While northern hemisphere consumers have faced months of high prices, OPEC members have benefited from soaring revenues. And not at the expense of production – a 1 November cut of 900,000 barrels a day (b/d), agreed in September, merely returned the ceiling to its pre-war level of 24.5 million b/d.

The key has been low OECD, and especially US, stocks and a punch-drunk market reeling at any hint of supply disruption. Events such as terrorist attacks in Iraq and Saudi Arabia would always prompt price spikes. But traders have been responding to such apparently insignificant events as reports of a single leaking tanker or refinery shutdown. A belated surge in US petrol demand, exacerbated in late November by the annual Thanksgiving celebrations, has coincided with the seasonal pick-up in heating oil demand to leave refiners stretched. Low product stocks in Europe limit arbitrage opportunities. OPEC’s apparent lack of concern at prices consistently at the upper end of its $22-28 a barrel price target, and the potential for further cutting as the group’s 4 December meeting looms, are also goading the bulls.

The consensus is that OPEC will put off lowering the ceiling but will not raise it to bring prices down. ‘Maybe in January/February they will start thinking about a reduction, but not while the price is pushing $30 a barrel,’ says Peter Nicholl, analyst at ABN Amro. Venezuela recently made some controversial noises about increasing the OPEC target band to $25-32 a barrel, but OPEC heavyweight Saudi Arabia swiftly moved to reaffirm the existing range. ‘Coincidentally, if prices don’t fall before 4 December, the meeting will take place on the 20th day of prices above $28 – OPEC’s theoretical trigger for a cut,’ says Kevin Norrish, analyst at Barclays Capital. ‘That’s unlikely to happen but I don’t see any increase either. There is not currently any need. Supply and demand are in reasonable balance.’

Several OPEC members have been demanding assistance from non-OPEC producers before they lop off any more of their own precious output. Such assistance is unlikely to be forthcoming. Amid the tumult engulfing his country’s oil industry, Russian Energy Minister Igor Yusufov took time out to flaunt his country’s consumer-friendly credentials in early November: he contacted OPEC secretary-general Alvaro Silva to call for a production increase to dampen prices. Mexico and Norway have also indicated unwillingness to come on board.

However, assuming OPEC opts for a quota rollover in December, the issue of oversupply will almost certainly need to be addressed in early 2004. Most market watchers expect a steep slide in the average oil price as the northern hemisphere winter draws to a close and stocks have had a chance to rebuild across the board. ‘Barring unforeseen supply disruptions, supply/demand numbers imply a need for OPEC to think about cutting early in 2004 if it remains committed to $25 as an ideal,’ says Nicholl.

The perennial ‘Iraq factor’ will also come into play. Iraqi exports have been steadily increasing from the southern fields to reach an October average of some 1.6 million b/d, a figure that is estimated rise to about 1.8 million b/d by the end of November. The long-delayed reopening of the northern Kirkuk-Ceyhan export pipeline will presumably come on stream within the coming month or two. Reports indicate that repairs to the sections hit by sabotage are complete. A restart – expected to be at around 600,000 b/d – awaits the deployment of a security force to prevent a repeat of such incidents. Of course, the poor and deteriorating security conditions imply that Iraq will continue to be a source of potential supply disruptions.


More positive news on the demand side is the emerging shoots of economic recovery. US gross domestic product (GDP) leapt by 7.2 per cent in the third quarter – one of the factors behind strong petrol demand. ‘You have to remember that the US consumes nearly a third of the world’s oil and more than 90 million b/d of gasoline,’ says Robert Skinner, analyst at the Oxford Institute of Energy Studies. ‘And estimates show that a 1 per cent rise in GDP translates into a 0.1 per cent rise in gasoline demand. Truckers start driving stuff around. Airline data also suggests Americans are going abroad less and driving around at home more.’

Tokyo raised its 2003/04 growth forecast in September on the back of healthy second-quarter GDP data. The Eurozone economies remain more sluggish but even here there are some signs of improvement. The latest monthly report from the International Energy Agency (IEA) revised upwards global demand growth forecasts for 2003 and 2004 to 1.3 million b/d and 1.1 million b/d respectively.

The problem for OPEC is that for some years increases in demand have been absorbed primarily by non-OPEC countries. Independent producers brought on some 1.4 million b/d of new capacity in the year to the end of September, driven by start-ups in Mexico, Canada, Equatorial Guinea and Brazil. ‘OPEC production has been stagnating for the last seven years,’ says Geoff Pyne, analyst at Sempra Energy Trading. ‘And 2004 is set to be another year of no growth because it looks like being another strong year for non-OPEC production, with big increases in Angola, Chad, Equatorial Guinea and Kazakhstan.’

International oil companies (IOCs) are investing heavily to bring on new capacity outside OPEC’s reach, especially in East Africa and the former Soviet Union. A number of ambitious new pipeline projects are also taking shape, promising to bring new sources of oil to the world market. World Bank funding for the proposed Baku-Tbilisi-Ceyhan pipeline, to make more Central Asian oil available for export, was approved in early November. Various proposals are on the table to bring Siberian crude into the global system.


An internal challenge for OPEC lies in members’ shifting capacities. Analysts question how many more quota adjustments OPEC can agree on without addressing the issue of quota realignment. In effect, only six members of the group are performing any swing producing role. Algeria and Libya are in such longstanding and flagrant breach of their quotas as to make the limits virtually meaningless. Venezuela and Indonesia, by contrast, are out of reach of both their new and old ceilings. ‘Because only six out of the 10 countries are likely to enact the agreed cuts, the pressure on the remainder is increasing,’ says Pyne. ‘OPEC needs to redistribute the quotas sometime before or during the first half of 2004, especially because of further Nigerian capacity increases.’

The issue is far from new. ‘There are analysts who have built entire careers over the past 15 years by saying that the quota issue would cause the imminent implosion of OPEC,’ says Norrish. ‘But it is a nagging problem and the way supply is going, it will need to be addressed, even if some of the Nigerian claims need to be taken with a pinch of salt.’

An OPEC committee is examining the vexed question and is considering widening the determining factors to include members’ macroeconomic conditions. But at the core of deliberations will remain capacity and reserves. Governments, aware of the crucial economic impact of any rebalancing, are already warming up for a fight.

Algeria, Libya and Nigeria have been intensifying longstanding demands for a bigger slice of the cake. Algeria’s rapidly rising production – 1.2 million b/d in October compared with a quota of 782,000 b/d – forms the foundation for its claims.

Libya, one of the world’s most underdeveloped oil-producing regions, is basing its case on probable reserves. Prime Minister Shukri Ghanem told a conference in London in early November that the country’s recoverable reserves were estimated at 40,000 million barrels: the BP Statistical Review of Energy for 2003 puts proven reserves at 29,500 million barrels. In common with other OPEC governments, Tripoli sees an increased quota as crucial to its ambition to attract foreign investment to boost capacity. IOCs do not want to sink large sums into exploration and development of reserves, only to be told to restrain their production. Tripoli is aiming at 2 million b/d by 2010, compared with output of 1.5 million b/d today and a ceiling some 190,000 b/d lower.

Nigeria has failed to meet its quota for long stretches of 2003 as political instability scares away foreign oil workers. But the country’s vast potential has proved too alluring for any permanent flight and IOCs plan to bring on large amounts of new capacity over the next two years.

While other OPEC producers have been less vocal in their jockeying for position, many have projects in hand to expand capacity. Among the most ambitious is the long-stalled Project Kuwait, which has been showing signs of renewed life in recent months. Three consortia of IOCs submitted development plans in late October. If implemented, the project would double production from four northern oilfields to about 900,000 b/d (see pages 40-42).


Tehran is one of those working hardest to defend its market share against incursion, most particularly from its old adversary, Iraq. While vehemently rejecting independent analyses that its capacity is decreasing, the government appears to be preparing to defend its corner from the reserves standpoint. The discovery of one of the world’s biggest oilfields was announced in July. Subsequently, Tehran submitted a new estimate of recoverable reserves to the OPEC authorities, up to 131,000 million barrels from 99 million – conveniently leapfrogging Iraq to bring reserves to exactly half of Saudi levels.

However, the problem with adding weight to reserves in the OPEC mix is the notorious unreliability of the numbers, especially coming from governments with an interest in inflating them. ‘Verifying reserves is extremely tricky,’ says Norrish. The typical method is to rely on an aggregate of third-party estimates. To compound the problem, there is a question of which reserves are deemed ‘recoverable’. Caracas made a renewed pitch in mid-November for inclusion of the Orinoco tar belt in the equation, which would take Venezuela’s reserves beyond those of Saudi Arabia.

So OPEC approaches 2004 with a lot on its plate. As a group, members must address an expected price slide in the short term and stagnating demand in the long. Internally, members have to negotiate the highly charged question of market share and prepare for Iraq’s reintegration into the fold. OPEC’s Indian summer could be coming to an end.

Clare Dunkley