London (Platts)--29Jun2009

Sharp cuts in upstream spending mean that world crude production capacity
will grow by just 4.2 million b/d in the period to 2014 rather than by the 5.5
million b/d forecast last November, the International Energy Agency said
Monday in its Medium-Term Oil Market Report.

The agency has also cut its forecast of capacity growth within the OPEC
oil cartel. Having previously forecast that OPEC capacity would grow by 3.2
million b/d by 2014, it now sees OPEC capacity growth at just 1.7 million b/d.

"Weaker demand, contract renegotiation, reduced cash flow, geopolitical
turmoil and increased resource nationalism underpin this year's more modest
outlook," the IEA said. "Saudi Arabia, the UAE, Algeria, Libya, Iraq and
Angola all see capacity expansion, but these are largely offset by decline
elsewhere."

Iraq, it said, "remains the OPEC wild card given constitutional and
security issues, and we maintain a cautious view on its supply capacity
growth."

The biggest impact of the spending squeeze has been on non-OPEC
production, the IEA said.

Having forecast last November that non-OPEC supply would grow by 1.5
million b/d by 2014, the IEA now sees non-OPEC production falling by 400,000
b/d from 2008 to 50.2 million b/d in 2014 from 50.6 million b/d in 2008.

"The largest downward revisions are in the Former Soviet Union and in
North America, the latter largely due to slippage in Canadian oil sands
projects. Of a total 2 million b/d of capacity identified as being deferred or
canceled in recent months, a full 1.7 million b/d involve Canadian oil sands
projects," it said.

Indeed, it said, "under a lower GDP scenario, persistent spending curbs
could reduce non-OPEC supply by a further 500,000 b/d, partly due to the
impact on mature field decline."

"The lower GDP scenario with accelerated decline rates implies decline by
2014 would be 900,000 b/d," it said.

The IEA sees non-OPEC supply at 50.31 million b/d this year, 50.59
million b/d in 2010 and 51.11 million b/d in 2011 before falling to 50.7
million b/d in 2012 and 50.4 million b/d in 2013.

"Revisions are not uniform across the period and the overall decline by
2014 masks assumed year-on-year growth in 2010 and 2011. This is partly due to
completion of a glut of projects that have been delayed from 2008/09," it
said. "In other words, this is the flip side of the coin to 2009's much
weaker-than-expected performance. But thereafter, from 2012-14, non-OPEC
supply is expected to fall each year."

However, the IEA sees sustained output growth for Canada, the US Gulf of
Mexico, Brazil, biofuels and the Caspian.

"The IEA does not believe that geological resource constraints will
necessarily impede future supply growth, but rather that barriers to
investment have undermined the pace at which production can be expanded in the
forecast period to meet demand growth," the agency said.

"The industry's ability to expand capacity, already constrained after
several years of creeping resource nationalism, rising costs, industrial
bottlenecks and chronic project delays, is now further impeded with sharp
reductions in planned upstream spending," it said.

The IEA noted that its recent report for G8 energy ministers had
estimated a 20% drop in international upstream capital spending this year,
saying that part of this drop related to lower costs, which may have fallen by
10%-15%.

DELAYS HAVE INTENSIFIED

"In theory, cost reductions and freed-up drilling, fabrication and
service capacity should ultimately serve the sector well to expand for the
future," it said. "But for now, as producers negotiate contract cost
reductions and await global demand recovery, upstream project deferrals and
delays have intensified."

Noting that some 2 million b/d of new capacity may have been deferred
indefinitely since last autumn, with a further 4 million b/d facing delays of
18 months or more, it said much of this deferred capacity had already been
captured in its evolving monthly projections and that much could be
reactivated later.

"It nonetheless leaves a rather anemic profile for supply growth through
2014 after a short-term surge in 2010," it said.

Meanwhile, although the IEA has cut its forecasts of both OPEC and
non-OPEC supply growth, it sees OPEC's crude and gas liquids capacity combined
rising by 4.3 million b/d to 43.2 million b/d, over the 2008-2014 period "due
to a more than 50% jump in NGL, condensate and other non-conventional supply."

It said OPEC gas liquids were "on track" to increase by 2.6 million b/d,
to 7.3 million b/d by 2014, with Middle East producers accounting for 90% of
the increase. It sees the share of gas liquids in total OPEC supply rising
from 12% in 2008 to 17% by 2014.