Oil prices beat most expectations in the first two months of the year. as exceptional factors again pushed prices higher than the forecasters had predicted. Cold weather and constraints on supply in the Atlantic basin came to the rescue and the bull market that began in the fourth quarter of 1995 kept on running. Yet, the prospect of Iraqi exports resuming cast a long shadow and OPEC will have to fashion a credible response if and when Iraqi oil makes it to market. The flood of non-OPEC supplies expected in the second half will also add to the pressures as spring gives way to summer.

By common consent. 1996 is likely to be a year that OPEC will prefer to forget. Its quota is being exceeded by about 1 million barrels a day (b/d) as several members blithely ignore their commitments. Reintegrating Iraq into a quota system that already lacks credibility will test to the limit what remains of OPEC solidarity.

Accommodating Iraq is not the only chal lenge to the OPEC consensus. Increasingly, members are pursuing national strategies to develop capacity which will be difficult to contain within a quota system. Algeria and Venezuela are leading the drive to attract major oil companies into new exploration and production agreements that will accelerate capacity expansion. Despite its pariah status. Iran is doing the same and Iraq has similar ambitions which must await the end of the embargo.

This race to acid capacity in OPEC countries is gathering speed, despite the short-term supply trends which are eroding OPEC's market share. This year, the additional oil supplied by non-OPEC producers will be close to 2 million b/d, comfortably outstripping the increase in demand, expected to be about 1.6 million b/d. OPEC will actually find the call on its oil supplies falling as the year advances (Oil & Gas, MEED Special Report. 19:1:96).

Looking further ahead, prospects are altogether different, particularly for the six main Gulf producers - Iran, Iraq, Kuwait, Qatar, Saudi Arabia and the UAE. In its 1995 analysis of world energy, the Parisbased International Energy Agency (lEA) projected that world oil demand could reach 85 million-105 million b/d by 2010, compared with 68 million b/d in 1994. In its various scenarios for the future, the IEA says that the additional supply required from the Middle East. compared with 1994, could rise by 20 million b/d. The six Gulf states have about 6 million b/d of spare capacity, implying a need to add about 1 million b/d a year of new capacity over the next 14 years.

The plans announced by the six states indicate an increase in capacity of 5.3 million b/d by 2000 at an estimated cost of $50,000 million. At the same time, natural gas reserves will be developed - both for reinjection and to increase exports - which could boost natural gas liquids (NGL) by about 1.8 million b/d. 'Investment will also be required for refining, shipping and pipelines; the total investment needed to boost crude oil and natural gas could easily be $100,000 million by 2000,' the IEA says.

Given the mounting economic strains in all the countries concerned, it is an open question whether or not they can fund such a huge investment. The IEA believes that market reforms will create the conditions for the six Middle East states, which account for 65 per cent of world oil reserves and 30 per cent of proven gas reserves, to develop the potential to meet the projected demands that will be made on them. Part of this process is likely to include greater participation by foreign oil companies - already apparent in Algeria and Venezuela - that will bring capital, expertise and technology.

Below is a summary of the long-term oil and gas development plans in the six states:

Iran planned to raise sustainable crude oil production capacity to 4.5 million bid by 1995 and achieved production of 4.1 million bid in August 1994. Gas production is rising, both for reinjection and domestic use, so that more Oil can be released for export. Price rises are being used to rationalise domestic energy consumption, boosting exports of refined products. A hybrid buy-back production sharing agreement has attracted foreign participation and there are 10 other projects open for similar co-operation. 'If the new system is implemented successfully, there is reason to believe that Iran will be able to develop its hydrocarbon reserves in line with demand for its oil and gas,' the IEA says.

Iraq has plans to boost oil capacity to 6 million b/d over eight years at a cost of $25,000 million. The interim goal is 5 million b/d by 2000. When UN sanctions are lifted, Iraq wants to bring in foreign oil companies - - much of the country has hardly been explored. Constraints include export capacity, currently limited to 1.7 million b/d, when Iraq could export 2.1 million b/d. As Iraq has limited access to the Gulf and all other routes cross neighbouring states, it will be a challenge for Baghdad to secure adequate export channels. Greater domestic use of gas will release more crude oil and refined products for export.

Kuwait is raising oil production in stages from the current 2 million b/d to an anticipated 3 million b/d early in the next century. It is increasing earnings per barrel by boosting refining capacity at home and abroad and diversifying into petrochemicals. Investment in future projects embracing exploration, oil wells, gathering centres. pipelines, refineries, storage tanks, tankers and petrochemicals is estimated at about $5,000 million. The costs of adding produc tion in Kuwait are among the lowest in the world.

Qatar is focusing on optimising production and use of its natural gas, and expanding oil production. Two of three proposed liquefied natural gas (LNG) schemes are underway and several gas pipeline schemes are being considered. The cost of these schemes is about $20,600 million, equivalent to three times Qatar's gross domestic product (GDP). Liberal terms have tempted foreign oil companies into new exploration and secondary recovery, with the aim of boosting oil production to about 600.000 b/d, a 50 per cent increase on 1994 levels.

Saudi Arabia is working through a programme to boost oil production capacity to an eventual 12 million bid from about 10 million bid at present. It is increasing the production of lighter crudes; making the industry more vertically integrated; expanding domestic and foreign refining to process 50 per cent of its crude production; and aiming to transport 50 per cent of its traded crude in its own tankers.

The steady expansion of the well-established and highly successful petrochemicals sector is adding value to the kingdom's natural gas resources. The total cost of these plans is estimated at $35,000 million-50,000 million over 12 years. Many of the investments are already well advanced. Fewer projects can be funded from cash flow, obliging Saudi Aramco and other state energy sector companies to borrow internationally.

The UAE should achieve sustainable capacity of 3.6 million bid in 1997, due mostly to efforts to maximise recovery in Abu Dhabi and sustain production in Dubai. This is expected to rise to about 3.8 million bid by 2000. Abu Dhabi is steadily raising LNG capacity for export and using more gas domestically. both for reinjection and consumption. NGL output, from natural gas production, is also rising steadily. Abu Dhabi is adding value by boosting refining capacity and diversifying into petrochemicals.

Developments outside the Gulf states may yet put the IEA calculations into a different perspective. The huge potential of the Caspian region and other parts of the former Soviet Union has still to be developed and technology continues to break new bounds, extending the life of producing fields and finding oil at depths that were once assumed to be beyond reach. If the demands on Gulf oil are delayed, international companies will also have to wait longer to realise hopes of obtaining access to upstream assets in the region.

* Middle East Oil & Gas, IEA, Paris, 1995