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Opec's Shrinking Spare Capacity Raises Risks

Copyright © 2021 Energy Intelligence Group

Mounting concern over future production declines led by Venezuela and Iran has flipped the oil market's focus from tightening inventory levels to global spare capacity. To be sure, a severe supply crunch is not expected soon, as US output alone is able to meet the bulk of demand growth this year. But with spare capacity additions often needing significant investments and long lead times, the world will have to lean on its current production cushion for some time. And the picture is bleak. How much spare capacity is out there and how quickly it can come on stream are untested and far from certain. What is clear, however, is that the oil market is far less robust than it was before the downturn. Compared with five years ago, Opec's effective spare capacity is down some 1 million barrels per day, PIW estimates. PIW calculates that effective global spare capacity has shrunk 17% since 2013 to 3.55 million barrels per day, but even this risks presenting too rosy a scene. Less than one-third of that capacity fits the International Energy Agency's (IEA's) technical definition of spare capacity -- namely, output that can be turned on within one month. What spare capacity does exist remains highly concentrated, with roughly 70% of the cushion residing in just one country: Saudi Arabia (see table). Although the kingdom has long been the world's key purveyor of spare capacity, Riyadh is not keen to bear too much of the burden given that surging to full capacity quickly could damage its reservoirs. Reaching its full 12.5 million b/d capacity would likely take more than a year to achieve, and it is only with the expansions of its Marjan, Berri and Zuluf fields that Riyadh is likely to feel comfortable doing so (PIW May28'18). Those expansions will not be completed until 2022-23. The spread of spare capacity is more balanced under the IEA's month-long definition, with Saudi Arabia able to bring on some 400,000 b/d, and Kuwait, the United Arab Emirates and Russia contributing roughly 300,000 b/d apiece. Spare capacity has traditionally given Opec its market power. The erosion of this power, coupled with Russia's capacity clout, is a big reason why the producer group is working so hard to preserve its non-Opec output alliance in some fashion for the long-term. So, too, are the significant threats that could further chip away at Opec's productive capability. If new members Gabon and Equatorial Guinea are removed, Opec's group productive capacity has fallen some 800,000 b/d over the past five years, whereas global oil demand has risen by some 10 million b/d. Half of Opec's members are overcompliant with the current Opec/non-Opec production cut agreement because they lack the ability to produce up to their output targets. In fact, production from the likes of Libya, Nigeria and Venezuela stands a full 2.75 million b/d below their 2013 capacity (EC Feb.8'13). Yet Venezuela's output is set to tumble further, while US sanctions on Tehran could hit Iran's output by nearly 700,000 b/d by mid-2019 (PIW May14'18). Even if oil markets are only likely to need Opec to come up with around 600,000 b/d of additional output in the second half of the year to keep balances in check, according to PIW estimates, the precarious state of global spare capacity may well have the industry hoping the US' aggressive new policies against Iran and Venezuela don't succeed too well (related). Some modest relief is in order, with Opec members Angola and Nigeria expected to add 100,000 b/d and 200,000 b/d of new production by year-end, respectively. Another 200,000 b/d of additional output could meanwhile be added from northern Iraq quickly if Baghdad and Erbil can resolve their oil dispute, while southern Iraqi fields could also surprise with more production. Russia is another wild card. The non-Opec giant is expected to have little trouble bringing back the 300,000 b/d of output it voluntarily cut, but analysts with Vygon Consulting believe the country could pump closer to 500,000 b/d if needed. Longer term, Russia could add as much as 600,000 b/d of additional production capacity over the next two to four years, according to Russian analysts, companies and government officials. Opec & Non-Opec Spare Capacity ('000 b/d) May Wellhead

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