This is an extract form http://www.businessweek.com/news/2010-03-15/opec-expands-oil-rigs-most-since-2007-as-quotas-prove-illusory.html
By Grant Smith and Alexander Kwiatkowski
March 15 (Bloomberg) -- OPEC is increasing oil drilling at the fastest rate in 2 1/2 years, even as production exceeds its quotas by the equivalent of a supertanker of crude a day and delegates prepare to pledge no increase in output.
The 12-nation group boosted its number of oil and gas rigs by 8.4 percent in January and February, the biggest two-month gain since June 2007, data from Baker Hughes Inc. show. OPEC members excluding Iraq pumped 26.8 million barrels a day last month, 1.9 million more than targeted, data compiled by Bloomberg show. Shipments will rise again this month, according to tanker-tracker Oil Movements.
While oil prices recovered from a four-year low at the end of 2008 as OPEC announced a record supply cut, excess production means the doubling in oil prices since then may have run its course, according to the Centre for Global Energy Studies and Commerzbank AG. The premium charged for crude deliveries in 2015 has plunged 43 percent in three months, indicating investors are less concerned of future shortages.
“OPEC will have to show its mettle,” said Leo Drollas, deputy director of the CGES in London, which was founded by former Saudi oil minister Sheikh Zaki Yamani. The consultant predicts Brent crude will fall 25 percent to $60 in the fourth quarter of this year. “If they can’t hold discipline, we’re looking at prices going to $50 by 2015.”
Vienna Meeting
Oil surged last year as the Organization of Petroleum Exporting Countries curtailed as much as 3.7 million barrels a day of output and the global economy emerged from its worst slump since World War II. Forty-two of 44 analysts surveyed by Bloomberg predict the group will maintain its official quota of 24.845 million barrels a day when ministers meet in Vienna on March 17.
In a March 10 report, OPEC estimated that its current production is 1.5 million barrels a day more than the demand for its crude in the second quarter. The forecast is based on analysis of non-member production and global consumption.
While crude fell 1.2 percent on March 12, it is up 2.7 percent so far this month on the New York Mercantile Exchange.
OPEC plans to add 12 million barrels to its daily production capacity by 2015, equal to what Saudi Arabia can pump today. The gains would exceed the expected growth in demand, according to the International Energy Agency.
Exploration Rigs
OPEC has taken on an extra 22 rigs this year, raising its total to 283, as increases in Africa compensate for a reduction in Saudi Arabia and Venezuela, the Baker Hughes data show. Producers outside of the organization have added the same number to total 785 rigs, a gain of 2.9 percent.
The Baker Hughes rig count is a barometer of current drilling and an indicator of future oil and gas supplies. The Houston-based company, the world’s third-biggest oilfield- services supplier, says its figures represent the number of rigs exploring and developing new fields, not ones for maintenance or “workover” activities.
“Despite OPEC’s production capacity goals being very aggressive, I think a large part of it will be sustainable,” said Eugen Weinberg, an analyst at Commerzbank AG in Frankfurt. “The chances for spare capacity increasing are larger than it narrowing. This potentially puts a ceiling on oil prices. Even if demand increases strongly, price increases should be dampened.”
Saudi Heavy Oil
Members are reviving some of the 35 projects delayed by the recession, OPEC Secretary-General Abdalla El-Badri said in December. Saudi Aramco’s Manifa heavy oilfield is “back on track” for completion in 2015, after being halted, according to the Paris-based IEA.
Nigeria increased its oil rigs the most among OPEC states in February, boosting the count to 12 from seven. The country may lobby OPEC for a higher output ceiling to compensate for production lost over four years to rebel attacks, Austen Oniwon, a group executive director at state-run Nigeria National Petroleum Corp., said in a March 9 interview in Cape Town.
The biggest prospect for additional OPEC oil lies with Iraq. The war-torn country signed deals last year with BP Plc, Royal Dutch Shell Plc and Exxon Mobil Corp. to help boost production to eventually rival that of Saudi Arabia, OPEC’s largest exporter.
Goldman Sachs, Bank of America Merrill Lynch and Societe Generale SA expect the rebounding oil demand recovery in emerging economies will require new crude supply. Goldman Sachs sees crude reaching $96.50 a barrel within 12 months, while Societe Generale forecasts an average of $104 in 2012 and Merrill says prices may rise as high as $150 in 2014.
Wall Street Forecasts
“If the OPEC rig count is increasing, and OPEC has plans to grow capacity down the road, that doesn’t strike me as bearish,” said Mike Wittner, head of oil market research at Societe Generale in London. “In fact it’s part of the bullish story, because non-OPEC supply has already hit a plateau so only OPEC can meet long-term global demand growth.”
Oil’s advance has lagged behind the most optimistic Wall Street analyst forecasts. Goldman Sachs predicted that crude would reach $85 a barrel before the end of 2009. The price of options contracts allowing investors to buy $100 crude for December delivery has fallen 60 percent since October.
The latest jump in OPEC’s rig count is the biggest since mid-2007, when it rose more than 10 percent through May and June as oil prices rallied toward $75 a barrel on accelerating demand from China and India. The rig count advanced with crude until October 2008, when a 10-month slump started as the banking crisis rattled the global economy.
Forward Curve Flattens
Increased drilling will have greater pull on prices in the years ahead than in the rest of 2010, IEA Executive Director Nobuo Tanaka said in a March 10 interview in Houston.
The forward curve graph of future prices is flattening as traders anticipate greater availability of oil. The premium for crude to be delivered in 2015 compared with this year was $6.77 a barrel today, down from $11.96 three months earlier.
“The world is still over-supplied,” Edward Morse, head of commodities research at Credit Suisse Group AG, said in a March 9 interview in Houston. “On the supply side, Iraq overwhelms everything else.”
Iraq’s oil exports last month reached the highest level in more than a year, jumping 7.4 percent to 2.07 million barrels per day, according to the country’s Oil Ministry.
Estimates collated by OPEC show the group’s adherence to its 4.2 million barrel-a-day supply cut, the biggest in its 50- year history, has withered to 53 percent as the recovery in oil prices above $80 a barrel spurs members to exceed their allocations.
Shipments Rising
Production from the 11 OPEC members bound by quotas rose to 26.811 million barrels a day in February, the organization said in a March 10 report. Shipments will increase 0.9 percent by the end of the month, according to Oil Movements based in Halifax, England.
Saudi Arabia sits on 4 million barrels a day of idle capacity that can be started when demand climbs. Iran, Angola and Nigeria are all pumping more than promised. Among OPEC’s 12 members, only Iraq is exempt from limits.
“Iraq doesn’t have a formal quota and Nigeria is acting like it doesn’t,” said David Kirsch, director of oil markets at PFC Energy, a consulting company in Washington. “The potential of Iraq to substantially increase its production over the next few years has really changed the supply dynamic.”
While the economy is recovering, OPEC Secretary-General el- Badri said Feb. 2 that ministers are unlikely to lift their quota. Iran’s oil minister, Masoud Mir-Kazemi, said today that OPEC should keep output unchanged because there is no sign of an increase in demand, AFP reported.
Libya is proceeding with plans to bolster production capacity, Shokri Ghanem, the chairman of Libya’s National Oil Corp., said in a March 9 statement on the company’s Web site. Even so, at the March 17 OPEC conference, “no new decision is expected.”
--With assistance from Margot Habiby in Houston, Robert Tuttle in Doha and Andres R. Martinez in Mexico City. Editors: Stephen Voss, Mike Anderson
To contact the reporter on this story: Grant Smith in London at gsmith52@bloomberg.net Alexander Kwiatkowski in London at akwiatkowsk2@bloomberg.net
To contact the editor responsible for this story: Stephen Voss on sev@bloomberg.net
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