OPEC Positioning Has Begun

Jim Brown
 
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Nobody expects OPEC to raise the production quotas when it meets on October 14th but several oil ministers have already started lobbying for changes.

Kuwaiti Oil Minister Sheikh Ahmad al-Abdullah al-Sabah, said "OPEC members need to adhere more strictly to existing quotas." He said, "I am not worried about demand, I am worried about the quotas."

Compliance among OPEC members to the 4.5 million barrel per day production cut has sunk to just above 50% meaning 2.2 million barrels are being produced in violation of the quota cut.

Kuwait, Libya, Iraq, Qatar, Ecuador have all said there is no need to change the current policy except to enforce the current quotas. This sounds like it is going to be a common thread at the October meeting. If members would enforce the quotas the prices could go up dramatically.

Another problem in OPEC is the rising demand inside the producing countries. This may be a reason why the 2.2 mbpd in excess production is not depressing prices. Because oil is a national resource with a very low actual cost for Middle East countries the growth in demand is significantly higher than non OPEC nations.

Saudi Arabia reported on Monday that energy demand in the country rose by +3.7% in 2009. That was down from a +6.4% growth rate in 2008. Average local consumption has risen by +5.9% annually for the last five years. Governor Muhammad al-Jasser said demand is growing so fast the government is looking at ways to reduce consumption including rationing.

Saudi Arabia produced 8.25 mbpd of oil in August. Saudi's consumption was roughly 3.28 mbpd. Saudi rulers would rather sell the oil than give it away to citizens in the form of subsidized prices. Gasoline sells for 91-cents per gallon in Saudi Arabia.

BP/Halliburton Testimony

BP and Halliburton took aim at each other in a series of presentations during a meeting at the National Academy of Engineering, which is studying the disaster for the Interior Department.

BP has said the spill was due to flaws in the cement and blaming Halliburton for the explosion. In testimony Halliburton refuted that argument saying that tests had proven the cement job was stable. They then blamed the bad well design and cost cutting shortcuts by BP for the failure.

A Stanford University geophysicist who serves on the panel believes the cement job failed because of cracks in the formation not because of bad cement. Zoback pointed to evidence that fluid circulated through the well prior to the cement job was returned in lower volume than pumped into the well. On one run alone there was a loss of 80 barrels during the actual cementing. This suggests there was hydraulic fracturing and cracks in the formation allowed the fluid to escape. Those same cracks prevented an accurate cement job and allowed the gas to eventually flow back into the well.

Zoback also showed that BP did not go deep enough in the cementing to overlap with the sand that would have been the most likely to crack.

The issue of the 21 centralizers was brought up again. Halliburton told BP to use 21 centralizers and BP only used six. A centralizer centers the casing in the well to allow cement to be pumped in uniformly along side the casing. Not using the correct number of centralizers could lead to a bad cement job.

This finger pointing will continue for months and I believe it will eventually rest on decisions by BP and improper monitoring of the well that caused the problem.

Jim Brown

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