Revolutions could rob Opec of its ability to manipulate supply

Colonel Gaddafi’s rather strange television appearance last night failed to quell the Libyan insurrection, and this morning has seen a mounting number of oil companies depart the country and the oil price continue to surge.

The news for Opec in the short term is bad, with Libya currently accounting for 1.6m barrels a day of oil production. In the long term, it could be even worse, however, especially if trouble spreads to Kuwait, with 2.3m b/d, Iran, with 3.7m, or even the big one – Saudi Arabia, with 8.3m.

For the moment, the cartel can only wait and watch what happens to production figures. But according to Fateh Al-Khayat, the former director of planning at the Iraqi oil ministry, the outlook is even worse in the long term. He has told an audience at the International Petroleum week in London:

Libya might go out of the market for a while. Algeria is a potential trouble spot. If we add Yemen and Egypt, troubled countries produce about 4m b/d. If that supply is disrupted, the other Opec countries cannot in my opinion compensate for that.

What is worse, said Al-Khayat, is that Opec is relying on Iraqi production to make up for shortfalls in the longer term, (“For the first time that Iraq will cover the others instead of the others covering Iraq.”) but Iraq cannot possibly produce what it is contracted to.

In 2017, if contracts were met, production would be 13.6m b/d from Iraq. That is higher than any other country in the world today. This cannot be achieved. It is a pipe dream and the world of oil should not count on it.

He said infrastructure limitations would mean Iraq could never export more than 6m b/d, not least because pipelines going through neighbouring countries would never be secure enough to provide a reliable supply.

Whatever the short term outlook, he had a stark warning for Opec:

By 2025, Iraq will contribute 5.6m b/d of an Opec call of 10.5m b/d. The rest has to come from elsewhere. Given the current political troubles, that is unlikely, and means Opec will not be able to manipulate the supply any more.

He did, however, have some good news for IOCs, which on the basis of the previous day’s discussions, appear to have a fairly bleak outlook. He predicted that for the new regimes in Egypt, Tunisia, and possibly elsewhere, to be able to meet the aspirations of their newly empowered populations, they would have to produce oil more efficiently than currently being done by state-owned NOCs. This, he said, would open the door for IOCs to come in and start generating revenue quickly enough to stave off longer-term turmoil.

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