend on how Opec splits the burden of the cut among its member states.

But the news is not all bad for the companies because they would benefit from any boost in prices that followed Opec’s decision.

The revenues of international and national oil companies have been hit as prices have fallen 25 per cent in the past three months from their high of $78.40.

Oil producers have watched the world’s storage tanks fill to 97 per cent capacity as a slowdown in US growth and energy conservation have reduced demand. Some big oil producers are even having to store oil on tankers, an expensive last resort option.

Saudi Arabia is said to be particularly worried about the slowdown in demand from OECD countries this year. The International Energy Agency, the consuming countries’ energy watchdog, which has overestimated OECD demand in the past months, in its most recent report forecast OECD oil demand for 2006 to contract for the first time in more than two decades.

The combination of lower demand and a host of new production from projects being realised around the world is expected to reduce the need for Opec oil by 2m barrels a day before the end of next year’s second quarter, the cartel’s officials say. This means Opec will not only have to cut now, but act a second time before the end of next January if it wants international oil to remain at the cartel’s new-found price floor of $60 a barrel.

Companies that could be hit by Opec cut

The following shows major listed international energy companies producing oil in Opec member countries that will have to cut back their production if the cartel agrees to reduce its quota by 1m barrels a day:

Amerada Hess (US)
BHP Billington (Australia)
Cepsa (Spain)
Chevron (US)
ConocoPhillips (US)
ENI (Italy)
ExxonMobil (US)
Marathon (US)
Norsk Hydro (Norway)
Occidental (US)
OMV (Austria)
Repsol (Spain)
Royal Dutch Shell (Netherlands/UK)
Statoil (Norway)
Total (France)

The degree to which individual companies will be affected will depend on how an output cut is distributed among Opec member countries.

Quotas and production

Opec agreed a new quota distribution system in February 1998 at a meeting in Vienna. Iraq was exempt because it was under United Nations sanctions. This exemption was extended following the US-led ousting of Saddam Hussein in 2003 because Iraq was still not able to fully control its oil sector even after sanctions were lifted.

The overall quota for the rest of the group has been 28m barrels a day since July 2005. The current breakdown, set against actual production is as follows:

Million barrels per day
Country: Quota Sep 06 production
Algeria 0.894 1.35
Indonesia 1.451  0.87
Iran 4.110  3.90
Iraq N/A 2.05
Kuwait 2.247  2.50
Libya 1.500 1.75
Nigeria 2.306  2.19
Qatar 0.726  0.82
S. Arabia 9.099 9.20 
UAE 2.444 2.65
Venezuela  3.223 2.55
Total 28 27.76

Sources: OPEC and International Energy Agency 

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