Naimi says oil markets under pressure from rising demand

Johannesburg (Platts)--27Sep2005

Saudi Arabian oil minister Ali Naimi said Tuesday the giant oil producer
would "soon" be able to boost its proven reserves by 200-bil bbl but insisted
that current market turbulence was not due to a lack of crude oil supply.
     The recent hurricanes in the US had exposed the fragility of the market's
ability to produce crude oil, refine it and deliver it to markets.
     While the market was not facing a crisis in supply, Saudi Arabia would
continue to offer lifters additional barrels as needed, Naimi said, but gave
no figures. Saudi Arabia produced 9.6-mil b/d in September, a Saudi official
said.
     "Ongoing analysis of Saudi Arabia's reservoirs and focused exploration
activity suggest that we will soon be able to boost our proved reserves by 200
billion barrels using the latest technology," Naimi said in a speech to the
World Petroleum Congress in Johannesburg, South Africa.
     "We are further encouraged by the fact that there are vast areas of the
kingdom that have yet to be explored. This leads us to say with confidence
that Saudi Arabia's proved reserves will expand significantly in the years and
decades ahead," said Naimi.
     Saudi Arabia's current reserves stand at 262-bil bbl, a quarter of the
world's total. Naimi has said previously that the kingdom could double its
proven reserves but not so emphatically.
     This trend would be emulated in other producing areas, he added. "In
short, we believe that there will be plenty of oil available to meet future
demand...We believe spare crude oil production capacity will grow sufficiently
in the next 3-4 years to restore some margin of safety to world crude
markets."
     Naimi again reiterated Saudi Arabia's plans to raise crude oil production
capacity from 11-mil b/d to 12.5-mil b/d by 2009. The kingdom could raise
capacity further to 15-mil b/d under a plan which could be implemented in
response to growing market demand.
     Current market turbulence was, however, not due to a shortage of crude
oil supply but a combination of factors, including a tightness in refining
capacity and insufficient investment in capacity.
     "These are turbulent times for oil markets. Prices are under pressure
because the petroleum industry's infrastructure is stretched thin. There is
tightness across the supply chain and our ability to meet unforseen challenges
today has eroded as most of the spare capacity of the 1980s and 1990s has
disappeared, resulting in a system that has a much smaller margin for error,"
Naimi said.
     "Ours is a system under pressure from rising demand, insufficient
investment in capacity, a mismatch between crude quality and the existing
refining base, and the balkanizing effects of legislated petroleum product
specifications," Naimi added, referring to the refined products specifications
that vary from state to state in the US.
     "Hurricane Katrina and its aftermath and now Hurricane Rita and its havoc
and disruption are the most recent and visible examples of the fragility of
our energy delivery system," Naimi said. 
     But Naimi said there was no reason for panic and there was enough crude
oil supply to meet current and future demand.
     "There is no shortage of petroleum resources left to be developed and
produced. This is what I call availability. The resource base is more than
sufficient to meet projected demand," said Naimi.
     However, "Currently from the upstream to the downstream all along the
supply chain the petroleum industry faces infrastructure constraints and
bottlenecks that are causing market volatility and restricting its ability to
bring oil from the ground to the consumer," Naimi said. "We should not confuse
this very real deliverability challenge with resource availability, which is
not a problem," he added.
    The deliverability problem had resulted mainly from an inadequate return
on investment caused by a prolonged period of low oil prices and low product
refining margins from the mid 1980s to the late 1990s.
     "Past experience teaches us that very low prices and very high prices are
not sustainable. During periods of low oil prices, capital tends to move out
of energy to sectors offering higher returns," said Naimi. 
     "...By reducing investment and encouraging demand, periods of low prices
set the stage invariably for an inevitable corrective rise in prices.
Conversely, we have also seen that when prices are too high, global economic
growth suffers, and ultimately the oil industry suffers from the ensuing
demand destruction. Clearly we all have a stake in encouraging a stable price
environment."
     Price volatility made it difficult to make investment decisions by both
producers and consumers. "Only speculators benefit from oil price volatility.
We therefore need to address the ongoing price volatility that continues to
impact oil markets, reducing flexibility and making it more difficult for the
industry to ensure stable markets."
     "Building on our long track record as the world's preeminent reliable
supplier of energy, Saudi Arabia is at the forefront of efforts to expand
capacity across the supply chain," he said.
     Among these efforts are: "Meeting our customers' current requirements by
offering additional supplies as needed; pursuing an aggressive exploration
program for oil and gas; expanding our production capacity from the current
11-mil b/d to 12.5-mil b/d by 2009 to meet future demand and maintain spare
capacity of at least 1.5-mil to 2-mil b/d; expanding and upgrading our
existing refineries both in the kingdom and overseas; building new export
refineries in Saudi Arabia and in key consuming countries which will be
able to handle heavy, sour crudes and adding additional tankers to our
fleet..."
---Kate Dourian, kate_dourian@platts.com

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