OiL PRICES: Cartel is better placed to profit from high prices.

Non-OPEC production lags
When oil prices tumbled to $10 a barrel in 1998, the world expected non-OPEC countries to ramp up production, provided the price of crude recovered.

Nine years later, history tells a different story. Maturing assets in key producer regions, soaring costs, tougher tax regimes and a shortage of trained personnel are stymieing output even as benchmark crude prices edge closer to $100 a barrel.

The trend has left oil producers within the Organization of the Petroleum Exporting Countries better placed to take advantage of soaring oil prices than those outside the group. The shortfall from non-OPEC producers has also contributed to the tightness in global oil supplies, further pushing crude prices toward record territory.

According to the U.S. Energy Information Agency, non-OPEC output remained nearly flat from 2004 to 2007, rising from 41.5 million barrels a day in 2004 to 41.9 million barrels a day this year despite the run- up in prices.

The 2007 forecast from the International Energy Agency, the Paris-based energy watchdog for the Organization of Economic Cooperation and Development, for total non-OPEC oil production has fallen 4.1 percent since January, to 50.17 million barrels a day.

Flexing their muscles

Part of the problem in ramping up production is that high oil prices have come with complications the industry didn't anticipate eight years ago, such as states increasingly flexing their muscles in dealings with private oil companies. This has happened in OPEC nations Venezuela and Algeria, but also in non-OPEC Russia. Even the U.S. has hiked royalties on offshore oil production as politicians accuse oil firms of ripping off the government.

Problems for Mexico

Elsewhere, more politically and fiscally stable regions are addressing spiraling exploration and production costs, or desperately trying to stem the decline of production in maturing basins. Latin America's largest producer, Mexico, is suffering from a steep decline at its largest field, Cantarell.

Furthermore Pemex is a strong symbol of national pride, discouraging politicians from opening the industry to foreign development. Mexico nationalized its oil industry in 1938 under President Lazaro Cardenas, a national hero.

Just to keep production stable at 3.1 million barrels a day Mexico has to move into uncharted territory, such as the ultradeep waters of the Gulf of Mexico. To date Mexico has only drilled exploration wells in 3,000 feet of water, compared with 10,000 feet across the U.S. maritime border.

This has left a huge black hole in Pemex's map of oil reserves. With an onerous tax regime and a lack of deepwater technology and experience, experts say Mexico will have to team up with foreign private oil companies if the country hopes to find and produce oil at deepwater fields in the Gulf. If Mexico doesn't act fast, it could cause a fiscal crisis; it only has nine years of proven reserves left at current production rates.

In Colombia, officials have opened its industry to private investment to reverse a steady decline. But the country is a relatively small producer and needs to make up for lost ground.

Of Latin America's other main non-OPEC producers, only Brazil's oil industry is making strides. Ecuador, which has lost output after taking over fields run by Occidental Petroleum, plans to join OPEC despite record oil prices. Membership in the elite oil club involves mandatory production quotas, limiting the country's ability to ramp up production at will.

Via: Chron|by PETER MILLARD and ELIZABETH COWLEY


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