Saudi Arabia to more than double spare capacity, Al-Naimi says

DALLAS (Bloomberg) -- Saudi Arabia, the world’s largest oil exporter, will more than double its spare capacity by the middle of the year to 4.5 million barrels a day as it brings the massive Khurais project on stream while cutting production with OPEC.

Khurais will add 1.2 million barrels a day to the kingdom’s capacity, more than the output of OPEC nations Qatar or Ecuador, Oil Minister Ali al-Naimi told the Cambridge Energy Research Associates conference in Houston on Tuesday. The target spare capacity has been 1.5 million to 2 million barrels a day.

“The most powerful tool we have for achieving a balanced market is our maintenance of spare production capacity,” he said. “Such capacity has helped to counter market volatility.”

Khurais, with a reserve of 27 billion barrels, began producing in the 1960s and was mothballed by Saudi Aramco in the early 1990s, Amin al-Nasser, senior vice president of exploration and production at Saudi Aramco, said last year. It is a satellite of the Ghawar field, the world’s biggest.

Saudi Arabia produced 8 million barrels a day of oil last month, Naimi said on Jan. 13 in New Delhi. It pumped 8.025 million barrels in January, according to Bloomberg data. That’s down 16 percent from July when oil prices reached a record.

The kingdom and other members of the Organization of Petroleum Exporting Countries may decide on a fourth supply cut in six months to halt the plunge in oil prices and encourage oilfield investment. OPEC’s next scheduled ministerial meeting is March 15 in Vienna.

-------------------‘Unsustainable’ prices

Oil prices, which soared as high as $147.27 a barrel on the New York Mercantile Exchange in July, were “unsustainable,” al- Naimi said. He blamed the rally in part on market speculators.

“There is no doubt in my mind that increased speculative interest in oil contributed to the extreme price volatility of the past few years,” he said. “Now that market sentiment has flipped, I expect continued volatility with exaggerated price weakness.”

From a fundamental standpoint, prices will be “just as unsustainable” at current low levels as they were at the “stratospherically high levels experienced last year,” he said.

Crude for March delivery rose 34 cents, or 0.9 percent, to $37.84 a barrel at 11:44 a.m. Singapore time in after-hours electronic trading on the New York Mercantile Exchange. Tuesday, it fell to the lowest settlement since Jan. 16 and posted the biggest decline since Jan. 27.

---------------Oil’s decline

Oil has plummeted 75 percent from the July record, based on Tuesday’s settlement price. It’s down 59 percent in the past year. Prices have fallen as a weakening global economy curtails demand.

“A year ago, we were riding the crest of a wave of rising commodity prices, asset values and wealth creation that appeared unstoppable,” al-Naimi said. “Today, as we ponder the horrific consequences and the terrible swiftness and scope of the collapse, we know now that what we saw then was not unstoppable, but rather unsustainable.”

Market stability requires prices low enough to allow economies to grow, particularly in developing countries, and high enough to encourage producers to invest, consumers to use fuel efficiently and production from marginal fields, non-conventional sources and from renewable fuels, he said.

“The danger of price volatility lies in its ability to obscure the market signals required to ensure adequate investment to meet future energy demand,” al-Naimi said. “Without greater stability in energy markets, the task of achieving global economic recovery will become significantly more difficult.”

----------------------New challenges

Traditional volatility triggers in the energy markets, such as geopolitics, weather and natural disasters, have now been joined by what al-Naimi called “the newly emerging challenges”: the products of global capital markets, the emergence of energy as an asset class and climate change.

“Over time, the world will likely transition away from the current fossil fuel-based energy economy,” he said. A successful energy policy “will also include efforts to increase the contribution of alternative fuels.”

Still, he said fossil fuels are “here to stay,” at least for the next 30 to 50 years.

“A nightmare scenario would be created if alternative energy supplies fail to meet overly optimistic expectations, while traditional energy suppliers scale back investment due to expectations of declining demand for their products,” he said.

Saudi Arabia last month committed to cutting another 300,000 barrels a day below its OPEC quota before the next meeting of the organization on March 15, Algerian Oil Minister Chakib Khelil said in the Algerian state-run newspaper El Moudjahid. It’s already producing its smallest amount of oil in five years.

-----------Restoring balance

“OPEC is determined to play its part in restoring balance to the market,” OPEC President Jose Maria Botelho de Vasconcelos said in a statement Feb. 6 in Luanda, the Angolan capital. “To this end, OPEC reaffirms its readiness to take whatever further decisions that may be necessary, during the forthcoming March meeting of the ministerial conference.”

The 12-nation group, which supplies more than 40 percent of the world’s oil, is scheduled to hold its next policy-setting ministerial meeting on March 15 in Vienna.

Saudi Arabia’s output cuts have surpassed the reductions it agreed to at an OPEC meeting in Oran, Algeria, in December, when producers agreed to cut output by 9 percent. It was the third OPEC reduction since September to halt the plunge in oil prices. It took the group’s target 4.2 million barrels a day below September levels.

---------------Global forecasts

Both OPEC and the International Energy Agency, an adviser to 28 nations, have trimmed global demand forecasts, citing economy factors. The IEA said Jan. 16 that oil demand will decline for a second year in 2009, the first back-to-back contraction since 1983, as the deepening recession erodes consumer spending.

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