PETROLEUM RESERVES AND PRODUCTION

An industry based on the distillation of crude oil for the creation of fuel in local and world markets.

In March 2003, the Middle East and North Africa produced 29 percent of all the oil produced worldwide (22.5 million barrels/day out of a total of 76.5 mb/d), and held 69.3 percent of the total world proven crude oil reserves of 1,050 billion barrels. At this rate of production, the Middle East will exhaust its oil reserves by 2030 unless significant new reserves are found. The inflow of cash to the region in 2003 from oil and related products can be estimated at US$215 billion.

Within the Middle East, five countries (Iran, Iraq, Saudi Arabia, Kuwait, and the United Arab Emirates [U.A.E.] control 90.5 percent of all reserves and 67 percent of production. Should Iraq be in a position to resume its pre-war(s) production, this group of five countries would produce 74 percent of the regional production and 29 percent of the world's demand. In 2001 the United States imported an average of 2,775 barrels per day from the Middle East, about 23.8 percent of its imports (BP Statistical Review of World Energy, 2002).

Production and Pricing

The cost of oil production in the Gulf is the lowest in the world. Marginal increases in production cost between $0.50 and $2.00 per barrel. The lower end of this range is most common in Saudi Arabia, the higher in the United Arab Emirates, due to the higher costs of offshore drilling. (For comparison,

crude oil in the middle east and north africa, 2002 average

country	oil production(in thousands) b/d*	population(in thousands)	bbls/capita	reserves in billions of barrels at end 2001**
*source: middle east economic survey 46:11 3/17/03, 46:12 3/24/03.
**source: bp statistical review of world energy, 2002.
table by ggs information services, the gale group.
saudi arabia	7,551	21,030	0.36	261.80
iran	3,470	64,530	0.05	89.70
iraq	2,014	23,580	0.09	112.50
united arab emirates	1,952	2,650	0.74	97.80
kuwait	1,853	1,970	0.94	96.50
libya	1,317	5,410	0.24	29.50
oman	950	2,620	0.36	5.50
algeria	883	31,840	0.03	9.20
qatar	640	700	0.91	15.20
egypt	630	67,890	0.01	2.90
syria	530	16,720	0.03	2.50
yemen	470	19,110	0.02	4.00
turkey	48	68,610	0.00	—
bahrain	27	650	0.04	—
tunisia	—	9,670	0.00	0.30
jordan	—	6,850	0.00	—
lebanon	—	6,560	0.00	—
israel	—	6,450	0.00	—
morocco	—	650	0.00	—
total	22,335	357,490	0.06	727.40

incremental costs are $12–$15/b in the North Sea fields, $3–$5/b in Mexico, and $18–$20/b in U.S. offshore wells.)

Most of the oil produced in the Middle East is sold via long-term contracts between national oil companies and direct users, such as ExxonMobil, TotalElfFina, ChevronTexaco, BP-Amoco, or AGIP. The oil producers also sell to large trading companies, such as Mark Rich in Switzerland or Phibro in the United States, which in turn resell to ultimate users. The contracts between the users and producers generally specify that prices be set (often quarterly) by the producer based on a standard benchmark, such as prices of Brent or Dubai light, and adapted to conditions such as distance, sweetness (level of sulfur), and gravity. Some producers also sell contracts to deliver oil through the main oil exchanges, primarily London and New York, but the exchanges are mostly used by the traders. Although the volume of oil traded on the exchanges represents only 20 to 30 percent of the total oil sold worldwide, the market price set on these exchanges is the main source of information used by major producers in setting their prices.

The most common price benchmarks used in long-term contracts between the Gulf state oil companies and their buyers are Dubai Light for shipments to the Far East, Dated Brent (North Sea) for shipments to Europe, and West Texas Intermediate (WTI) grade for shipments to the United States. Prices of the crude oil actually shipped are modified by adding or subtracting a certain amount per barrel to reflect the grade, the quality, the distance to the market served, and the timing of the purchase relative to the benchmark quote.

When a producer is ready to effect a shipment under a given contract, it contacts the user, who in turn arranges to have a tanker ready at the point of sale for loading within forty-eight hours. Shippers and users, who have quite precise expectations on when to expect loading orders, often have tankers waiting nearby the loading facilities. In the case of Gulf shipments, tankers wait near Khor Fakkan on the Gulf of Oman.

API Gravity and Pricing

Crude oil is graded according to gravity, measured by the American Petroleum Institute degree of gravity (API): the higher the number, the lighter the grade. Heavier grades require more energy to refine than the lighter grades and are used to produce heavier and cheaper products. The region produces a large range of crudes from the newly developed Saudi ultra-light crude at API 50.4 to the Syrian Souediah Heavy at API 24. Standard light crudes in the Gulf have an average API of 34; Algerian crude is very light at API 44.

Many refineries are unable to use a wide range of API crudes. When refineries are overstocked with light crude, the discount on heavy crudes may decline and sometimes turn into a premium. In general, crudes of different API degrees from the same point of sale will be priced differently. For crude shipped out of Raʾs Tanhura in 1991, the average discount on heavier grades amounted to 10.7 percent for an API difference of 7 degrees.

Prices, relative to the benchmark oils, are modified according to the sweetness of the relative crudes, the less sulfur the sweeter. In the Middle East, the light Gulf crudes tend to be relatively sweet, while the Syrian crudes are very sour. Sweet crudes are preferred by refiners because they are cheaper to process and less corrosive on equipment.

Pricing, Distance, and Timing of Sale

The distance and cost of transport between the point of sale and the place of delivery is reflected in prices. At similar API grade, Arabian Light 34 sold on an average of seven years (1988 to 1994) at a discount of about $1.73 from North Sea Brent for shipments to Europe. Arabian Light 34 for the same period sold at a discount of $3.01 from WTI for shipments to the United States. (This last difference also reflects a difference in lightness in favor of WTI.) Even within the Gulf, prices also are adjusted for distance. In 1991 similar-grade oil shipped to Europe—Oman Light 34 (shipped from Oman)—sold at a premium of 2.7 percent over the Saudi Light 34 shipped from Raʾs Tanhura approximately 560 miles (900 km) north, and at a premium of 5.1 percent over Iranian Light 34 shipped from Kharg island, 683 miles (1,100 km) north.

Changes in market conditions between shipment announcement and loading is included in the computation of price. For example, Saudi Light 34

comparison of fob (free on board) crude oil prices for major grades in 1991*

api type of oil	average $ from origin grade	average $ from northwest europe	average u.s. gulf	average from singapore
* in dollars per barrel.
source: international crude oil prices, major time series from the 1860s to 1991. middle east petroleum & economic publications.
Table by GGS Information Services, The Gale Group.
arab light saudi arabia	34	19.8	19.42	19.33
arab heavy saudi arabia	27	17.68	17.12	16.69
iran light iran	34	19.35	—	19.39
minban u.a.e	39	20.92	—	21.58
kirkuk iraq	36	20.46	—	—
kuwait kuwait	31	17	—	17.99
sahara blend algeria	44	22.01	23.06	—
zouitina libya	41	22.43	—	—
oman oman	34	20.33	—	—

was adjusted by $1.90 per barrel on shipment to Europe ordered in December 1993 but effected only in January 1994.

Numerous other factors also affect the prices and the above-mentioned adjustments. The availability of tankers at any one time influences the cost of shipping; supply and demand for ships is arranged by numerous ship brokers worldwide. Price terms are quoted in reference to an index of total daily costs called the "Worldscale." Insurance rates also influence prices. At times of turmoil in the Gulf, insurance rates rise significantly and force the producers to absorb most of the increase to entice buyers to continue lifting crude from within the Gulf.

Main Gulf suppliers of crude oil to the United States, 2001

	in thousands of b/d
source: energy information administration. <http://www.eia.doe.gov/emeu/cabs/pgulf.ht>
Table by GGS Information Services, The Gale Group.
saudi arabia	1,600
kuwait	275
iraq	780
total u.s.imports from the gulf	2,700

Purchases of Saudi and most other crudes in the region by the oil companies and major traders are usually done using thirty-day sight letters of credit, confirmed by a local bank. However, the original ARAMCO partners are not required to issue such letters of credit and instead buy on open-book basis from ARAMCO. Upon loading of oil, the ship-master signs the bill of lading. The seller then presents the bill of lading, the insurance documents, and a signed draft to the local bank for payment. Payment is then effected by the local bank within thirty days of the date of the bill of lading.

Pipelines

Pipelines allow producers to bring oil closer to the main users and thereby cut the cost of transport. The main pipelines in the region have been laid to facilitate access to the European markets. Pipelines from the Gulf fields to the Mediterranean, which provide the most efficient transport, are subject to political problems. The tapline opened in 1975 from Saudi Arabia to Lebanon was closed by Syria; the Iraq-Syria pipeline was closed by Syria in 1982, but has been partially reopened by Syria in 2001 and is being tested for use at a rate of about 200,000 barrels per day. The pipeline from Iraq to Turkey is being used for most shipments of Kirkuk oil from Iraq to the Mediteranean. Its present capacity is about 1.5 million barrels per day but could be increased with investments in pumping facilities. The Trans-Arabian pipeline from Iraq to Yanbu on the Red Sea, through Saudi Arabia, was closed in 1990 when Iraq invaded Kuwait and has remained closed since.

The major pipeline presently used in the Gulf is the East West Arabian pipeline (Petroline), which is 745 miles (1,200 km) long and has a capacity of 4.8 million barrels per day. The other major pipeline is the Sumed pipeline in Egypt, which allows oil shipments to bypass the Suez Canal and has a capacity of 2.4 million barrels per day. Algeria exports gas to Europe by two pipelines; one through Tunisia to Italy and one through Morocco to Spain.

Bibliography

British Petroleum, Statistical Index. Available from <http://www.bp.com/centres/energy2002>.

Energy Information Administration. Available from <http://www.eia.doe.gov>.

Hartshorn, J. E. Oil Trade: Politics and Prospects. Cambridge and New York: Cambridge University Press, 1993.

International Crude Oil Prices, Major Time Series from the 1860s to 1991. Nicosia, Cyprus: Middle East Petroleum & Economic Publications, 1993.

Middle East Economic Survey. Nicosia, Cyprus: Middle East Petroleum & Economic Publications, 1957–.

Stauffer, Thomas R. Indicators of Crude-Oil Production Costs: The Gulf versus Non-OPEC Sources. Occasional Paper, no. 19. Boulder, CO: International Research Center for Energy and Economic Development, 1993.

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