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Demand for Gulf crude set to rise

/ 5 July 2010

DUBAI ó The Gulf regionís central role as an oil production and export centre is set to grow in the aftermath of the disastrous oil spill in the Gulf of Mexico, oil industry analysts said.

Following the disruptions to oil production, that the Arab Gulf is likely play a critical role in ensuring that global oil markets remain well supplied through this challenging period, Badr Jafar, Executive Director of the UAE-based group Crescent Petroleum, said on Sunday in an emailed statement.

Gulf of Mexico oil spill disaster was triggered on April 20 by explosion and fire on the drilling rig leased by BP. Since then, oil has been pouring into the Gulf from a blown-out undersea well. This has halted deep sea explorations in several

The Arab Gulf region is central to the global oil supply system. In 2009, the region, boasting total oil deposits at more than 2,700 billion barrels, produced on average 23.6 million barrels of oil per day, equivalent to 30 per cent of world production. With the fallout from the oil spill in the US Gulf of Mexico, the Arabian Gulf region’s central role is set to grow.

“We at Crescent have no doubt that the repercussions of the spill for the industry are going to be felt for many years to come,” said Jafar.

One unquestionable outcome is that the whole oil and gas industry will now be under great scrutiny and will be held, justifiably, to the highest possible safety and environmental standards. Another is that the Gulf will play a critical role in ensuring that global oil markets remain well supplied through this challenging period.” Jafar said.

He said deepwater drilling for oil and gas is now understood to be even more difficult and high-risk than previously thought. “Consequently, it seems likely the sector will face not only more regulation but also the threat of reduced or delayed investment,” he said.

Lee Hudson Teslik and Christian Menegatti, analysts at Roubini Global Economics, believe that increased expenses from regulation of deepwater drilling and insurance would be costing the industry roughly $6.5 billion. It would mean $2.3 billion in collateral losses for oil and gas support industries. “By contrast, the costs of the moratorium should be less than $200 million in 2010, even if it continues for six months as originally planned. And even using the most extreme estimates on the size of the spill, the cost of the crude lost in the ocean will be well under $1 billion, assuming oil prices stay near current levels.”

The International Energy Agency (IEA) estimates that the six month moratorium on drilling in the US Gulf of Mexico, which may yet be extended, combined with the time required for new deepwater regulations to be drawn up and adopted, means that the US Gulf of Mexico region could lose one to two years of progress relative to where it would have been had the spill not happened. The IEA estimates that as a result, by 2015, the US Gulf of Mexico oil production could be 100,000 to 300,000 barrels of oil per day lower than previous forecasts.

Oil experts also do not believe that the supply disruptions caused by Gulf of Mexico oil spill would impact the oil prices.

Teslik and Menegatti refuted theory that the spill would be creating a supply shock that significantly affects the price of oil. “The U.S. oil market is well supplied, with inventories above their five-year averages, and consumption remains subdued. Shipping lanes do not seem to have been affected much, and the United States could always tap its Strategic Petroleum Reserve in a pinch. The Gulf of Mexico produces only 1.7 percent of the world’s petroleum, and most of this production is continuing as scheduled.”

The IEA estimate the impact of a global slowdown in the deepwater exploration and production sector could reduce global supply by around 800,000 or 900,000 barrels of oil per day by 2015, or 1 per cent of estimated 2010 global demand. While small relative to overall global production, the potential loss of these volumes could prove critical to the global oil supply and demand balance since deepwater developments are set to be the key marginal suppliers to the global oil supplies over the next decade.

Jafar said the Arab Gulf region’s focus on onshore and shallow water production safeguarded it from many of the new problems facing the deepwater industry. “However, precisely for this reason the demands upon it are likely to grow as the threat of tightening global supplies loom. More oil industry investment is likely to be needed to ensure adequate production is maintained. Furthermore, ensuring more oil is available for export may also require the increased development of regional gas production and gas-fired power facilities to reduce the need for oil consumption within the region.”

“We believe the Arab Gulf’s private sector will play a key role in contributing to the continued security of the global oil system.” says Badr Jafar, “That is why we are actively investing in the oil and gas sector within and outside the region. The Gulf of Mexico incident has shocked the industry and the world; we will do our part in ensuring it does not lead to an economic shock as well.”issacjohn@khaleejtimes.com

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