Analysts expect Opec not to abandon expansion

Driven by a long-term strategy, Opec members will not abandon their expansion plans for the year and 2010 despite the prevailing low oil prices and a production cut, energy economists say.

As of now, work has commenced on about 100 capacity expansion projects in Opec countries with an estimated cost of $120 billion (Dh440bn).

These upstream projects are in addition to all energy infrastructure projects and downstream expansions.

"The upstream projects scheduled for 2009 in Opec countries should all come on line, though some minor delays may be experienced. For many of these projects, commercial viability was determined at relatively low price levels, and would have been stress-tested down to $30/b or so," said David E Kirsch, manager, market intelligence services, with PFC Energy.

While Opec countries will prefer to have these projects online, they would also shave off production from the already existing oil fields to meet the requirements of recently announced cuts.

"In many countries new projects could be on stream, but older fields could see reduced production, especially in those areas where a lower production could extend the life of existing reserves," Kirsch said.

This enhancement in production capacity comes simultaneously with the largest ever production cut by Opec. The group has just implemented its largest ever production cut of 4.2 million barrels (from September 2008 levels) a day. Eleven Opec members jointly produce 24.485 million barrels of oil a day from January 1, 2009. This, as per Opec data, is 63 per cent of Opec's production capacity in 2009.

"The largest project – Khorais – is coming on stream in Saudi Arabia, where it was always envisioned to supplement existing surplus capacity. Strategic commercial reasoning is behind the Saudi Aramco decision to go ahead with these projects, which will be less affected by short-term volatility in oil markets," Kirsch said.

While the Khorais project in Saudi Arabia plans to add 200,000 barrels per day to the Saudi production capacity, Angola's BBLT phase two project that comes on stream in 2009 will add 130,000 barrels a day to its capacity, Opec data showed.

Most of the recent oil forecasts have predicted that oil prices will rise in the second half of 2009 or early in 2010.

"Oil prices are not expected to stay low for a long time. Also, the sector looks at a long-term view in deciding investment plans rather than following short term price volatility. So we might see most of these projects commencing on time," said Dheeraj Shahdadpuri, an analyst with Dun & Bradstreet, Dubai.

Although the impact of a reduction in production has been minimal on oil prices, the prices are likely to look up again once the economy recovers, Shahdadpuri said.

Kirsch said a surge in demand for refined products, which likely later this year, is to support prices. Spot crude prices have edged closer to future prices in the past one week. He said there is little possibility of oil "reverting to backwardation" in the near future as the demand for final refined product grows.

Follow Emirates 24|7 on Google News.