OPEC Prepares For A More Flexible Price Defence/Market Share Strategy.

*** Dated Brent & Spot Dubai, Like WTI, Are Prone To Price Distortions; US Premia Over Brent & Dubai Begin To Fall As Inventories Start Rising

*** Iraq Is No Longer A Key Factor To Shot-Term Supply; It Won't Be Able To Reach Its Pre-War Level Of Output Before End Of Next Year; Saddam's Ghost Keeps Coming Through P/L Explosions

*** Statoil Buys Into BP's Stakes In Algeria's In Salah & In Amenas Gas Ventures, With Each To Produce 9 BCM Per Annum To Be Exported To Europe

OPEC member-states are debating a new price defence strategy flexible enough to allow room for Iraq's return to the oil market and limit competition from non-OPEC areas. At their next ministerial meeting on July 31, they will face a Saudi-led position in favour of letting prices slip below the $25/b average for OPEC's basket of seven crude oils, a level which will not be sustainable beyond August. The following is a fleeting review of the position of and key developments in each of OPEC's 11 countries, listed by alphabetical order:

Abu Dhabi, the only state in the UAE to comply with OPEC production quotas, fully agrees with Saudi Arabia that the organisation on July 31 should keep its 25.4m b/d oil output ceiling unchanged until the next ministerial meeting on Sept. 24. Hinting at this position, UAE Oil Minister Obaid Bin Saif Al Nasseri told reporters after OPEC's June 11 meeting in Doha: "We may need to lower the actual production (then 26.1m b/d), but not the ceiling".

OPEC's average basket price of $25/b is too high. At this level the price is allowing increased oil supply from non-OPEC sources and expanded E&P budgets in non-OPEC areas at the expense of OPEC's share of the market. World oil demand in 2002 was exceptionally weak for the third consecutive year, with consumption having grown by a mere 290,000 b/d from 2001. But non-OPEC production rose by 1.45m b/d. Alone Russia saw its production rise in 2002 by 640,000 b/d. Russian oil production keeps rising. Total non-OPEC production in 2003 is expected to grow by almost 1.3m b/d to 49.24m b/d, while world oil demand from 2002 will only increase by about 850,000 b/d.

While most of OPEC's oil is long haul, non-OPEC producers are closer to the consumers. The competition for market share is not only between OPEC and non-OPEC producers. It is also between conventional oil and alternative sources of energy. The latter competition is potentially far more dangerous for OPEC than the one among the oil producers of both camps. Once an alternative source of fuel hits the market for a certain volume, an equal volume of conventional oil disappears from this market - in most cases forever. The bulk of the world's market for conventional oil goes to the transportation business.

A more immediate problem for the UAE and its Persian Gulf neighbours is the steady fall in Dubai's oil output, now less than 150,000 b/d of a marker for sour crudes trading on both sides of Suez, which has allowed the spot price of this grade to be easily manipulated by market players. A purchase of a few cargoes of Dubai in one deal by a player can raise its spot price irrespective of market fundamentals for sour grades. Likewise, the sale to a few Dubai cargoes can cause the marker's price to fall.

Abu Dhabi on June 1 cut its production from 2.145m b/d to 2.06m b/d in line with a new quota of 2.216m b/d for the whole of the UAE (see Abu Dhabi survey in Nos. 1-4).

Algeria, with its draft petroleum law shelved earlier this year, is ahead of a schedule to raise oil production capacity to 1.5m b/d by 2005. It wants a higher quota from OPEC than its current 811,000 b/d, with actual production before the June 1 limit having exceeded 1.1m b/d; but it will not pursue this demand until the time comes for OPEC to increase production. Now Algeria wants OPEC to lower the ceiling in view of a steady decline in oil prices. Algiers depends heavily on a high oil prices, while Saudi Arabia is concerned by a resultant decline in world oil demand.

Algeria's Energy and Mines Minister Chakib Khelil in mid-May survived a major cabinet change, caused by President Abdelaziz Bouteflika's sudden sacking of Premier Ali Benflis and his replacement by former premier Ahmed Ouyahia. But Khelil was humiliated by the shelving of the petroleum law, which he had promoted since early 2000 when he became minister and sought to end Sonatrach's monopoly in the upstream, midstream and downstream branches of the petroleum industry (see survey of Algeria in Nos. 5-8).

On June 23, Statoil announced it was buying 49% of BP's stake in the In Salah gas E&P venture - passing to the Norwegian company a 31.85% interest in this project's revenue sharing contract with Sonatrach - and 50% of BP's share in the In Amenas production sharing agreement (PSA). Statoil was about $740m for these stakes.

The In Salah fields will begin production in 2004 and their plateau output will be 9 BCM/year. Production at In Amenas will begin in 2005 and will build up another 9 BCM/year profile. Both ventures will be exporting their gas to Europe. Statoil, founded in 1972 as a state-owned NOC and partly privatised in 2001 when 17.5% of its shares were sold to private investors, has long wanted to be involved in the growth potential of North Africa. It considers Algerian gas exports to Europe significant to future expansion for the Norwegian firm.

Indonesia: Struggling to raise its oil reserves through foreign and local investors, Indonesia only can produce 1.05m b/d of oil while its OPEC quota from June 1 is 1.317m b/d. Most of its oilfields have been depleting, and extraction of large waxy oil deposits in place on the island of Sumatra will be too expensive to produce. Therefore, the Jakarta government favours a cut in OPEC production during the organisation's July 31 meeting or on Sept. 24.

State-owned Pertamina has lost its upstream monopoly in Indonesia, where it now competes with foreign and local companies in the acquisition of new E&P blocks (see survey of Indonesia in Nos. 9-12). With its fields depleting, Pertamina is branching out of Indonesia. It hopes a new national government in Iraq will eventually honour an E&P agreement it signed with Saddam's Baathist regime for a gas-rich block in the western desert.

BPMigas, the state's upstream agency, is tendering next October nine oil and gas E&P blocks in Kalimantan, Java, Papua and the Natuna Sea. These are in addition to 11 blocks tendered in early 2003 for which bids are due by end-July, with awards expected in August. The latter blocks are located in promising areas, including six in east Java where ExxonMobil and Santos of Australia have made significant discoveries.

A state panel in June appointed Pertamina as sole marketing agent for LNG sales to Japan. This resulted from a compromise agreement reached by the panel's main members: Energy and Mineral Resources Minister Purnomo Yusgiantoro, the ministry's Director-General of Oil and Gas Iin Arifin Takhyan, BPMigas President Rachmat Sudibyo, and Pertamina President and CEO Baihaki Hakim.

LNG sales to other markets will be handled by the panel, which will include the promoters of four new LNG export projects. The panel will appoint as sole agent any of these projects' lead partners securing a purchase deal. The projects are in the following order of importance to Indonesia:

1. A BP-led Tangguh venture in Papua with a capacity of 7m t/y by 2007, likely to reach 10m t/y by 2010. Pertamina has secured an $8.5 bn contract with China for the purchase of 2.6m t/y of Tangguh LNG for 25 years starting from 2007. This is when the Fujian regasification terminal should be completed. BP, competing with Pertamina, is hoping Fujian will eventually receive another 2.4 t/y of Tangguh LNG through its own agency.

2. Pertamina-led projects to build a 5m t/y LNG plant in East Kalimantan by 2005 and one in Central Sulawesi to have a capacity of 6m t/y by 2006/07. Pertamina would be appointed as sole sales agent if it secures purchase contracts, including one with Marathon which is to have a regasification terminal built in Mexico.

3. ExxonMobil's East Natuna venture, but this project is not likely to be realised in the near future (see Gas Market Trends No. 11).

Pertamina, a limited liability company since April 2003, has been the signatory of all Indonesian LNG sales contracts concluded until September 2002. Some of these contracts expire in 2007, 2010 and 2011, with the September 2002 deal to expire in 2032.

Pertamina, which will be privatised as from 2005, was stripped of its role as Indonesia's only LNG marketer and seller under a new oil and gas law which came into effect in 2001. The law allowed LNG producers in Indonesia to market their own volumes overseas. But many experts in 2001 said the government was wrong to turn its back on Pertamina's long experience in the marketing of LNG. In October 2002 Pertamina proposed to the government that it be reinstated as the sole seller of the republic's LNG. The government refused, as BP and other promoters of new LNG projects argued they had an equally good experience in this business.

In the summer of 2001, BP was authorised to market Tangguh's LNG in China. That was the first time a private company was allowed to handle the marketing of Indonesian LNG. But BP failed to secure its highly sought prize, the Guangdong supply contract which went to Australia's North-West Shelf LNG venture.

Jakarta later sent a marketing team headed by a senior Pertamina official as the Tangguh project was offered the contract to supply Fujian, which will be China's second import terminal. Pertamina's success in securing the Fujian deal in September 2002 encouraged the company to step up its campaign for the government to reinstate its LNG marketing monopoly rights.

Because of competing offers to market LNG by different project promoters and in order not to discourage foreign investment in this business, the state panel has decided to keep overseeing and co-ordinating all LNG sales deals indefinitely.