Some OPEC Nations Charge Ahead Despite Slow Oil Demand

LONDON (THE WALL STREET JOURNAL via Dow Jones), Nov. 18, 2009

Energy forecasters increasingly predict slowing growth in global oil demand in the years ahead, but some OPEC nations are heading in the opposite direction and ramping up their capacity to pump oil.

Qatar, for example, is set to raise its oil-production capacity early next year from an existing field known as Al Shaheen. The more than $6 billion expansion project brightens the revenue prospects of the Mideast state but highlights a bigger problem brewing for its partners in the Organization of Petroleum Exporting Countries.

After keeping a tight tether on supply in recent years by cautiously investing, the 12-nation cartel finds itself battling an untimely convergence of lackluster consumption that magnifies its own rising supply capacity -- which may in turn reignite old battles between members over market share and ultimately push oil prices lower.

OPEC output capacity is expected to increase around one million barrels a day in 2010 as projects enter service in Angola, Iraq, Qatar and Saudi Arabia, according to Bill Farren-Price, energy director at Medley Global Advisors.

"Significant challenges face OPEC next year," Mr. Farren-Price says. "It will struggle to integrate a wave of new OPEC production capacity that vastly exceeds world demand for its crude." Many of the projects started development well before the recession.

Projects like Al Shaheen may swell OPEC's nominal spare production capacity, a measure of its overall capability to bring barrels to consumers, to roughly 7.5 million barrels a day. That would will leave OPEC capacity up about 15% from 2008, almost a 10-year high, depending on how much oil the group is actually producing.

Operated by Denmark's AP Moller-Maersk, the offshore Al Shaheen field started producing crude in the early 1990s and could almost double in capacity to over 500,000 barrels a day, says Qatar oil minister Abdullah Bin Hamad Al-Attiyah. "The expansion is coming along as expected," he said, dismissing concern about depressed demand.

Mr. Al-Attiyah and other OPEC officials say China, India and other parts of Asia will remain OPEC's fastest-growing markets. OPEC exports to Asia, not including Japan, grew by 22% in 2000-08, according to OPEC data. By comparison, shipments to North America, mainly the U.S., were flat in that period.

Prices, meanwhile, have risen about 77% this year to $79 a barrel, thanks in part to a weak U.S. dollar that is encouraging investors to buy higher-yielding oil futures contracts, and in part to big OPEC production cuts this year. Those cuts are likely to be kept in place at the group's final meeting of the year scheduled for Dec. 22 in Angola, OPEC officials say.

But problems seem set to mount. In the near term, a persistent glut in crude inventory this year is expected to last into 2010. Yet OPEC is cranking up its ability to produce oil -- and that could extend the current supply glut.

Among the most aggressive has been Angola, which has doubled its production capacity -- from a low base -- since 2004, to about 2.1 million barrels a day. Most of the output from its 100,000-barrel-a-day Tombua-Landana offshore project will start in 2010. Chevron Corp. is developing the $3.8 billion project.  

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