Forget Flood

Iraqi army did not surrender en masse, the civilians did not greet the coalition forces as liberators, and neither did the Iraqi regime turn...

Iraqi army did not surrender en masse, the civilians did not greet the coalition forces as liberators, and neither did the Iraqi regime turn out fragile. A drawn out war will affect global energy supplies adversely. Oil prices, showing downward trends, are already spiralling. Global spare shut-in capacity, which is marginal, is largely with OPEC countries. An energy crisis, therefore, looms large.

The Middle East accounts for 35 pc of about 76 million barrels per day bbl/d of global consumption while the US, as the largest consumer of petroleum 26 pc, produces only 12 pc. Studies indicate that during the past decade, non-OPEC other than Former Soviet Union production increased only 0.8 pc per year. Although Russian production peaked in 1986, it is the only non-OPEC country that has shut-in capacity, with its production of over 7 million bbl/d.

As late as March 6, 2003, International Energy Agency stated, 8216;8216;At estimated March production levels, OPEC spare capacity will be no more than 2.1 8211; 2.6 million barrels per day 1.5 8211; 2.0 million bbls/d excluding Iraq. This is the second lowest spare capacity level in the past three decades. This low level of capacity is of concern in light of Kuwait8217;s statement that it could have to curtail output in its northern and western fields if the Iraqi situation worsens.8217;8217;

Iraq produced till the start of the war at the rate of 1.8 to 2 million bbl/d; its internal requirement is 0.6 million bbl/d. Reduction of exports from Iraq per se will not, therefore, critically affect world oil supply because the OPEC could make it up. The current situation is, however complicated by the fact that Venezuelan production is still not back to normal and Nigerian production is curtailed by internal unrest.

A prolonged war will certainly affect world oil supplies due to a combination of factors: restricted Iraqi exports, possible disruption in supply Kuwait and Saudi Arabia, inadequate global shut-in capacity and the increased requirement due to the war somewhat compensated by reduced demand due to the approaching spring.

Iraq8217;s main export crude come from the country8217;s two largest active fields: Rumaila in the South which extends a short distance into Kuwaiti territory and Kirkuk in the North, each with over 10 billion bbls reserves. How soon the coalition is able to put these fields in operation and open the ports of Basra and Umm Quasar are also major issues.

Although oil as a weapon is no longer potent, its insidious use cannot be ruled out. Obviously, the laws of demand and supply still apply. If Saudi Arabia decides not to use its shut-in capacity and relinquishes its role as a 8216;swing producer8217; to pressurise the coalition into a ceasefire, there is likelihood of a graver oil crisis.

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Russia is the only country that could bail out the 8216;8216;coalition of the willing8217;8217;. There have been unconfirmed reports, based on frequent visits of Russian petroleum experts to Washington in February and March 2003, that the US and Russia have an understanding in this regard.

India started reducing its dependence on West Asia oil from 1999-2000. From a high of 83 pc in 1991-92, India is now down to about 60 pc dependence on the West Asia. However, this figure is still high enough to cause anxiety. India imported oil worth US 12.7 billion Rs 61,000 cr last year. A 1 increase escalates the oil bill by 1.7 million or Rs 8.2 cr. India therefore can ill-afford a steep rise in oil prices.

The oil prices will likely soar until the war situation stabilises. This could result in a genuine insufficiency and India as the rest of the world, would fall back on its reserves. The USA has 600 million barrels of reserves, Japan has 170 days worth and a recent announcement said that India has 23 days8217; crude storage capacity, mainly in the existing crude pipelines counting this as a strategic reserve is questionable and 35 days8217; capacity for storing refined products mainly at the refineries.

What after the war? Iraq holds the world8217;s second largest proven reserves about 112 billion barrels but could have another 200 billion barrels because the country is 90 pc unexplored due to years of war and sanctions and consequent denial of the latest technology and equipment. The rosy picture of an immediate oil bonanza seems misplaced. Mathew R. Simmons, Chairman 038; CEO, Simmons 038; Company International, World Oil, February 2003, says, 8216;8216;given the critical state of Iraq8217;s oil system, massive spending will be needed to merely sustain its existing optimum daily production of 2.5-2.8 million bbl/d. It will take close to a decade or more and 30-50 billion to get Iraq to levels of 5-6 million bbl/d. Thus, there is unlikely to be Iraq oil flood as soon as the war ends8217;8217;.

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Major General retd S.C.N. Jatar is chairman, GOI committee for assessing security for oilfield installations. He also heads the ONGC committee on review of organisation restructuring. Earlier, he was with HPCL as a consultant.