Oil strategy could backfire

OPEC could lose market share to other sources

05/29/2001

Bloomberg News

LONDON – In 1998, when oil prices sank to $10 a barrel, BP PLC and its partners stopped work on the Clair oil field off the Scottish coast. With oil back to about $28, they may restart the $750 million project later this year.

That would be one more sign that oil prices now stuck above $20 for the longest period since the mid-1980s is spurring investment in oil fields outside OPEC nations.

The developments could threaten to make the group a victim of its own success by boosting supply and stealing market share, or eroding prices.

"If they stick with their oil price target of $22 to $28 a barrel, they are going to encourage a lot of non-OPEC supply that wouldn't otherwise have come out," said John Waterlow, an oil analyst at Wood Mackenzie Ltd.

"Companies are going to bring in the oil they knew about but didn't bother developing."

While ministers from the Organization of the Petroleum Exporting Countries prepare for next Tuesday's meeting, non-OPEC nations are increasing supplies – by 600,000 barrels a day, or 1.3 percent, this year, the International Energy Agency estimates.

Yet many OPEC officials say they expect to leave output unchanged, supporting prices.

At least five of the group's 11 members – Algeria, Iran, Kuwait, Qatar and the United Arab Emirates – have said production quotas won't change in Vienna.

OPEC will consider increasing supplies if the price of its oil index stays above $28 a barrel for 20 consecutive trading days.

The OPEC benchmark has recently been near the top of a $22 to $28 target range. Prices have stayed inside the band since January, helped by OPEC decisions to remove 2.5 million barrels a day from the market.

In turn, oil companies are expected to increase spending on drilling and exploration by 20 percent to $114 billion this year.

Baker Hughes Inc., a U.S. oil-services company, reported that in February, 2,430 drilling rigs were operating worldwide, the highest since November 1987.

The group's challenge is to keep prices high enough to satisfy members' financial needs without stimulating enough non-OPEC production – in the Gulf of Mexico, North Sea, Russia, the Caspian basin and West Africa – to erode its 40 percent share of the world market.

"As confidence in OPEC's management of prices increases, a lot more development projects get under way," Royal Dutch/Shell Group chairman Mark Moody-Stuart said earlier this year.

Prices would have to drop to about $15 a barrel to stop the increase in oil flow outside OPEC, said Leo Drollas, deputy director of the Centre for Global Energy Studies.

http://www.dallasnews.com/business/stories/379493_opec_29bus.ART.html

-- Martin Thompson (mthom1927@aol.com), May 29, 2001