SAUDI ARABIA - The Global Oil Market Perspective.

Two issues least mentioned by the world media but which will have major implications for global oil trade in the coming months and years are these: Some of OPEC's price hawks are less correct than others in reporting their actual oil production capacity, and some non-OPEC "experts" are deliberately spreading doubts about Saudi Arabia's potential of maintaining its position as the world's largest provider of crude oil - despite sharply rising project and E&P costs.

Saudi Aramco in 2006 found 3.6 bn barrels of oil, 6% more than it produced. It added 10.4 TCF to its natural gas reserves in 2006, more than double the annual target. Saudi Arabia holds the world's largest oil reserves at more than 265 bn barrels and the world's fourth largest gas reserves in excess of 245 TCF. In 2005 Saudi Petroleum and Mineral Resources Minister Ali al-Na'imi said the kingdom could easily raise its proven oil reserves by 200 bn barrels. Saudi Aramco's installed oil production capacity, including the kingdom's share of the Divided Zone, increased to 11.3m b/d by end-2006. A capacity addition of 300,000 b/d came with completion of the Haradh field increment. Another 500,000 b/d increase in Saudi Aramco's installed capacity will be ready before end-2007.

Saudi Aramco makes a number of oil and gas discoveries every year. In early 2007, for example, it found an oilfield 70 km south-east of Ghawar and 280 km south of Dhahran. On Feb. 11, Dirwazah-1 tested oil in the 'Unayzah Fm at 15,310 feet. The well flowed 3,915 b/d of oil with 11.9 MCF/d of gas. On completion of a production system, the well is to flow at a higher rate (see gmt13SaudiGeoSep24-07).

World demand is rising rapidly. With the era of easy-to-extract oil subsiding, Saudi Aramco recognises that a greater share of output beyond 2010 will have to be drawn from harder-to-access fields which have become extremely costly to explore and develop. So, along with its massive programme of conventional exploration, it is moving with ambitious projects to develop heavy oil and gas in E&P projects the cost of which has risen more than three-fold since 2002 (see omt14SaudiFieldsOct1-07).

Some OPEC members have had a history of ramping up capacity claims when it is time to talk about production increases. As with the output cuts agreed last October and December, to take 1.7m b/d from the market, OPEC's Sept. 11 ministerial conference pegged the baseline for the cuts to independent reckoning of the group's output, not outdated formal output quotas.

So OPEC has recently released a new list of output allocations which shake to their core some claims of recent production levels. It has re-assigned allocations among its 10 active member-states (excluding Iraq & Angola) to raise the output ceiling by 500,000 b/d to 27.253m b/d from Nov. 1, reflecting rising production capacity in some countries and declines in others. Saudi Arabia, holding most of OPEC's spare capacity, has the greatest share of the increase - with an allocation of 8.943m b/d, up from an OPEC-reported August output of 8.616m b/d. Algeria, which in 2001 had asked for a larger OPEC quota, has a supply target 57% larger than its old quota, at 1.357m b/d.

OPEC arrived at the new numbers by taking each country's production in September 2006 to divide up the new ceiling. The allocations give higher shares to members having invested to expand production, such as Algeria, at the expense of those having done less or under-invested in oil E&P. Indonesia, a net oil importer, saw its share fall 38% to 865,000 b/d from a quota of 1.399m b/d. Venezuela and Iran have much lower targets than their old quotas as both have reported output capacity levels way above independent estimates. Because of under-investment for years, Iran is losing 500,000 b/d of sustainable capacity every year; so its new share from Nov. 1 is 3.817m b/d, while Tehran keeps claiming its capacity is 4.2m b/d. Venezuela's new share is 2.47m b/d, down 753,000 b/d, while Caracas keeps claiming its capacity is 3.2m b/d - having since 2002 invested more on President Hugo Chavez's social projects than on petroleum E&P.

Chavez, who often expounds on oil and OPEC policy, unusually has not weighed in on the issue, though his weekly TV show lasted a record eight hours on Sept. 23 and he addressed such topics as breast implants for teen-age girls (he's opposed). Venezuela is one of the five founders of OPEC, set up 47 years ago in Baghdad. In the 1990s Venezuela, on a rampant expansion which invited IOCs into the country, sometimes lifted output well above 3.5m b/d, ignoring OPEC quotas along the way. Chavez later reversed that; a crippling strike in late 2002 and an overhaul of Petroleos de Venezuela (PDVSA) has hobbled output since. Much of its capacity has been lost as a result of resource nationalism, with IOCs having been forced to abandon the country.

So nervous oil markets will be watching OPEC's ten more for how much crude oil they do not produce than for how much they do heading into winter. Fourth-quarter world oil demand is expected to rise 2.1m b/d from the third quarter and gain 2.4m b/d from a year ago to 87.8m b/d, according to IEA estimates.

Dariusz Kowalczyk, chief investment strategist at CFC Seymour on Oct. 3 was quoted as saying: "In the long run, I expect prices to fall below $70 on the modest global economic outlook and the decline in the hurricane premium". Qatar's Energy and Industry Minister Abdullah bin Hamad al-Attiyah has brushed aside the need for OPEC to boost output again. He said OPEC's summit in Saudi Arabia to be held in November was not likely to decide on a rise in the group's ceiling. OPEC's next ministerial conference is to be held in Abu Dhabi in December.

Rising drilling and rig costs, combined with shortages of skilled staff and equipment, are affecting petroleum projects throughout the Middle East, with some being delayed and contracts being renegotiated. Producers from Saudi Arabia to Algeria and Libya have embarked on ambitious plans to increase production capacity to meet growing global demand and take advantage of record oil prices. But many will struggle to meet their schedules, and can expect to pay exorbitant prices if they are to ensure they have the material and personnel in a market suffering severe constraints.

Candida Scott, an analyst at Cambridge Energy Research Associates (CERA), says: "It's having an impact and that impact is going to increase over the next few years. We are seeing projects being delayed simply because they can't get the equipment delivered on the timescale they used to". A critical bottleneck is the shortage of skilled staff, with an industry workforce dominated by people close to retirement and inexperienced graduates. The issues affect producers worldwide. The Middle East accounts for 20% of world projects to add production capacity between 2007 and 2012 and CERA says this is the region requiring the most manpower over the same period, with 35% of the world's projected total.

One of the high-profile examples of a project affected is in Algeria, where state-owned Sonatrach recently cancelled a PSA with Repsol/YPF and Gas Natural of Spain for an integrated 5 TCF gas E&P/LNG venture at Gassi Touil, citing cost overruns and development delays. When the consortium got the PSA in 2004, its economics were marginal. Since then, the project's overall costs have risen 127% from $3 bn to $6.8 bn. The FT quoted Craig Mc-Mahon of Wood Mackenzie as saying: "A lot of people have suggested Sonatrach's decision to cancel the project was nationalism, but...the fact is it was based on simple economics". He said at best, the project will start producing in mid-2012, at least 21/2 years later than expected, and its cost could be over $10 bn.

The world's petroleum industry is expected to face a 15% shortage of qualified engineers by 2010 - a shortfall of 5,500 to 6,000. CERA's Pritesh Patel, co-author of a report on the skills shortage, says already there are too few engineers to meet 2007 E&P project demand. BP has indefinitely postponed several deep-water developments in the Gulf of Mexico. BP partly blamed "resource constraints" for its decision. Patel says the shortage of engineers has been building up over the past few decades.

In Abu Dhabi, which produces about 95% of the UAE's petroleum, completion of some larger projects is being put back by nine to 12 months. Development of the onshore Bab oilfield has been delayed mainly because of the scarcity of specialised equipment. Officials had put development of the Bab and Shah fields out to a joint tender. But they chose to re-tender just for Shah, which is less complex and has higher liquid yields.

Abu Dhabi is taking a more stringent approach than Saudi Arabia, which has a more liberal view of the market. Saudi Aramco will pay top dollar to secure resources. David Fyfe of the IEA says: "The Saudis have been adept at ordering equipment and rigs; their project management skills are fairly honed - getting access to the equipment they need. But in doing that they are paying much more than they would have five years ago". According to the oil services company Baker Hughes, about 270 rigs operate in the Middle East, up from 158 in September 2000, with Saudi Arabia employing about 130. But even as costs rise, says Wood Mackenzie's Colin Lothian, Saudi Arabia has the advantage of scale.

For smaller producers it means having to compete with larger ones who can offer longer contracts and pay top rates. The issues can be exacerbated by difficult operating environments. In Libya, attractions for IOCs include the country's under-explored status and its proximity to Europe.

Abu Dhabi will cut crude oil output by around 600,000 b/d in November. The state-owned Abu Dhabi National Oil Co. (ADNOC) recently said: "A scheduled essential maintenance programme will take place in November 2007 at three offshore fields - Upper Zakum, Lower Zakum and Umm Shaif. During the maintenance period, production will be reduced by approximately 600,000 b/d". It did not specify how long the work will last but said it had taken measures to meet its commitments, adding: "This maintenance programme has been well planned for over a year and ADNOC has worked closely with its term clients to ensure there is minimal disruption to their operations, which also coincides with the scheduled seasonal refinery maintenance in the market... ADNOC's commitments to its term clients are all met by advancing the majority of liftings, and some deferments that have been rescheduled by mutual agreement".

ADNOC said crude processing will be cut as maintenance work will be done by its refining unit, Takreer, at the Ruwais refinery between Dec. 22 and Feb. 25, 2008. It said: "The amount of crude that will be released from this shutdown will be around five million barrels". Abu Dhabi accounts for the bulk of the UAE's crude oil production of 2.5m b/d. An APS source this week said at times up to 800,000 b/d of Abu Dhabi's crude oil production will be shut in during the maintenance period.