Will Gulf states live up to EIA and IEA projections?

Mark Jones jones118 at lineone.net
Fri Jun 29 15:53:45 MDT 2001


 "either EIA & IEA are wrong, or a supply crisis is coming"

from WorldOil Magazine

A. F. Alhajji

Either EIA & IEA projections are wrong, or a crisis appears to be imminent.
The World Energy Outlook 2000, compiled by the U.S. Energy Information
Administration (EIA), and the International Energy Outlook 2001, authored by
the International Energy Agency (IEA), indicate that oil production in the
Arabian Gulf states must almost double by year 2020 to meet rising world
demand.

The EIA outlook states, "The reference case projection implies aggressive
efforts by OPEC member-nations to apply or attract investment capital, to
implement a wide range of production capacity expansion. However, the
combination of potential profitability and the threat of competition from
non-OPEC supplies argues for the pursuit of an aggressive expansion
strategy."

The reference case requires Gulf states to increase their oil production 80%
by 2020. This means adding about 13 million bopd by 2020 - with Saudi Arabia
increasing its capacity by more than 7 million bopd, to about 17 million
bopd. This seems highly unrealistic. So, either EIA & IEA are wrong, or a
supply crisis is coming, because Saudi Arabia and its neighbors cannot
increase production by 80% for many technical, financial and political
reasons.

Mistaken projections. Two recent studies by prominent oil market experts Guy
Caruso (Center for Strategic and International Studies, Washington) and
Prof. Deromt Gately (New York University) show that such EIA and IEA
projections are wrong. In his study, "How likely is the consensus projection
of oil production doubling in the Persian Gulf?", Gately states, "Such
projections are not based on behavioral analysis of Gulf countries'
decisions. They are merely the calculated residual demand for OPEC oil, the
difference between projected world oil demand and non-OPEC oil supply."

He continues to criticize EIA's projection model. "Their projections exhibit
only minimal price responsiveness," said Gately, "which leads to the
conclusion that the underlying model is internally inconsistent. . . . Given
that OPEC's oil production capacity has not changed significantly in a
quarter-century, it seems unreasonable to expect that it would now double
within two decades."

What if demand projections are correct? Will Gulf states double their
collective oil capacity by 2020? The answer is no, for several reasons,
including a lack of economic benefits, lack of capital and foreign
investment, a shift toward focusing on natural gas, and Saudi Aramco's own
dominant plans.

No economic benefits. What are the benefits from expanding capacity? Gulf
states may earn the same amount of revenue, or more, by selling less oil for
higher prices. Gately points out that these countries will expand capacity
only if they benefit from it, and only if aggressive output expansion makes
them significantly better off economically. He concludes, "Modest output
growth will do just about as well as aggressive growth. Such rapid expansion
of capacity is not profitable for Saudi Arabia and its neighbors."

Lack of capital and foreign investment. Adding 13 million bopd to capacity
requires an investment of more than $100 billion, and Gulf states cannot
afford such a high level. The EIA realized this fact and suggested that
these states embrace foreign investment. Given various scenarios of Gulf
geopolitics and economics, foreign investment in the oil sector will NOT
take place in the next two decades - it just does not make sense.
Additionally, it took three years before foreign operators were allowed to
sign memorandums of understanding with Saudi Arabia, to invest in the gas
sector. It will take many more years for these projects to materialize - one
can imagine how long it will take for projects to begin, if Gulf states open
their oil sectors.

The focus is on gas. Meanwhile, national oil companies in the region are
focusing on natural gas, not oil. OPEC's growing population - especially in
the Gulf, where almost half of the population is children - translates into
rapid growth in domestic energy demand. State firms are forced to find
another source, such as natural gas, to meet this demand. Otherwise, their
oil exports will decrease constantly. In addition, state firms are racing
against time to make sure that they will get the lion's share of gas
projects before international majors step in. As an example, Saudi Aramco
plans to invest $45 billion on gas projects for the next 25 years.

Aramco has its own plan. The new Saudi Aramco strategic plan calls for an
oil production increase of 100,000 bpd annually for the next five years, to
reach sustained output of 8.9 million bpd by 2006. The company utilizes the
same method used by EIA and IEA - calculate demand and non-Saudi production,
then calculate the call on Saudi oil.

Based on this method, Aramco has estimated its production growth, which
turns out to be at odds with EIA & IEA projections. New investment figures
assembled by Aramco indicate that the firm wants to maintain 1.5 million bpd
of excess crude capacity. This will result in productive capacity of around
10.5 million bopd in 2006 - the same historical figure that Aramco has tried
to keep for the last 25 years! Recent reports indicate that Saudi Arabia is
advancing two new projects that, together, could add about 1.5 million bpd
of oil output capacity. The envisaged schemes - Qatif and Khurais fields -
could add at least another one million bopd onto Saudi Aramco's capacity
over the next few years, once declines at other fields are taken into
account.

In conclusion, if demand projections are correct, most of the growth will be
met by an increase in non-OPEC production, which is more responsive to price
signals than OPEC. As for the EIA and IEA projections, they serve a dual
purpose - functioning as a wake up call and offering some one to blame when
the market goes awry.


Dr. A. F. Alhajji is an award-winning assistant professor at Colorado School
of Mines' Division of Mineral Economics and author of the book, OPEC and the
World Oil Market: An Alternative View. He is a regular contributor to this
column.


http://www.worldoil.com/magazine/MAGAZINE_DETAIL.asp?ART_ID=1554&MONTH_YEAR=
Jun-01




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