NEW DELHI: Reliance Industries Ltd (RIL) and the government are set for a legal showdown, as the petroleum ministry today disallowed the company’s $1.2-billion cost recovery from its investment in the KG-D6 field. The country’s largest company has already taken the government to the Supreme Court over its failure to appoint an arbitrator on the cost-recovery issue.
The disallowed cost recovery would mean the government’s profit petroleum for FY11 and FY12 would rise by that amount. The ministry yesterday sent a notice to RIL, disallowing a cost recovery of $457 million for 2010-11 and $778 million for 2011-12 due to its failure to meet drilling commitments.
The ministry has held RIL responsible for violation of its committed work programme in the production sharing contract (PSC). In its letter, it alleged the company failed to fulfil “obligations” under the PSC and “deliberately and willfully caused breaches, which have led to immense loss and prejudice to the government and the people ofIndia”.
Together with 6.5 mscmd of output from the MA oilfield in the same block, the KG-D6 output is around 34 mscmd as against the nearly 70-mscmd target (61.88 mscmd from D1 & D3 and eight mscmd from the MA field).
RIL confirmed the receipt of the notice but opposed the move. “We have followed the production sharing contract and development plans approved by the Directorate General of Hydrocarbons (DGH). The current behaviour of the D6 field was not envisaged by anyone, not even the DGH when it had approved the plans. Moreover, the production sharing contract does not mention the concept of ‘partial cost-recovery’,” said an RIL spokesperson. However, the ministry letter to RIL states that “it is ironical that a development plan prepared and submitted by you taking into account your own projections is not being adhered by you”.
Under the New Exploration and Licensing Policy, the government first allows companies to recover their cost from revenue. The companies subsequently share a portion of the production with the government, termed as profit petroleum. Both the drilling programme and the share in profit petroleum are biddable components for the oil and gas blocks.
In a pre-emptive move, RIL had in November last year slapped an arbitration notice on the ministry, saying the PSC allowed for operators to recover 100 per cent of the capital and operating expenditure on oil and gas fields and it did not in any way link the cost recovery to production. The ministry has refused to join arbitration till now, saying there is no dispute. But the latest notice brings out the dispute over how much cost can be recovered. Since the government did not appoint an arbitrator, RIL moved the Supreme Court last month with a plea seeking the appointment of an arbitrator.
The letter signed by A Giridhar, joint secretary (exploration), states that RIL has till now spent $5.7 billion on the development of the Dhirubhai-1 and 3 (D1 & D3) gas fields in KG-DWN-98/3 (KG-D6), of which about $4.6 billion has been incurred on production facilities alone.
“It is brought to your notice that up to March 31, 2011, you have recovered a sum of approximately $5.258 billion from the petroleum operations in the D1 and D3 development area,” the letter states. D1 & D3 are producing about 27.5 million standard cubic metres per day (mmscmd) as against 61.88 mmscmd committed by RIL in its $8.8-billion development plan for the fields.
The ministry says that lower than anticipated production has led to under-utilisation of the field facilities. Also, it blamed the fall in output from 53-54 mmscmd achieved in March 2010 to the drilling of less than the committed wells. RIL, under the approved field development plans, should have put 22 wells on production for 61.88 mmscmd of output by April and 80 mmscmd by the end of the year from 31 wells. The company has so far drilled 22 wells on the fields but has put on production only 18 wells. The other four have not been connected to the production system, as they contain uneconomical reserves. Of the 18 wells, six had to be shut because of high water and sand ingress and a fall in pressure. RIL believed the field had not behaved as predicted and so indiscriminate drilling would be a big drain on cost.
In its plea to the apex court, RIL said, “The costs incurred by the contractor, in the exploration, development and production of hydrocarbons, are fully recoverable as stipulated under the PSC. Expenses incurred by the contractor are based on activities that are approved by the management committee under annual work programmes and budgets presented by the contractor.”
ONGC UNDERTAKES MASSIVE EXPLORATION CAMPAIGN IN CHAMBAL VALLEY
MUMBAI: State-run energy explorer has taken up a massive exploration campaign in the Chambal Valley of Rajasthan. In that area, ONGC is operating in three NELP Blocks – VN-ONN-2003/1, VN-ONN-2004/1 and VN-ONN-2004/2 awarded by the Government of India and the blocks encompass districts ofKota, Bhilwara and Baran.
Apart from these blocks, ONGC is the licensee and holds 30% participating interest in the RJ-ON 90/1 block ofBarmerBasin, which is the largest onshore discovery inIndiarecently. Exploration activities currently underway inChambalValleyarea comprise a massive seismic survey campaign followed by drilling of exploratory wells.
Two wells are under drilling presently; one each at Chechat and Palaita. One well at Suket area is to be drilled shortly and preparation for the same is in progress. Based on the outcome of these wells, few more prospects have been identified for drilling for hydrocarbon probing and its commerciality, said the company.
ONGC TRIPURA UNIT I TO RUN BY MONTH-END
KOLKATA: The first unit of ONGC Tripura Power Company’s 2 X 363.3 MW gas-based power plant in Palatana may become operational by end-May. Power generation and stabilization of production at unit I will take another 4-6 weeks.
Sources told Business Line that the gas injection to the boiler will take place by the end of this month. The parent, ONGC has completed the laying of gas pipelines nearly a month ago.
North-East Power Transmission Company (NEPTC) — a joint venture between OTPC, Power Grid and the beneficiary States — is nearing completion of 246-km of the Palatana (Tripura) — Silchar (Assam) transmission line. This is the first phase of a 661-km transmission project which should connect OTPC to the national grid at Bongaigaon.
“We are expecting the generation to stabilise by end-July. Meanwhile, there will be reasonable progress in implementing the second phase of the transmission project,” a source close to the OTPC project told Business Line.
According him, expectations are rife that the 122-km Silchar (Asam) — Byrnihat (Meghalaya) stretch of the transmission project will be operational by August, helping OTPC to tap more demand in the region.
As per the agreement, of the total 363-MW generation from the first unit, 99-MW may be allocated to Tripura and 120 MW toAssam. However, due to lack of industrial activity, the region’s appetite for power may be lower. Also, compared to gas-based power, the region has access to cheaper hydro-electric generation.
The issues will be settled once the power evacuation facility is fully commissioned.
The project, which is a hallmark of Indo-Bangla cooperation (ensuring smooth passage of the heavy project equipment to Palatana in Tripura throughBangladesh), will help ONGC to monetise its idle gas assets in Tripura.
The oil and gas major is on course to step up gas production in Tripura from 1.7 million standard cubic metre a day (mmscmd) to a little over 5 mmscmd.
OIL’S NOT WELL ON SOUTH CHINA SEA
Chinahas once again warned companies looking to explore for hydrocarbons in the South China Sea (SCS) to stay away from the disputed waters. TheSouth China Seais believed to hold large reserves of undiscovered oil and gas.
The US Geological Survey pegs the discovered and undiscovered resources at 28 billion barrels of oil and 7.5 trillion cubic metres of gas in the offshore basins of the SCS — reason enough for the dragon to spew fire.
Despite the United Nations Convention on the Law of the Sea (UNCLOS, 1982) guidelines, ownership disputes continue to stir up the SCS waters. Among the nations flanking its shores,China,Vietnamand thePhilippinesare aggressively claiming sizeable portions of the sea.
Chinahas been demanding almost the entire area and is rooting for bilateral talks to resolve the territorial disputes, arguably to use its size to influence the one-to-one dialogues.
Recently,Beijingraised objections to ONGC’s presence in SCS. ONGC’s overseas arm, ONGC Videsh (OVL) holds stakes in a producing gas field — Block 06.1 in the Nam Con Son basin offVietnam’s south coast — in a joint venture with TNK-BP and state explorer PetroVietnam.
In 2006, OVL won a contract to jointly explore, along with PetroVietnam, Blocks 127 and 128 in the Phu Khanh basin,Vietnam. It then signed a three-year deal with Petrovietnam in September 2011 to jointly explore for oil and gas in these blocks. OVL later relinquished Block 127 after it encountered dry wells.
The blocks in question — 127 and 128 — lie within the Vietnamese maritime border as per the UNCLOS guidelines and partially beyond the line of control claimed byChina. However,China’s claims are based on historical maps that find little support in international law.
Not only is theSouth China Seabelieved to possess substantial hydrocarbon reserves, but it is also a vital transit point for ships. DespiteChina’s repeated warnings to nations for cessation of exploration inSouth China Sea,Indiahas maintained its stand of respecting the freedom of international navigation through this key shipping route.
The region can be an important piece on the energy supply map for bothIndiaandChina. It opens up the shipping route for bringing ONGC’s Sakhalin oil toIndia’s coast through theStrait of Malacca.
Vietnam,Indonesiaand thePhilippinesare pushing for increasing exploratory drilling in their respective Exclusive Economic Zones (EEZs) and Indian companies, like other international players, should grab this opportunity with both hands.
First, this will add a hydrocarbon supply source that is closer to its own shores, cutting down on the transportation distance; second, India’s relationship with the Association of South-East Asian Nations (ASEAN) will gain ground, apart from the ‘customary’ regional cooperation status.
NotwithstandingChina’s rhetoric,Indiahas reiterated its intention to partner withVietnamin exploring for oil and gas in the disputed waters and expanding the decade-old cooperation withVietnamon key sectors, including energy.
New Delhihas, so far, done well in dealing with the Chinese diplomacy on this issue. Moreover,India’s commitment to partnerVietnamcan be a dampener forChina’s intentions;Chinawould have thought of using its size to dominate the bilateral negotiations with stakeholders for its claims of ‘indisputable sovereignty over the entireSouth China Sea’ — a bid to seek regional hegemony.
To protect its interest in the South China Sea and in ASEAN,Indianeeds to be both forceful and diplomatic. As of now,New Delhi’s reply to Chinese bickering has been thatIndiahas faith inVietnam’s sovereign claims over the concerned blocks and ONGC’s investment is purely commercial in nature, with no political connotation. As per the UNCLOS boundaries,Indiastands justified.
New Delhi, with due regard to its own stand onKashmir, should not put its foot in its mouth by giving opinions on territorial debates. It also has to deal with the tempestuous task of settling its own border dispute withBeijing. Hence, concerted efforts to increase bilateral energy cooperation withVietnam, thePhilippinesand other ASEAN countries may prove to be a diplomatic masterstroke, as it will checkChina’s high-handedness in the region and establishIndia’s commercial interest without political spite.
Conventional wisdom says having more friends always helps. BothIndiaandChinawould be reluctant to get into a debate that threatens the stability of the region. Moreover, theSouth China Seais not the only thread in Sino-Indo ties.
In today’s globally interdependent world,IndiaandChinaneed each other in more ways than one. Military engagement will bring no material gains to either side.Chinaseems to understand this, considering its reluctance so far to use its military might in thwarting oil exploration efforts in the SCS.
Igniting a dispute that leads to a full-fledged military engagement — which unites the ASEAN againstBeijing, stops all exploration activities and provides theUSa reason to intervene — will surely be unpalatable forBeijing.
India, likeChina, is on the cusp of a demographic and economic makeover, and in need of increasing energy supplies to fuel economic development. Both the countries are keen on securing energy supplies from across the globe, with energy import bills damaging their balance of trade. TheSouth China Seais one such region that holds promise. It will be foolhardy to let the opportunity pass, while global majors flock to exploit the region despite the sovereignty disputes.
The presence of energy majors such as ExxonMobil and BP in the SCS substantiates the promise that the region holds. Hence, it is in the best interest of both countries and the other littoral states to let the region be explored and its potential be assessed through material developments.
Internal strife could lead to waning international interest and lesser involvement of global energy majors, who bring with them invaluable expertise and world-class technology.
Indian policymakers will do well to stick their neck out for protectingIndia’s interest in the SCS, without jeopardising the peace of the region by taking a radical diplomatic stand at ASEAN.
The debate on the territorial sovereignty is not new, and many companies continue to explore in the region without much problem. Fittingly, as the energy industry believes, challenges and opportunities go hand-in-hand.
INDRAPRASTHA GAS-PETROLEUM AND NATURAL GAS REGULATORY BOARD CASE HEARING ADJOURNED TO MAY 8
NEW DELHI: IGL’s (Indraprastha Gas) hearing in the high court against the Petroleum and Natural Gas Regulatory Board (PNGRB) has been adjourned to May 8, 2012. The sole supplier of compressed natural gas in Delhi/NCR has appealed in the court against the regulatory board’s decision to regulate its network tariff and selling price.
IGL in its earlier statement has also mentioned that it will file an application in the Appellate Tribunal also. “The order has various facets some of which will be challenged before the Appellate Tribunal for Electricity as well. There are various issues in the order of the Board which needs clarification, on which IGL will have to await the response of PNGRB before the court during the next hearing,” said the company’s statement dated April 11, 2012.
PNGRB in its order dated April 9, 2012 has asked IGL to cut down its network tariff by 63%. In a retrospective decision, it also asked the company to refund the difference to its customers for the period from April 1, 2008 till the date of issuance of order.
IGL in its petition has however alleged that PNGRB is not entitled to regulate the price of gas sold by the company and the variables taken into account by the board to calculate the network tariff are misleading.
HINDUSTAN PETROLEUM DELAYS VIZAG PLANT MAINTENANCE
SINGAPORE: Hindustan Petroleum Corp has delayed maintenance plans at a crude unit and a secondary unit at its Vizag refinery in southIndiaby at least six weeks to the earliest in the second week of May, industry sources said on Thursday.
The company had planned to shut a 60,000 barrels per day (bpd) crude unit and a fluid catalytic cracker at the 166,000 bpd Vizag refinery from April to May for 45 days. But this has now been delayed to May-June, one of the sources said.
“The contractors wanted a longer mobilisation period to mobilise the equipment,” the source added. The exact dates of the maintenance period have not been fixed, the source said.
ANALYSTS SAY RIL-BP DEEP WATER BLOCK VALUATION DOWN BY A HALF
MUMBAI: First came the downward revision in reserves; then came the relinquishment of blocks. In less than a year of signing the transformational deal between Reliance Industries (RIL) and British Petroleum (BP), analysts say the value of the deep-water blocks held by RIL and BP (in India) is down by over a half.
In February 2011, when BP picked up a 30 per cent stake in RIL’s 23 Indian oil and gas blocks for a consideration of $7.2 billion and further performance related payments of up to $1.8 billion, analysts valued the deep-water assets anywhere between $24 billion and $30 billion. As of April 2012, the value of the same assets has come down between $12 billion and $15 billion, six analysts told Business Standard. An email sent to RIL seeking valuation details remained unanswered.
“Given the reserve downgrade and relinquishment of blocks, the value of these assets held by RIL and BP has come off,” said the assistant vice-president (research) of an institutional securities firm in Mumbai, who did not want to be named. “While production from the KG D6 asset has seen a significant downgrade from 10 tcf (trillion cubic feet) to around 5.5 tcf, the relinquishment of block D9 has wiped away a valuation of $1-1.5 billion.”
CLSA had, in its February 2011 report, said BP had, at $7.2-9 billion for 30 per cent, valued assets at $24-30 billion, but subsequently RIL told analysts on April 20, 2012, that it would restate its proven reserves downwards by 12-15 per cent — from 6.5 trillion cubic feet (tcf) in March 2011 to 5.5 tcf likely, including FY12 production, in its annual report.
This has made analysts downgrade RIL’s exploration and production portfolio alone by over a half. “RIL’s E&P business should have been valued at $15 billion but that is not the case,” said the head of research at a broking firm. “Today, we are valuing it at not more than $8 billion which is an optimistic estimate. With D6 probable reserves now at 40 per cent of what they used to be, E&P portfolio has already been downgraded.”
BP had, in its annual report for 2011 calendar year, stated that it was accounting for just 0.3 tcf of proven reserves (1P) for its 30 per cent stake in KG-D6, implying that gross 1P reserves in KG-D6, including the government’s share, is barely 1.4 tcf. It has, within a year of the deal, already reduced the value of its Indian exploration and production assets on books by $785 million.
Added to this is the relinquishment of 10 blocks. “We are surprised by RIL’s relinquishment of 10 exploration blocks in FY12” said Sanjeev Prasad and Tarun Lakhotia of Kotak Institutional Equities Research in a report. “The company had reported oil and gas discoveries in four of these blocks and the key KG-DWN-2001/1 (KG D-9) was estimated to have prospective resource potential of 4.7 tcf of natural gas and 180 million barrel of oil and condensate.”
A senior BP executive said on the condition of anonymity that BP, considering the deal between RIL and BP came as a package, had taken whatever RIL had on offer. “All of RIL’s deep-water blocks were on offer. Some blocks were valuable and some were not valuable. It is, however, difficult to put a figure to one block and evaluate its value,” he said.
BP, in an emailed response BP said, the company “and RIL (and other contractors as appropriate) jointly continue to evaluate the blocks, high grade and rationalise the portfolio, and focus our efforts on delivering the value proposition of our partnership”.
BP said the two partners are working on an integrated development plan (IDP) to develop and integrate other discoveries in KG-D6 (satellite fields, R-series,other satellites, NEC-25) into the existing infrastructure. After the management committee’s approval for predevelopment activities, RIL plans to file the IDP in the second half of financial year 2013.
In January 2012, the government’s management committee had approved the optimised field development plan for development of four satellite discoveries (D2/D6/D19/D22) in KG-D6 block ). In February 2012, the management committee of KG-D6 block declared the commerciality (DOC) of R-Series (D34) discoveries.
Analysts say R-series and the other satellite discoveries combined, could produce around 15-20 million standard cubic metres per day (mscmd) on a reserve base of around 4 tcf. However, these are not over and above what has been proven on D6. “These, in fact, will serve to perhaps get production back to the 60-65 mscmd level that it was supposed to be,” said an analyst.
Gross gas production from RIL’s flagship KG-D6 field production in fourth quarter was 35.8 million cubic meters per day — down 30 per cent year-on-year. “Now, RIL and BP have said that they will be submitting a full re-development plan to the Directorate General of Hydrocarbons in October this year,” said Mriganka Jaipuriyar, Senior Editor (Asia), Oilgram News, Platts. “But what happens after that will depend, to a large extent, on what the Indian government decides to do about its current gas pricing mechanism, which in turn will determine the block’s economic viability.”
CAIRN INDIA TO INVEST $5 BILLION IN BARMER BLOCK TO UP OUTPUT
NEW DELHI: CairnIndia, along with partner ONGC, will invest $5 billion in Rajasthan’s Barmer block to ramp up output to 300,000 barrels per day, from 175,000 at present. CairnIndiahad written to the petroleum ministry about its plans for the block, said a person close to the development.
Of the 25 discoveries made by the company in Barmer, two are producing. The Mangla field is producing 150,000 barrels, while another 25,000 is coming from the Bhagyam field. Another field, Aishwarya, would be contributing 10,000 barrels in the coming years, while Bhagyam would add 15,000 barrels. This would take the Barmer output to 200,000 barrels, for which the field development plan has already been approved by the government.
The Raageshwari and Saraswati fields commenced production during the year; cumulatively producing at a rate of 500 barrels. The development of Aishwarya field is underway. Its engineering, procurement and construction contracts have been awarded and it is expected to commence production towards the end of 2012.
CairnIndiais the operator of the Rajasthan block, with a 70 per cent participating interest. Joint venture partner ONGC has a 30 per cent stake. More than 150 wells have been drilled in Rajasthan and have yielded 25 discoveries to date in the block.
HIKE DIESEL PRICE OR FACE BoP SHOCK, SAYS MORGAN STANLEY
NEW DELHI:India’s oil subsidy burden this fiscal could cross R1 lakh crore, nearly one and half times the budgeted amount, if the country does not revise fuel prices to pass on the high cost to the consumer, warned Morgan Stanley Asia. At R1,04,400 crore estimated by the global financial services firm, the subsidies add up to 1% of the country’s gross domestic product (GDP).
India has earmarked R43,580 crore as oil subsidy for the year and expects upstream companies ONGC, Oil India and Gail India to meet about 38% of the losses incurred by retailers IOC, HPCL and BPCL. Morgan Stanley said if oil subsidy is to be limited to the budgeted levels, regulated domestic fuel prices must rise by 19.5%, assuming the government bears a subsidy share of 22%-39%.
It said the country faces a high risk of stress on the balance of payment (BoP) front because of the higher crude prices and the only way to stave off the crisis was to cut subsidies by freeing diesel price. The current account deficit (CAD) had shot up to an alarming 4.3% in 2011-12 against 2.3% in the previous fiscal on declining capital inflows and rising trade deficit, which had touched $185 billion last fiscal against exports of $303 billion.
The last timeIndiafaced a major BoP crisis was in 1991, which triggered economic reforms. The Reserve Bank ofIndiaand the finance ministry are comfortable with a CAD of 2.5% of GDP. In this year’s Union budget, finance minister Pranab Mukherjee doubled custom duty on gold imports to 4%, which accounted for over $50 billion last fiscal and were the second highest contributor to CAD after oil imports.
Morgan Stanley further saidIndiawould remain exposed to slowdown in capital inflows triggering problems on the BoP front, unless the government reduced subsidies or international crude oil prices declined sharply. A slowdown in capital inflows will increase pressure on the exchange rate, which will raise the cost of capital and in turn, end up hurting growth further, it said. Foreign institutional investors (FIIs) have already started paring their equity and debt holdings inIndiaafter the government proposed general anti-avoidance rules, which could ending up taxing short-term capital gains made by FIIs.
Morgan Stanley said even if the country avoids a BoP shock by issuance of sovereign dollar bonds or dollar deposits, bringing down the cost of capital will be difficult unless fiscal policy is tightened. This year’s budget has highlighted the possibility of selling sovereign bonds to foreign investors.
The research report said that lack of pass-through of rising crude oil prices have also suppressed headline inflation, while the government’s fiscal deficit would overshoot target even in 2012-13. Fiscal deficit stood at 5.9% in 2011-12, as compared to the target of 4.6%. For 2012-13, it has been pegged at 5.1%. “Headline inflation has moderated to 6-7% after two years from at 9-10%, but we believe the delay in pass-through to administered products has suppressed headline and core inflation to a significant extent. The government’s fiscal deficit (central plus state and off-budget subsidies) is still likely to be expansionary at 8.5% of GDP in FY2013,” it said.
HALDIA PETROCHEMICALS LIMITED DOUBTS BASIS OF TCG APPROACHING ARBITRATION COUNCIL
KOLKATA: The Haldia Petrochemicals Limited (HPL) today questioned before the Calcutta High Court the Chatterjee Group’s (TCG) move to approach the International Council for Arbitration for resolution of transfer of 155 million shares in its favour.
Arguing in the court of Justice I P Mukherjee, counsel for HPL Pratap Chatterjee said that Supreme Court judgement of September 2011 comprehensively adjudicated all the issues and “there is no cause of action on behalf of TCG to move the Paris-based International Council for Arbitration”.
Chatterjee argued that the Supreme Court had noted that TCG had not been able to meet its commitments in bringing in funds for the company for which Indian Oil Corporation (IOC) had been allotted shares to raise much-needed finance.
He said that in larger public interest, Supreme Court findings should not be allowed for review or reconsideration by any private body like the International Council for Arbitration, the dispute settlement arm of International Chamber of Commerce.
Counsel for TCG Sudipto Sarkar said that the Supreme Court judgement did not mention about transfer of 155 million shares which was left between the two promoters to resolve among themselves.
Sarkar said that TCG had invoked the arbitration clause of the January 2002 agreement between the two promoters, the other one beingWest Bengalgovernment, which ought to be resolved at the international council.
The matter had being posted for hearing tomorrow.
PAKISTAN TO LIMIT OIL IMPORTS FROM INDIA TO 10 PER CENT
ISLAMABAD:Pakistanis considering a proposal to limit oil imports fromIndiato 5-10% of the total requirement till confidence-building measures between the two countries take root, according to a media report.
Pakistan’s total oil imports currently stand at around $14.5 billion and annual imports of petroleum products fromIndiawill not be allowed to exceed $1.5 billion at the initial stage, a government official told the Dawn newspaper.
The two countries are in discussions on the issue of import of petroleum products, including liquefied natural gas, fromIndia.
“The proposal is to start importing between 5-10% of total oil requirement fromIndiabecause we have to be cautious and careful in dealing with oil supply security and dependability issues,” the unnamed official was quoted as saying.
The two sides are exploring the possibility of LNG supplies fromIndiathat could be transported through bowsers and tankers via land route as this could provide relief to bulk consumers inPakistan’s Punjab province, particularly aroundLahoreandFaisalabad, the official said.
The two countries have formed working groups for negotiations on pricing and modes of transportation as early as possible. This decision was made during three-day talks between the Petroleum Secretaries inNew Delhiin March. Subsequently,Islamabadproposed dates for a dialogue that were not acceptable toNew Delhi, while dates proposed byIndiawere inconvenient to Pakistani authorities. The two sides are expected to meet sometime during May, the report said.
OPEC SAYS PUMPING HARD TO BRING OIL PRICE DOWN
LONDON/PARIS: The Organization of the Petroleum Exporting Countries, or Opec, is working hard to bring down oil prices that jumped towards $130 a barrel earlier this year, its secretary general said on Thursday, and is pumping much more than its official target even as exports from cartel-memberIrandwindle.
Oil surged in March to $128 a barrel, the highest since 2008, as increased concern over the loss of Iranian oil due to tighter sanctions combined with supply hitches elsewhere.
“We are not happy with prices at this level because there will be destruction as far as demand is concerned,” Opec secretary general Abdullah al-Badri told an energy conference. “We’re working hard to bring down the price. We’re not comfortable.”
His comments weighed on oil prices, which had already fallen back from the March high. Brent crude on Thursday fell as low as $116.10, its lowest since early February. It had been trading above $118 earlier in the day.
The 12-member Opec is pumping 32.3 million barrels per day (bpd), Badri said, citing figures given to Opec by member countries.
That is 2.3 million bpd more than Opec’s target of 30 million bpd and higher than a Reuters estimate of Opec output in April published this week.
Badri again identified $100 as a comfortable price—a level endorsed by top Opec producerSaudi Arabiain January—and said the price was being driven higher by speculators. “There has been no shortage of oil in the market. Producers have been able to meet consumer needs,” he said. “We also see this as being the case for the rest of 2012 and the foreseeable future.”
“Today the price continues to be driven by excessive speculation,” Badri said.
The extra Opec oil is filling gaps caused by an unusually large number of supply outages globally. Supply breaks were running at nearly 1.3 million bpd as of early April.
It has also offset a decline in exports fromIran, which is facing stiffening Western sanctions over its disputed nuclear energy programme.
Iranian oil exports were running at between 200,000 and 300,000 bpd below last year’s level, Maria van der Hoeven, head of the International Energy Agency, or IEA, told Thursday’s conference.
Iranian officials have said the country exported an average of 2.2 million bpd last year.
The IEA, adviser to 28 industrialized countries and manager of their emergency oil stockpiles, last year tapped its members’ strategic oil reserves to cover shortages caused by the loss of Libyan exports.
There could be a case for releasing stocks if an unexpected event occurred, as with the civil war inLibya, although there is no reason currently to do so, given that the market is well supplied, Van der Hoeven said.
“At this moment, although prices are relatively high, it’s not the case,” she said.
“You can use this instrument only once … so timing and circumstances are very important.”
Badri’s figure of 32.3 million bpd for Opec production is even higher than a Reuters estimate of 31.75 million bpd for Opec output in April—the highest since 2008.
Opec in December set the target at 30 million bpd, settling an argument that broke out in 2011 afterIranand other members opposed a Saudi-led plan to raise the production ceiling.
Output has remained above the target all year as Libyan supply has recovered.
While supply may be ample at present, forecasters such as IEA have for years been urging oil-producing nations to vastly expand investment in order to meet rising future demand.
Qatari oil minister Mohammed al-Sada, also attending the meet inParis, warned oil would head ever higher unless trillions of dollars are invested in the energy sector.
Gulf producers will have to stump up $100 billion a year over the next 25 years to meet future demand, out of total investment of $19 trillion, he said.
“If these investments are not achieved by 2016, the price will rise to over $150 in real terms,” he predicted.