AZERBAIJAN - Looming Supply Problems In Europe.

Russia's gas monopoly Gazprom was on June 30 quoted as saying it had failed to reach a gas import deal with Turkmenistan for late 2006 and 2007, raising the prospect of new cuts in gas supplies to Europe. Imports of Turkmen gas are vital for Gazprom as its own output stagnates and it needs more to cover growing demand at home and in Europe. It ships most Turkmen volumes to Ukraine and any disruption could potentially lead to lower supplies to Europe via Ukraine's transit pipelines.

Talks had been suspended after Ashgabat asked Gazprom to pay $100/1,000 cubic metres, up from the current $65. Gazprom said Turkmenistan would respect the existing deal and sell Gazprom 30 BCM at old prices in the meantime.

Turkmenistan had already threatened in June to cut all gas supplies to Gazprom if such a contract was not signed before mid-August. Fitch ratings agency says Europe could face another gas crisis very soon following disruptions in January after Gazprom cut gas to Ukraine after a pricing dispute. It says the key elements are calls by Ukraine's prime minister-designate to re-visit the gas deal with Moscow, Turkmen demands for higher prices, and Gazprom's intention to raise prices for Ukraine from July. Reuters on June 30 quoted Fitch's Jeffrey Woodruff as saying: "It seems like all the makings of a perfect storm. Any of the events in isolation could be enough to spark new supply interruption concerns in Europe, but all of them colluding near the beginning of the [mid-July] G8 summit on energy security seems almost unbelievable".

Turkmenistan, a landlocked state run by President-for-life Saparmurat Niyazov, has forged a foreign policy of "neutrality" since independence which has seen it snub both Russian and Western influence. But it still relies on Gazprom's Soviet-era pipeline network to get almost all of its gas to the market, so carrying out the threat would starve it of its main source of income. Gazprom did not say when its CEO Alexei Miller and Niyazov may resume talks.

Iraq's crude oil output has reached 2.5m b/d, its highest level since the US-led invasion. Oil Ministry spokesman Assem Jihad last week said 1.6m b/d were being exported from the southern port of Basra, while 300,000 b/d were being pumped from the northern area of Kirkuk to the Turkish port of Ceyhan. The other 600,000 b/d produced are for domestic use.

Iraq's production had slipped drastically since the invasion in March 2003, to an average of 2m b/d in early April, as the system faced repeated insurgent sabotage, alleged corruption, theft and mismanagement. Oil Minister Hussein al-Shahristani, a prominent Shi'ite known for his honesty who assumed the post on May 20 as part of PM Nouri al-Maliki's new government, has promised to increase oil production and give all Iraqis a share. Jihad said new measures were being implemented and was optimistic the situation will improve, saying: "We hope to add 200,000 to 300,000 [b/d] before end-2006". Jihad told AP he hoped to double the amount of crude pumped to Ceyhan in that time period. (Iraq's oil industry has never regained even the reduced production levels that prevailed in the 1990s, when Iraq was under tough UN sanctions. In 1990, its peak production year, Iraq extracted about 3.5m b/d).

Saudi crude oil is stranded in tankers on the high seas, circling the globe in search for buyers. The Saudi Ambassador to the US, Prince Turki al-Faisal, on June 27 told US-Arab Economic Forum held at the George R. Brown Convention Centre that 350,000 barrels of heavy crude oil could not be sold because the world lacked the refining capacity to turn it into useful fuels like gasoline or diesel.

The world's refiners only had room to run lighter crudes. High demand for light/sweet grades continues to drive up oil prices even though there is plenty of the heavier crudes. Prince Turki said: "The fact is, the biggest bottleneck in oil prices is the security situation, particularly in our part of the world". But exacerbating the situation was a lack of refinery capacity. While Saudi Arabia was building more refineries and talking about expanding into hot markets like China, he pointed out, there was a lack of refinery capacity in the US - where there had been no new refining project since 1976. William Berry, executive VP at ConocoPhillips, said one way to deal with the need for capacity was to reduce US demand by increasing fuel-efficiency standards. He said tougher standards would help conserve gasoline, adding: "The federal government needs to step up efforts to promote the efficient use of energy in all sectors of the economy, including transportation".

John Watson, president of international E&P for Chevron who joined Berry on the panel, said the US consumed more than 20m b/d of oil but produced only about one-third of that. Berry called it disturbing that many discussions about energy focused on reducing reliance on what was labelled unstable foreign supply, adding: "Repeated pronouncements by US lawmakers about backing out Mideast imports may deter Arab producers from expanding capacity at the very time the world needs them to do so". John Hofmeister, president of Shell Oil, said US inter-dependence with Middle Eastern oil producers was fundamental to sustained economic growth for countries throughout the world. Steve Simon, senior VP at ExxonMobil, called the Middle East vitally important, saying: "The US has a strong interest in what happens to production in the Middle East". Albert Helmig, executive adviser and former vice chairman of the New York Mercantile Exchange (NYMEX), said the entire world needed oil, adding: "We are all inter-dependent".