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The New York Times: Tougher Year Lies Ahead for OPEC: "...some major projects... have experienced delays this year - among them... a 225,000-barrel-a-day project managed by Royal Dutch Shell in Nigeria's offshore region that started production last month.": Friday 9 December 2005

Published: December 9, 2005
For OPEC, the easy days may be drawing to an end.

Thanks to strong demand, a global economy that continues to show strength, limited increases in supplies from producers like Russia and Kazakhstan, and repeated interruptions in production from the Gulf of Mexico, members of the Organization of the Petroleum Exporting Countries have gone through 2005 with what has been, to them, a perfect alignment of stars: high prices along with high production and high demand.

With prices still holding near $60 a barrel and winter demand in full swing, OPEC ministers will meet Monday in Kuwait City for what increasingly looks like a purely formal gathering. For the time being, the group is likely to stick to its current policy of pumping at full tilt.

But after having avoided divisive issues for the last year, OPEC is likely to face a much different picture next year. Analysts said the group might have to consider production cuts, as non-OPEC producers increase their own supplies, if it wants to stop prices from falling too low.

One issue that may be discussed privately during Monday's closed session is the largest unresolved question for OPEC today: What is the minimum price that the group will choose to defend?

"There is an increasing challenge for OPEC next year," said Craig Pennington, the director of the global energy group at Schroders in London. "If you look at what people expected last year, non-OPEC supplies have disappointed and demand has been stronger. The result has been in OPEC's favor. But next year will be tougher. And they will not want prices to drop below $50 a barrel. They will need to cut production."

Over the last three months, OPEC oil ministers have watched with concern as oil prices dropped by about $15 a barrel from their high of $69.81 the day after Hurricane Katrina hit the Gulf Coast. Prices touched a low of $55 three weeks ago, before rebounding as cold weather set in on the East Coast.

Yesterday, crude oil futures on the New York Mercantile Exchange settled at $60.66 a barrel.

But the price of the "OPEC barrel" - a composite of 11 crude oils representative of the organization's actual production that OPEC looks at when considering its policy - has already fallen below $50. Since then, the price has recovered a little and was at $52.88 a barrel on Wednesday.

That has given OPEC ministers a little breathing room for the rest of the year, according to analysts at Barclays Capital in London.

"It looked as if ministers might need to enter the Kuwait meeting thinking fairly explicitly in terms of laying out the first sandbags for later price defense," the analysts, Paul Horsnell and Kevin Norrish, wrote in a note this week. "Perhaps now some of the urgency has been taken away. However, a one-week rally most definitely does not mean the questions on policy and targets have gone away."

Many delegates, including the representatives from Saudi Arabia, Kuwait, Iran and the United Arab Emirates, have said that the group is unlikely to announce cuts in actual production at next week's meeting. Some, however, have raised concerns that OPEC, which accounts for a third of world production, is pumping more oil than the market needs.

Yesterday, Kuwait's state news agency quoted Abdullah bin Hamad al-Attiyah, the energy minister from Qatar, as saying, "There is no crisis in the oil supply and the international market has witnessed an excess of oil, a matter which led to an evident drop in oil prices in comparison to the previous period."

Some of the group's members have already started to talk publicly about what they would consider a good price, by which they mean a price floor. One thing is certain: the previous price band of $22 to $28 a barrel, which was abandoned in January, is now extinct. No new target has been set since, though the energy minister of Venezuela, Rafael Ramírez, said yesterday that he would propose that one be adopted.

Referring to the types of oil traded in London and New York, Edmund Daukoru, the oil minister from Nigeria, told reporters in Vienna on Dec. 1, "Mid- $50's for Brent or West Texas would seem like a reasonable level; it would be ideal, appropriate."

The growth in global demand, which has forced most oil producers to pump to their maximum capacity, has mostly wiped out the group's spare capacity this year. Only Saudi Arabia, OPEC's largest member, still has some 1 million to 1.5 million barrels a day of untapped production.

But new supplies are expected from outside OPEC next year and those may ease some of the tightness on the oil markets. In total, these could add as much as 1.3 million barrels a day of capacity by the end of 2006, according to Frédéric Lasserre, the head of commodity research at Société Générale in Paris.

Even OPEC's acting secretary general, Adnan Shihab-Eldin, expects additional non-OPEC oil to reach as much as 1.6 million barrels a day next year.

That includes some major projects that have experienced delays this year - among them the BP Thunder Horse platform in the Gulf of Mexico, which is eventually expected to produce 250,000 barrels of oil a day, and a 225,000-barrel-a-day project managed by Royal Dutch Shell in Nigeria's offshore region that started production last month.

OPEC countries are also adding new supplies, though at a far slower pace. Another 700,000 barrels a day may be added from places like Saudi Arabia, Algeria or Libya.

Global oil demand next year is expected to grow by 1.5 million barrels a day to reach 85.5 million barrels on average, according to estimates by Barclays.

If all the expansion projects are completed on time, and barring any unexpected disruptions from producers - a big if, given the impact of this past year's devastating hurricane season on oil production in the Gulf of Mexico - then potentially the world might find itself with more supplies than demand next year.

That would force OPEC to reopen negotiations within the group on when and how to allocate cuts in production to keep prices from falling.

Still, some analysts expect that the growth in demand next year will outpace the addition of new supplies, making OPEC's job easier.

"What really allows OPEC to keep rumbling on is ongoing demand growth," said Jan Stuart, an economist at UBS in New York, who forecasts a 2 percent increase in consumption next year. "OPEC can afford to stand by."

OPEC currently produces about 30 million barrels a day, including about 1.8 million barrels from Iraq. Last September, the group suspended its quota system, the self-imposed limits on its members' production, after oil production from the Gulf of Mexico was interrupted by hurricanes.

"Debates within OPEC next year," said Mr. Lasserre of Société Générale, "will be very different than 2004 and 2005, when the theme was boost, boost, boost; 2006 will be more about stability of prices."

So far, however, the group can enjoy one of its best years in two decades. For OPEC countries, which together account for half the world's oil exports, this year will bring revenue of $430 billion from oil sales, according to the Energy Department.

"Every producer around the world is producing the marginal barrel to take advantage of high prices," said Fadel Gheit, a longtime oil analyst at Oppenheimer & Company in New York. "Right now, OPEC is not holding back. But OPEC wants to have its cake and eat it, too."

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