March 2, 2011 / 10:50 AM / 8 years ago

Analysis: Popular unrest could crush OPEC spare capacity

DUBAI (Reuters) - Unrest sweeping the Middle East could squeeze OPEC’s precious spare oil capacity for the long term as well as the near term as fearful governments delay reforms needed to tame galloping domestic fuel use. The disruption of much of Libya’s 1.6 million barrels per day (bpd) of production already threatens to make a serious dent in the less than 5 million bpd of OPEC oil that can be swiftly added to markets in times of shortage.

A woman stands in front of gas prices at a petrol kiosk in Dal Mar, California, March 1, 2011. REUTERS/Mike Blake

Saudi Arabia, the world’s leading exporter, with total capacity of around 12.5 million bpd, holds the bulk of the world’s spare capacity — defined as oil that can be brought onstream within 30 days and sustained for 90 days.

A senior Saudi source said on Monday it was producing about 9 million bpd and still had roughly 3.5 million bpd to hand. The kingdom has also insisted that the amount includes the kind of light, easy-to-refine oil that Libya ships to chiefly to Europe.

Not everyone is convinced.

One factor behind a spike in crude prices to nearly $120 a barrel last week was a report by Goldman Sachs that Libyan disruption could absorb as much as half of OPEC’s spare capacity.

Until the upheaval in Libya, many had drawn a contrast between price strength that had already taken crude to around $100 a barrel early this year and the record rally of 2008 to nearly $150, when spare capacity was less than 2 million bpd.

Some analysts now see more similarities than differences as OPEC’s spare oil margin dips below the level of 5 percent — roughly 5 million bpd — of global demand analysts view as comfortable.

The International Energy Agency predicts oil demand will rise to a record of more than 90 million bpd by the end of this year. <IEA/M>

Field maintenance meanwhile could temporarily choke off capacity.

“We’ve seen they’ve approved a budget for very deep maintenance for their (Saudi’s) fields, so the maximum spare capacity during that maintenance could fall around 500,000 bpd at various times,” said David Kirsch, director of market intelligence services at consultancy PFC Energy in Washington.


Further in the future, the problem could be rising domestic use, which Saudi Arabia and other members of the Organization of the Petroleum Exporting Countries have long been hoping to restrain by cutting subsidies and raising fuel prices.

“One of the biggest victims in this unrest is the drive to lower subsidies. Nobody will dare to do that now,” said Samuel Ciszuk, senior Middle East and North Africa Energy analyst at IHS Global Insight.

A wave of popular revolt has toppled Tunisia’s and Egypt’s presidents, left Libyan leader Muammar Gaddafi clinging to power and inspired protest in Saudi’s neighbor Bahrain.

Saudi King Abdullah’s response has been to announce benefits for Saudis worth some $37 billion.

One analyst, speaking on condition of anonymity, said the measures would serve to drive consumption — “hence additional demand on power generation, hence a bigger strain on its crude production and oil products.”

Saudi oil industry figures seen by Reuters showed the kingdom estimated direct use of fuel for power generation in Saudi Arabia would rise to 540,000 bpd this year compared with 403,000 bpd last year.

Refinery use was forecast to rise to 1.987 million bpd from 1.827 million bpd in 2010.

Banque Saudi Fransi Chief Economist John Sfakianakis said energy subsidies, which he estimated cost 27 billion Saudi riyals per year $7.20 billion) for transport alone, had to be addressed urgently to preserve the nation’s oil capacity.

“Every day in Saudi about 50,000 barrels of oil are being burned just because of the school run,” he said.

Surging energy consumption is an issue across the Gulf, including in the United Arab Emirates and Kuwait, which apart from Saudi Arabia are the only other countries with significant spare capacity.

A report by Wood Mackenzie consultants last year predicted Gulf states would struggle to find enough gas for power, meaning more and more of their oil would be burned in power generation, rather than be made available for export.

Already spare capacity in the United Arab Emirates and Kuwait is limited.

Analysts’ estimates vary, with some pegging it at only around 500,000 bpd for the two producers combined.

A source at Kuwait’s National Petroleum Company said Kuwait held between 600,000 and 700,000 bpd of spare capacity.

The United Arab Emirates has said it has total capacity of around 2.8 million bpd and is producing around 2.3 million bpd, leaving 500,000 spare.

Of the total 2.8 million bpd, half is light Murban crude.

Saudi Arabian crude is predominantly heavy, but incremental production that took its total capacity to 12.5 million bpd, including the empty quarter, has included light crude.

The kingdom last week took reporters to its Khurais field and said it could pump up to 1.4 million bpd of light oil.

“Around 60 percent of Saudi’s spare capacity is heavy and 40 percent is light, and out of the total OPEC spare capacity which is around 5-6 million, 30 percent is light,” estimated Kamel Al Harami, independent oil analyst based in Kuwait.

Additional reporting by Humeyra Pamuk in Dubai and Reem Shamseddine in Khobar, Saudi Arabia, editing by William Hardy

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