US oil spill to bolster Saudi role in market

A massive crude spill in British Petroleum offshore area in the Gulf of Mexico is expected to bolster Saudi Arabia's role in balancing the oil market but will unlikely impact crude prices in the short term, an official study said yesterday.

While the suspension of drilling operations in that area could depress rig prices, offshore operations could become costlier due to an expected rise in risk premiums, said the study by the Saudi-based Arab Petroleum Investment Corporation (Apicorp), an affiliate of the 10-nation OAPEC.

The study, sent to Emirates Business, estimated world offshore oil production at around 25 million barrels per day, about 29 per cent of global supply. Driven by fast developing deepwater, it should account for 45 per cent of global supply growth up to 2015, against 24 per cent during the 2000-2008 period.

But Apicorp added that no matter what share of US production is lost due to the Macondo spill, it would hardly affect this outlook, unless output from key offshore provinces in Brazil, Angola, and Nigeria were equally disrupted.

"Our normal working assumption for such a premium is 15 per cent of the total cost of a typical large scale project in a difficult environment. Raising the premium to 20 per cent would increase the economic cost of deep water by $3 to $4 per barrel. No matter what further assumptions are made, projects' breakeven prices remain within our recently adjusted anchor band of $70-90 per barrel, which takes in higher costs of marginal production from enhanced oil recovery, heavy oil, bitumen, and oil shales," said the study, authored by Ali Aissaoui, head of Apicorp's economic research department.

Aissaoui noted that whatever scenario is chosen for the impact of Macondo on oil supply and costs, one should bear in mind that the global supply-demand balance implied assumes that demand is first met by non-Opec.

"This puts the burden of balancing the market on Opec, which cannot assume such a role without an additional capacity to draw from. Opec currently holds more than 6mbpd of spare capacity, nearly four times US offshore production. The fact that two thirds is in Saudi Arabia underscores its greater responsibility for stabilising the market," he said.

"Recent assertions by Saudi policy makers that their country 'remained a force for moderation on oil prices"' should help keep market expectations firmly anchored around the so-called fair, established price of $75 per barrel."

Aissaoui described the Macondo spill as the worst oil incident of its kind and said it had cast a shadow on the development of one of the key sources of oil growth.

He expected the incident, which has inflicted heavy losses on BP, to restrict deep offshore production and increase its cost, but not in "a proportion that could affect significantly global supplies in the near term".

"As a result, oil prices are unlikely to move outside our anchor band of $70-90 per barrel. Any longer term outlook must remain conjectural until we gain a better understanding of what precisely caused the incident and how energy policy makers and the petroleum industry are likely to deal with its aftermath."

Another study sent to this newspaper said it believed the Macondo oil spill would have little impact on oil production but it added that the incident may trigger a more cautious approach to hurricane-related shut-ins in the US. "A prolonged drilling ban, though, could start to undermine production by the end of the year, given the rapid natural decline rates of deepwater wells," said the study by the London-based Centre for Global Energy Studies (CGES), which is managed by former Saudi Oil Minister Sheikh Ahmed Al Yamani.

"While recent economic developments in the US are supportive of oil prices, global oil inventories remain abundant and may put a cap on price rises for some time to come. Although the volume of refined products held in floating storage has fallen steadily since December, offshore crude oil stocks have risen and, at 90 million barrels, are back at their peak levels of a year ago."

It said that the level of oil prices in the near future would depend very much on the pace of economic recovery during the second half of 2010.

"Although the signs from the US appear encouraging, the outlook for Europe is much less optimistic," said CGES, which groups several ex-Opec officials.

" European economies remain in the doldrums, as governments begin to introduce austerity measures in the face of ballooning deficits. The CGES expects oil prices to remain volatile around a flat trend for the rest of 2010."

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