Prices and production
So far this week, oil prices have been moved by the fate of the US economy, militant attacks in Nigeria, the dollar, IEA consumption forecasts, and US stockpiles. The week opened with prices around $69 a barrel, made it above $73 and closed Wednesday back at $69.
In Nigeria, the militants continue attacks aimed at completely stopping oil exports and they appear to be making good progress. Shell says its production is down to 140,000 b/d from 999,000 b/d back in 2003 and a local newspaper reports that the company is reducing its operations in the Niger Delta. There is still oil waiting to be loaded at costal terminals, but the outlook is for considerably lower exports later this summer. Given that the worldwide demand for oil is weak and the size of the spare production capacity now available, Nigerian production can probably continue to fall without much influence on prices US demand for oil products, now averaging 18.4 million b/d, is down by 5.8 percent from last year. The weakness is still in distillates, which are closely tied to economic activity, and jet fuel. US distillate stocks have been rising steadily since last October and now stand at 155 million barrels — 34 million higher than at this time last year.
So far this week, there has been no news suggesting that an economic turn around is imminent.
The Auction
Like so much else in Iraq, the outcome of this week’s oil auction can only be characterized as bizarre. To deflect complaints that the oil service contracts awarded to foreign companies in recent months were arrived at in secret, Baghdad decided to hold a live, televised auction where bids to develop eight oil and gas fields would be opened in public. Each bidder was required to submit a per barrel fee for helping rehabilitate the oil field and an estimate of how high it could increase production for that fee.
Prior to the auction, the Iraqi government came under heavy criticism over “giving away” Iraqi oil to foreigners. The government countered that critics should not worry as Iraq would make 100 times more from the additional oil production than the foreigners. Problems arose when it turned out that Baghdad had decided that $2 a barrel was the most it would pay the foreign companies for their assistance. The 35 bidding oil companies were seeking from $4 to as high as $26.70 a barrel.
At the end only one oil field was auctioned off when a consortium of BP and China’s CNPC agreed to lower their bid to develop the giant 17 billion barrel Rumaila field from $3.99 to $2.
The foreign companies will not own the oil they produce but will only receive the agreed fee per barrel from the government while the rest of the sale price goes to Baghdad. Under these conditions there is little or no profit for oil companies to operate under what could be very dangerous conditions. The matter is now in the hands of the Iraqi cabinet to decide the next step.
