THE WALL STREET JOURNAL: Extra Supply Won't Come In Time to Tame Impact Of $50 Crude on Recovery (ShellNews.net)

By BHUSHAN BAHREE

Staff Reporter of THE WALL STREET JOURNAL

October 4, 2004; Page A3

VENICE -- With oil having settled above $50 a barrel for the first time, petroleum executives say the industry won't be able to bring on enough extra supply in time to significantly tame prices in the short term, due to long lead times needed to gin up new fields.

In Washington, finance ministers and central bankers of the so-called Group of Seven countries, the developed world's largest economies, expressed concern about oil prices damaging global economic growth prospects. They urged the Organization of Petroleum Exporting Countries, the world oil cartel, to produce more oil and consumers to moderate petroleum use.

The G-7 warning came after the U.S. benchmark light, sweet crude for November delivery settled up 48 cents on Friday at $50.12 -- the first close above $50 a barrel and the highest settlement price in the 21 years that oil futures have traded on the New York Mercantile Exchange. (See related story.)

Still, the price increase shows no signs yet of triggering a recession-inducing shock. A prime force behind the run-up in oil prices, soaring demand, is a product of the strongest global economic growth in a generation. The International Monetary Fund last week forecast that global gross domestic product will grow 5% in 2004, the fastest rate in three decades. The IMF warned that oil prices will contribute to a slowing of the recovery in 2005, to 4.3% -- slower growth than expected, but still brisk.

While at a record high in nominal terms, the price of oil is still short of highs during the early 1980s, when adjusted for inflation. At a gathering of many top industry executives in Venice over the weekend, Western oil companies stressed that they can do little to pump up output in the short term, as they typically produce at maximum capacity at all times. Some members of OPEC are raising their capacity to pump, but even in Saudi Arabia, which has the easiest reserves to develop, it takes as much as two years to bring new fields to production.

Other factors, to be sure, could work to ease oil prices. A return of stability in oil-rich Iraq could lead to a significant boost in output from that major exporter. And an easing of China's breakneck economic growth, and surging oil imports, could moderate the current spike in global demand for oil.

Even to gin up oil in the medium term, oil companies need access now to previously discovered reserves if they are to help meet the increasing need for oil to power world economic growth. Oil projects take several years to complete, and some can take a decade or more. In recent decades, big oil finds have petered out. International oil companies have had to go deep under the ocean, such as off west Africa, or to the Caspian Sea, which is landlocked and far from transportation facilities, to develop fields, while easy-to-tap giant fields in the Middle East remain off-limits to Western oil companies.

A major project by BP PLC in Azerbaijan will start exporting oil in significant quantities only next year, 15 years after it was first started. Part of the problem: building a pipeline through a clutch of countries to take the oil to a Turkish port. In Kazakhstan, a group of companies led by Italy's ENI Spa expects the first trickle of oil from the giant Kashagan oil field in 2008, about eight years after discovery.

"We can't go through the whole industry cycle of exploration, development and production" quickly enough to dent prices in the short term, said Thierry Desmarest, chief executive of France's Total SA, in an interview on the sidelines of the Venice meeting. -

Total, like many others, has been pressing countries in the Middle East, home to the world's largest discovered reserves of oil, for production contracts. But much of the Middle East is still closed to Western investment in the oil sector. "The problem is access to oil" reserves, said J. Robinson West, chairman of Washington-based PFC Energy, a consulting company that hosted the Venice conference.

Oil companies find higher prices have made some countries less receptive to Western involvement in developing their resources, Mr. West said in summarizing some of the weekend's discussions. Western oil companies typically offer capital and technology to develop oil fields. But oil revenues are rising, and the countries have little incentive to share some of this bounty with foreigners. Increasingly, they can invest on their own and contract service companies to provide off-the-shelf technology.

Analysts reckon that the world needs to add some six million barrels a day of new capacity every year. Some four million barrels a day of this is to replace production at depleting fields, using a conservative estimate of a 5% annual decline in the world's oil pumping capacity of more than 80 million barrels a day. An additional 1.5 million barrels to two million barrels a day or more is needed to fuel world economic growth. And some more is needed to restore spare production capacity that has been eroded in recent years. The spare capacity, a cushion against supply or demand shocks, is needed to tame volatility and high prices in world oil markets.

At the G-7 meeting in Washington, the ministers devoted special attention to ways that the world's energy markets can be made more transparent and more efficient, in the hopes of avoiding future oil-price spikes. Britain's Chancellor of the Exchequer Gordon Brown said high oil prices were "dampening consumer spending and company profitability." He called for the International Energy Agency to adopt better systems for amassing and passing along energy market data so that producers and buyers could coordinate better to avoid shortages and price spikes.

U.S. Treasury Secretary John Snow said current oil prices are "out of line with the fundamentals" and argued prices should begin to drop in the months ahead. Jean-Claude Trichet, president of the European Central Bank, also contended that prices would begin to fall. But he said, "If they don't, this will have an impact that won't be good at all."

--Neil King Jr. contributed to this article.

Write to Bhushan Bahree at bhushan.bahree@wsj.com