It is Not the Supply of Crude that is the Problem,

but the Supply of Certain Oil Products,

Mr. Chakib Khelil, Algeria's Minister of

Energy and Mines, tells AOG

  

(Following is the text of a telephone interview with Mr. Chakib Khelil, the Algerian Minister of Energy and Mines, which took place on 30 March, on the eve of the OPEC Ministerial Conference in Vienna).

 

AOG : Minister, some time ago already Algeria asked O P E C for an increase in its production quota, and you recently spoke publicly about a figure of 1.1 million b/d, corresponding to 80% of your oil production capacity (see page 13). What is the position at the moment?

Chakib Khelil : This matter is not on the Conference agenda. A commission was set up and it confirmed that capacity should be the most important parameter for determining national quotas. The issue was then sent back to the board.

The subject of quotas was a particularly important issue before 2003. Because of theproduction problems in Venezuela and Nigeria and the war in Iraq, at one point in the first half of 2003 there was a shortfall on the market of around 4 million b/d. The situation changed after that, but since then Algeria has maintained its oil output at a level virtually equivalent to its production capacity. This is not an urgent issue, there f o re. The problem will arise again in a more acute fashion either when world demand declines or when other OPEC member countries are in a position to increase their capacities. It seems evident, however, that world oil demand is going to continue growing, in particular because it is being driven by China, which alone accounted for 30% of the increase in demand in 2003. On the supply side, production in Venezuela and Indonesia remains limited, as is Iraqi production for reasons to do with security and constraints at the level of oil facilities.

The situation could change significantly, for example if Iraq succeeds in making its facilities secure, or if Nigeria manages to produce a lot more than its current rate of output, as it says it intends to do. However, I do not see any such change in the very short term.

AOG : In your discussions with your colleagues within OPEC, have you noticed any fundamental opposition to Algeria’s request for an increase in its quota?

C. K. : On the contrary, the basic reaction was positive. Furthermore, some member states do not manage to produce the equivalent of their quotas, which leaves a margin.

AOG : World oil prices a re currently within a range of around $31 to $36 per barrel. Can one really imagine that there is a serious risk of a significant fall?

C.K. : One has to be cautious. Oil stocks are beginning to be built up and world demand is expected to fall by 2.5 million b/d in the second quarter of 2004. It is not possible for OPEC to continue producing at the current rate and hope prices will remain at their present level, while demand is going to drop like that.

One also has to take account of the attitude of the investment funds that are increasingly involved in the oil market. When they alter their positions, it can have a very substantial impact. In the past, one has already seen prices fall by around $5/b to $7/b for that reason. All in all, I think prices are going to drop to within the $22-28/b target price band for the O P E C crude basket. I hope they will not go below that. In any event, we have decided to hold an extraordinary meeting in Beirut on 3 June, which will enable us to reexamine the situation.

AOG : Why have prices been so high for some time?

C . K . : Apart from the behavior of investment funds and speculative phenomena, the current level of prices reflects political tensions and uncertainties linked in particular to the consequences of the death of Sheikh Yassine, the terrorist attacks in Madrid and the situation in Iraq.

Another important factor relates to gasoline specifications in the United States and their consequences. Refineries have to adapt to these specifications, which requires time, and for that reason it is sometimes not possible to transfer gasoline from one state to another. The approach of summer, and hence the driving season, in the United States fuels the perception of future tightness in the market. It is not the supply of crude that is a problem but the supply of certain products, which is a very different issue.

Lastly, one must not forget the impact of very high gas prices in the United States, which leads to inter-energy substitutions. That increases the pressures on oil demand.

AOG : OPEC takes decisions, but does not always put them into effect. If the Conference were to decide to confirm the decision taken in Algiers in February, which is to say to reduce the production ceiling by 1 million b/d with effect from 1 April [OPEC effectively confirmed this decision on 31 March], what would Algeria do actually?

C. K. : Algeria would reduce its oil production by 10%.

AOG : What would you tell consuming countries, especially the United States, that call on OPEC to behave responsibly as regards the consequences of its decisions on the world economy?

C. K. : We are sensitive to the issue of world economic growth, since oil demand is largely a function of that growth. Furthermore, we encourage growth by providing a continued supply of crude so as to ensure that the world economy is constantly supplied with enough oil, which is the case. Crude prices are certainly high for the reasons I have mentioned, but there is no imbalance between crude oil supply and demand.

However, if the price of West Texas Intermediate w e re to remain at its current level [Editor’s note: $36.25/b for May contracts on the New York Mercantile Exchange on 30 March] for a whole year, let us assume, there would undeniably be a negative impact on growth. But we a re talking about a much shorter period and that is not sufficient to hamper world economic growth. For the United States, I would have to be convinced of the contrary, given the size of the American economy, with a gross domestic product of some $10,000 billion. As regards European countries, the sharp increase in the value of the e u r o vis-ŕ-vis the dollar results in reasonable prices.

AOG : OPEC is experiencing some problems in choosing its next Secretary General. How do things stand on that score?

C. K. : Three member states – Venezuela, Kuwait and Iran – were in contention for the post. Venezuela withdrew its candidate and we are hoping one of the other two countries will do the same, since we must have a unanimous decision. In any event, the Indonesian President [of the OPEC Conference] is managing the current situation very well.

AOG : According to you, what is the ideal profile for the job?

C . K . : We are in favor of a Secretary General who has considerable expertise in the oil field. He certainly plays a political role, but he must not be solely a politician. The job requires technical knowledge and market know how in order to help us produce the scenarios we need. The Secretary General must also ensure the good administrative management of the organization and know how to get diff e rent groups of people to work efficiently on different subjects. In addition, we have to ensure that OPEC’s credibility is maintained by preventing it from becoming involved in other considerations than those that concern it.

AOG : Do you think you can reach a consensus in the very short term?

C. K. : I think that will be difficult. We need a little time. The present environment is not the most appropriate.  

The decisions taken by the OPEC Conference on 31 March 2004