Monday, December 20, 2010

Don't Mess with the Big Boys; Saudi Arabia is still King of OPEC

When Iraq recently raised its oil reserve estimates by 25% to 143 billion barrels, the initial assessment by analysts was that the Iraqis were drawing battle lines with Iran, their former enemy and the country which had hitherto held second place as holder of the second largest conventional oil reserves after Saudi Arabia.

But the numbers game being played by Iraq and Iran, which shortly afterwards announced its own reserve hike to reclaim the second slot from the Iraqis, albeit with little scientific backing, has raised heckles in another Middle Eastern country.

Enter Saudi Arabia, the undisputed leader of the OPEC pack with its hefty 260 billion barrels of crude oil reserves.

Listening to Saudi Arabian oil minister Ali Naimi speak at a symposium celebrating OPEC's 50th anniversary, the message was clear and it was directed at Baghdad. "Saudi Arabia is a founding member of OPEC and it holds the world's largest crude oil reserves, has the biggest production capacity and is the largest oil exporting nation," Naimi said in a presentation at the start of the ceremony on October 18.

"This is a position that the kingdom will continue to hold for some time," he added, in what appeared to be a veiled message to other OPEC members such as Iraq and Iran not to challenge the oil giant.

Perhaps due to a scheduling problem or by design, none of the other 11 OPEC ministers attended the ceremony in Riyadh, where the organization was represented by its secretary-general, Abdalla el-Badri. This led some observers to note that it was unusual for invitations by the kingdom to be turned down by lesser members of the producers' club.

The seeds of what appears to be an attempt by some to position themselves for a realignment of power within an organization that has long been dominated by Saudi Arabia began last December.

That was when Iraqi oil minister Hussein al-Shahristani appeared to be laying down the gauntlet when he said that Iraq's oil production capacity would exceed 12 million b/d within six to seven years once the 11 oil fields offered up for development under long-term service contracts by foreign oil companies reached plateau production.

That 12 million number matches Saudi Arabia's current production capacity -- excluding the neutral zone shared with Kuwait which would take it up to 12.5 million b/d.

Yet Saudi Arabia, which has often stated as policy a desire to maintain oil market balance, retains some 4.5 million b/d of idle capacity with production running at around 8.1 million b/d, in line with OPEC production quotas from which Iraq is excluded.

Iraq, a founding member of OPEC -- which makes its absence from Riyadh more intriguing -- has been exempt from output restrictions as it rebuilds its energy infrastructure, which was decimated by decades of wars, first against Iran in 1980, the invasion of Kuwait in 1990 and the ensuing sanctions that hindered investment in its energy sector.

Now the sleeping giant awakes and the two largest Arab oil producing states appear to be heading for a showdown. [Read more]

(New estimates at West Qurna-1 and Zubair oil fields helped push the Iraq's total to 143 billion barrels, i.e. 24% upward revision of the country's 115 billion barrels of proved oil reserves. Concerning Saudi Arabia -- EIA estimates that the kingdom produced some 8.5 million barrels of crude per day in September 2010, including lease condensate and about one-half of the production in the Kuwait-Saudi Arabia Neutral Zone. In September 2010, Neutral Zone production by both Kuwait and Saudi Arabia totaled about 538,000 barrels per day - D.R.)

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