World Energy Supply Is To Reach 283M B/DOE, With 3.7M B/D Of Spare Capacity, By 2015.

*** OPEC Capacity To Produce Crude Oil Will Rise From 33.45M B/D To 65.5M B/D By 2030; By Then OPEC's Supply Of NGLs Will Rise To 8M B/D, From 4.8M B/D At Present

*** Russia Wants To Establish A Cartel Of Nat. Gas Exporting Countries Like OPEC; But The Kremlin Keeps Quiet About This For The Time Being, Wanting First To Secure Its WTO Seat

*** WTI On Nov. 15 Rose After 3-Day Fall To $58.76 And The Average Of The Unleaded Gasoline Retail Price In USA Was $2.29/G, Down 2.7% From The Same Period In 2005; Distillate Stocks In USA Were Up 10% On The 5-Y Average

Addressing an international petroleum conference held in Tehran on Nov. 20-21, APS Energy Group President Pierre Shammas forecast that the world's primary energy demand will rise to 279.3 million b/d of oil equivalent by 2015, with the capacity to supply the global market to reach 283 million b/doe. This would leave the world with a spare capacity of 3.7 million b/doe by 2015, which is not much - meaning that oil prices would remain high through most of the period until then.

The following are extracts from the Shammas presentation: "...The need for expansion of capacities to produce petroleum (oil and gas) in the coming years is attested by the tightness of the current market and a difficult balance between supply and demand. In this respect the price of crude oil plays a crucial role.

"Capacity expansions on the supply side are proceeding apace and are dependent on the security of demand. There are no guarantees for the security of demand. The only credible security from the demand side comes from consumption projections being made by individual countries as well as by multilateral organisations, without taking into account such major risk factors as global and/or regional economic recessions".

Of the world's total of primary energy demand, he said, "the combined share of crude oil, natural gas and coal will account for about 82%, to 217.85 million b/d of crude oil equivalent, on the assumption that WTI's front-month price is to average $55/barrel of 2005 US dollars or above.

"On the basis of this scenario, the world by 2015 will have a sustainable capacity to produce about 283 million b/d of crude oil equivalent in oil, natural gas, coal and alternative sources of energy. The spare capacity of about 3.7 million b/d of crude oil equivalent will not be much. This means crude oil prices will be strong most of the time, which will help in the commercialisation of alternative sources of energy to the extent that these will be able to account for about 18% of the sustainable world capacity by 2015. The share of alternative sources of energy will grow to more than 20% of total primary energy needs by 2030.

"At times...when the spare capacity is to consist partly of alternative sources of energy, the latter will take priority over conventional petroleum; their share of the market will expand at the expense of conventional oil whose price will then be depressed. But the price movements in the period between now and 2015 will be mainly driven by the following factors:

1. The pace of technological advance for alternative sources of energy will accelerate when the average WTI price is above $55/barrel in 2005 US dollars continuously for more than 12 months.

2. The pace of technological advance for conventional petroleum will accelerate at the expense of alternatives when the average WTI price is below $55/barrel continuously for more than 12 months.

"Speculation in energy futures will continue and alternative sources of energy will have entered the futures markets by 2015. This factor - speculation in energy futures - will be strong only for as long as investors prefer commodity markets over equity markets. Things might change in favour of equity markets".

"OPEC will be in the lead in expansion of capacities to produce crude oil and condensate/NGLs. OPEC's capacity for crude oil will rise from 33.450 million b/d now to as much as 50.250 million b/d by 2015 and 55.5 million b/d by 2030. With condensate/NGLs included, OPEC's capacity now comes to as much as 38.250 million b/d and will reach 57.255 million b/d by 2015 and 73.5 million b/d by 2030.

This calculation is based on the assumption that Iraq's crude oil production capacity will rise from 2.5 million b/d in 2006 to as much as 4 million b/d by 2015 and 10 million b/d by 2030. This is also based on the assumption that Saudi production capacity for crude oil will rise from the current level of 11.3 million b/d to 13.5 million b/d by 2010 and to 15 million b/d by 2015 and through to 2030.

Kuwait's sustainable crude oil production capacity is to rise from 2.58 million b/d to 3.5 million b/d by 2015 and to as much as 10,000 b/d by 2030.

In Iran, three fields will enable the country to raise its crude oil production capacity by 1 million b/d in the next three to four years. These are Azadegan, Yadavaran and Anaran oilfields in southern Iran. It is said the oil recovery rate in these giant oilfields is about 10-16% and in some cases may touch 40%.

Non-OPEC crude oil and condensate/NGLs production capacity by 2015 will have risen from 49.3 million b/d in 2006 to between 50.5 million and 51 million b/d by 2015.

Russia is the world's biggest energy supplier, surpassing Saudi Arabia in energy exports measured in barrels of oil equivalent (boe), 13.3 million b/doe per day for Russia versus less than 10 million b/doe for Saudi Arabia.

Russian Deputy Prime Minister Alexander Zhukov was on Nov. 7 quoted as saying his country's crude oil and condensate production had grown at a rate of about 10% in the early years of this decade but has since slowed significantly.

Russian crude oil and condensate output dropped 0.4% month-on-month in October to 9.71 million b/d, down from a post-Soviet record high of 9.76 million b/d in August. Russia's average crude oil and condensate output for the first 10 months of 2006 was up 2.3% compared with the

first 10 months of last year, however.

                OPEC PRODUCTION & CAPACITIES 2006-2030
                                 (000 b/d)

                         Current     Oct.'06     Nov.'06       Cap.    Cap.
                          Quota      Output      Capcty.       2015   2030

Algeria                   0.835       1.390         1.400      2,000   2,000
Indonesia                 1.412       0.860         0.860      1.000   0.500
Iran                      3.934       3.950         4.100      5.950   6.500
Kuwait                    2,147       2.550         2.580      3.500  10,000
Libya                     1.428       1.760         1.760      3.000   4.000
Nigeria                   2.206       2.190        2.800       4.500   5.000
Qatar                     0.691       0.840         0.850      1.500   1.500
Saudi Arabia              8.719       9.100        11.300     15.000  15.000
UAE                       2.343       2.650         2.700      4.000   5,000
Venezuela                 3.085       2.520         2.600      5.800   6.000
Total                    26.800      27.810        30.950     46.250  55.500

Iraq                        --        2.100         2.500      4.000  10.000
Grand Total                          29.910        33.450     60.250  65.500

OPEC NGL                              4.800         4.800      7.000   8.000
Grand Total With NGL                 34.710        38.250     57.250  73.500

"The state-controlled gas monopoly Gazprom on Oct. 26 called for the Moscow government to step in to prevent a repeat of last year's winter fuel crisis, which it said was likely because of a poor state of readiness in the regions. Gazprom, which supplies one-quarter of Europe's gas needs, had to restrict deliveries to some of its European customers last year to ensure there were sufficient supplies for domestic users who were enduring an exceptionally cold winter.

Gazprom said: "The unsatisfactory current level of reserve fuel stocks in the regions causes serious concern. There is a threat of a repeat of last winter's events, when many regions turned out to be unprepared for a sharp decline in temperatures", adding: "The situation that has developed requires immediate intervention by state regulatory bodies".

Gazprom had to briefly cut its gas supplies on the route to Hungary by 20% in January, and said it could also reduce flows to Italy and Austria, although it said it had never fallen below its contractual obligations. It soon restored supplies to 7% above contractual volumes to European customers and 40% more than the contracted amount to Russia. The company said it planned to significantly raise investment in 2007 - to 531.78 billion roubles ($19.82 billion) compared with 373.14 billion roubles planned this year. It also slightly increased its 2006 production forecast by 3 BCM to 551 BCM.

Moscow has recently confirmed that the country's exports of natural gas this year will be higher than in 2005, when they had risen 8.04% to 152.478 BCM, down from 189.4 BCM in 2003. Gazprom, which has a monopoly on gas exports, still believes its sales out of Russia would be raised to 360 BCM/year by 2010, although independent experts say Gazprom's exports could resume a decline which occurred in recent years due to its limited investment in Russian gas E&P.

According to a plan adopted in 2000, the growth of Russia's gas output should be limited to 700 BCM/year by 2020, with non-Gazprom firms to produce up to 170 BCM/y. Coal production would rise from 210m t/y in 2000 to 430m t/y by 2020. Power generation should increase from 880 bn kWh in 2000 to 1,620 bn kWh by 2020. The plan for gas and exports is far more conservative than one projected in 1997 by Gazprom.

Alexander Medvedev, head of Gazprom's export arm Gazexport on March 13, 2006, told reporters the company expected this year's export revenues to rise 27% due to high global energy prices. He said Gazprom's revenues would rise to US$33 billion from US$26 billion in 2005.

The European Union (EU) of 25 countries relies on Russia for over 25% of its energy needs, with Germany importing over a third of its natural gas from Gazprom. Most east European members of the EU are completely depended on Gazprom supply of natural gas.

Gazprom sells less than 28% its gas output to Europe, which accounts for about 70% of its revenues thanks to high international oil prices. Its remaining production of natural gas, which in 2005 amounted to 547.249 BCM (up 0.82% from 2004), is sold to the Russian market at heavily subsidised prices. Local gas prices will remain heavily subsidised despite repeated EU demands that Moscow liberalise the domestic energy market in line with a free system in Europe.

Even if Gazprom's external partners, such as Wintershall of Germany, are to sell their Gazprom gas back to the Russian market this would have to be at the much lower domestic prices. The situation in Russia is not likely to change much during President Vladimir Putin's final term in the presidency to 2008.

In its annual 2006 World Energy Outlook (WEO), the Paris-based International Energy Agency (IEA) on Nov. 7 said world consumers faced ever higher oil prices in coming decades as investment in new supply was too slow to meet growing demand. A barrel of crude oil may cost a nominal $57.79 in 2010 or $51.50 in real terms, up from a respective $40 and $35 expected in 2005. The nominal price may hit $97.30 in 2030, up from $65 expected last year. It could even reach $130.30 if investment falls short.

"We have revised upwards our assumptions for oil prices in this Outlook", said the IEA, an adviser to 26 industrialised countries, noting: "This revision reflects the continuing recent tightness of crude oil and refined products markets". WTI at NYMEX hit a record of $78.40 on July 14 - with Brent having hit a $78.62/barrel high in August 2006, leaving consumer governments worried about their economies.

Concern is mounting over risks to energy supplies and climate change from burning fossil fuels.

The IEA's 596-page study urges world leaders to enact policies that will leave the world consuming 10% less fuel in 2030 than if demand were unchecked. The IEA said that, to meet the world's thirst for oil, $4.3 trillion will need to be invested in capacity expansions for oilfields and refineries by 2030 and it was far from certain all the investment will occur.

>>Resource nationalism, the trend for countries such as Venezuela, Algeria and Russia to seek more cash and control from companies that work their oil and gas fields, is among the factors which may restrain investment. The IEA said the required investment of $164 billion a year was almost double actual spending of more than $100 billion a year in the first half of this decade. The agency added: "Investment needs to increase in each decade of the projection period as existing infrastructure becomes obsolete and demand increases".

Most of the investment - $125 billion a year - would be for developing and exploring oilfields with some $30 billion devoted to oil refining. A shortfall in investment in new supplies would send oil prices even higher.

IEA Director Claude Mandil on Nov. 7 presented the IEA World Energy Outlook (WEO) 2006 in London, projecting the world's primary energy demand to go up by just over one-half between now and 2030 - an average growth of 1.6% per annum. Demand grows by more than one-quarter in the period to 2015 alone. He was hence emphatic when he said, "fossil fuel demand and trade flows, and green house emissions would follow their current unsustainable path through to 2030 in the absence of new government action".

The report emphasised that the centre of gravity of the global demand was shifting, as over 70% of the growth during this period was to come from the developing world and China alone accounting for 30% of that total. In case of no remedial action from the governments, which the IEA report mentions as the Reference Scenario, fossil fuel would still account for 83% of the increase in energy demand between 2004 and 2030.

Consequently world crude oil demand would reach 99 million b/d in 2015 and 116 million b/d by 2030 - up from 84 million b/d in 2005.

However, in order to meet the galloping demand, the IEA projects cumulative investment of the order of over $20 trillion over the 25-year period until 2030. Of it, investment in the oil sector, and that with three quarters of it going into upstream, was estimated at $4 trillion over the same period - huge by any standards. Is that sort of investment forthcoming is anybody's guess.

In the 2006 WEO, the IEA has once again emphasised that oil supply is increasingly dominated by a small number of producers. OPEC's share of global supply grows significantly, from less than 40% now to 48% by 2030. Saudi Arabia, according to the IEA projection, continues to remain the kingpin, by far the largest producer.

The IEA concedes that non-OPEC conventional crude oil output peaks by the middle of the next decade, though natural gas liquids production continues to rise. The report also discusses various pricing scenarios and projections through to 2030. Indeed these projections are Reference Case scenarios in a situation when things continue as they are today and consuming governments and societies do not take any action to change the outlook. That though looks unlikely.

The average IEA crude oil import price is assumed to be slightly higher than $60 per barrel (in real 2005 dollar terms) during 2006 and 2007 - up from $51 a barrel in 2005. The IEA report then predicts a decline in the global crude prices - to about $47 a barrel by 2012. The agency's report then assumes that prices would rise again thereafter - though slowly - reaching somewhere around $55 in 2030.

Indeed Mat Simmons & co are not figuring in this OECD projection anywhere, otherwise they would have led every one to believe that crude oil prices would touch the roof over the next few years. The IEA report urges the governments to take the steps to change the scenario - so as to enhance energy security, raising the issue of consuming countries' vulnerability to supply disruptions and resulting price shock.

>>The IEA says: "OECD and developing Asian countries become increasingly dependent on imports as their indigenous production fails to keep pace with demand". The report hence warns: "Much of the additional imports come from the Middle East along vulnerable maritime routes.

The concentration of oil production in a small group of countries with large reserves - notably Middle East OPEC members and Russia - "will increase their market dominance and their ability to impose higher prices". The IEA report exhorts the consuming nations to take urgent measures to alter the scenario - referred to as alternative policy scenario.

The alternative scenario envisages the world's oil demand to reach 103 million b/d in 2030 - 20 million b/d higher than 2005 but still 13 million b/d less than projected in the above Reference Scenario. The report says that close to 60% of this saving could come from the transport sector. More than two thirds could come from more fuel-efficient vehicles.

Increased biofuels and nuclear energy use could also help in reducing oil consumption. There could be people around who agree to all what is said above, yet Mandil and his team cannot be taken lightly. In all the projections being made in the global energy capitals today, the above has to be a part of the overall equation, for it has a direct bearing on their overall well being.

Saudi Arabia has accelerated its near-term production expansion plans and may add up to an additional 1.5 million b/d a day in crude oil output in 2010-2011 to mitigate potential supply disruptions and meet growing global demand, according to a new report published by a Riyadh-based government consultancy.