Saudi Arabia To Pause Adding Oil Capacity After '09

ROME, April 21, 2008 (Dow Jones Newswires)

In another bullish signal to global oil markets, Saudi Arabia, the world's biggest oil exporter, says it has no plans to beef up its oil production capacity beyond the amount it is already pursuing for several years until it gets clearer signs about future crude consumption.

Saudi Arabia is in the midst of a more-than-$50 billion, multi-year oil production expansion plan to meet growing demand in Asia and other emerging markets. The kingdom is expected to boost its pumping capacity to a total of 12.5 million barrels per day by 2009, up about 11% from current capacity of 11.3 million barrels a day.

But Saudi oil minister Ali Naimi said he believes the growth in alternative energy like biofuels is casting a growing cloud of uncertainty over future oil demand - forcing the kingdom to put the brakes on capacity plans, possibly for a decade, after 2009.

The move will likely provide another bullish sign to oil traders about tight crude supplies in the years ahead that have already helped send crude prices to a record of $117 a barrel on Friday.

"All the latest projections, at least up to 2020, do not require anything higher," Saudi oil minister Ali Naimi told Petroleum Argus in an interview. "Unless we see really genuine demand, we have to pause right now and see what happens," he said.

Naimi has said in past months that future capacity additions were uncertain beyond the kingdom's current plan but hasn't, up to now, laid out a timeline as to when additional pumping capacity might be added.

Naimi, who is here in the Italian capital for a big oil conference, didn't elaborate about his interview comments on Saturday. The three-day conference begins Sunday.

Naimi said the kingdom would reconsider its production plans over time, but said crude demand forecasts are already getting pinched, in part due to increased consumption of crop-based biofuels, like ethanol, whose use is growing in the U.S.

"We will revisit it when demand requires it. If you look at projections for demand, it has started going down," he said.

Ethanol and other alternatives like biodiesel, a favorite in Europe, remain just a tiny fraction of global oil demand - and are expected to remain so for many years - but their consumption is rising amid high energy prices and their attractiveness in reducing carbon emissions.

Beyond demand concerns, Naimi's comments also appear to reflect the kingdom's desire to put more focus on its internal development, which is underscored by its own brisk energy demand. Saudi Arabia's King Abdullah said earlier this month that the country planned to hold onto some of its new oil discoveries for the benefit of future generations.

Saudi Arabia has earned itself a solid reputation as a reliable oil supplier over the decades, but some analysts said Naimi's latest comments could fan market concerns about the health of crude supplies going forward at a time when many market watchers expect non-OPEC supplies to plateau over the next decade.

"They (the Saudis) are looking more inward and at serving their own development needs...but Naimi's comments also say something clearly about projections about demand," said Bill Farren-Price of Medley Global Advisors.

Saudi oil policy makers would build new capacity and wouldn't let other nations eat into the country's market share as the leading exporter if they really believed current long-term oil demand projections, Farren-Price said.

In its long-term oil outlook, the International Energy Agency, the Paris-based energy watchdog, said global oil demand could reach 116 million barrels a day by 2030, up 33% from today's world oil demand of about 87 million barrels a day. Some analysts have also questioned that outlook.

The IEA recently said it expects global biofuel production, mainly ethanol and biodiesel, to rise to 387,000 barrels a day this year, up 80% from 2006. As a percentage of overall oil demand, the IEA's outlook for biofuel supply this year amounts to just 0.5% of the roughly 87 million barrels of crude consumed every day globally.

ROME, April 21, 2008 (Dow Jones Newswires)