Saudis expect to continue sharp rise in oil output

November 11, 1990

RIYADH, Saudi Arabia (AP) -- Saudi Arabia expects to be producing 8.5 million barrels of oil a day soon and is considering expanding its oil industry to put out 10 million barrels a day despite the threat of war with Iraq.

Iraqi President Saddam Hussein has threatened to devastate the kingdom's main oil areas in the northeastern desert if the U.S.-dominated multinational force in Saudi Arabia launches an offensive to liberate Kuwait.

Saudi officials, speaking on condition of anonymity, said it was only the fear of war -- not any actual shortage -- that drove the price of a barrel of oil up from $16 before the crisis to its current $34.

But former Saudi Oil Minister Ahmed Zaki Yamani and other Saudi sources said the fundamentals of the market do not justify an oil price much above $20 a barrel -- let alone the $40 a barrel touched recently.

Mr. Yamani said that if Iraq pulls out of Kuwait peacefully and Iraqi and Kuwaiti production is rapidly restored, the price is likely to drop even more steeply, perhaps to well below $15 a barrel, because of doubts about OPEC's ability to cut production promptly.

Saudi officials are confident that if Mr. Hussein attacked, he would only be able to inflict minimal damage with his missiles and attack jets.

"Our defenses at the oil fields are good and the industry by its very structure is very widely dispersed," said one Saudi source, speaking on condition of anonymity.

He noted that throughout the eight-year Iran-Iraq war, the Iranians never stopped using their Kharg Island offshore oil terminal, despite its proximity to Iraq and almost daily air raids.

The Saudis have already raised their oil output to 8.2 million barrels a day, a 10-year high and a 57 percent increase since Iraq invaded Kuwait Aug. 2.

That, along with increases by other producers in the 13-member Organization of Petroleum Exporting Countries, has made up for the shortfall of 4 million barrels a day caused by the U.N.-imposed embargo on Iraqi and Kuwaiti oil.

The Saudis are not even able to sell all of the oil they are producing now because customers are not buying up all of the inferior grades, petroleum experts say.

But a New York analyst said Friday that it makes sense for the Saudis to have the capacity to pump 10 million barrels a day so they could try to control future price increases or supply problems with quick jumps in production.

"They don't want to see a situation where the supply would be disrupted," said Philip Dodge of Nomura Securities International Inc. "They'd like to be able to drive the price back to $20 today, but they don't have the capacity to do it, and they don't want to find themselves in that situation again."

The Saudis, who fear high oil prices will cut back demand, are trying to calm world oil markets by telling reporters about the possibility that they could speed up the expansion, another analyst said.

"What they say and what they achieve could be two different things," said Ann-Louise Hittle, a senior oil analyst with Shearson Lehman Brothers Inc.

Saudi Arabia has about 255 billion barrels of proven reserves, the largest in the world, equal to the combined reserves of the United States, Soviet Union, China, Mexico and Venezuela.

Oil Minister Hisham Nazer said last week that output could reach 8.5 million barrels a day by the end of the year. An expansion plan drawn up before the crisis aimed for 10 million barrels a day by 1995.

Although officials stress that no decision has been made yet to implement the plan, the Saudis are considering accelerating it, with 1992 as a possible target date.

Saudi authorities have announced at least six oil and gas discoveries over the past year in a previously unexploited desert region 45 to 125 miles south of Riyadh, the capital.

The fields are well placed strategically, the nearest being more than 310 miles from the Kuwaiti border, unlike the existing fields in the Eastern Province.

Mr. Nazer has refused to cite specific figures for the extent of the new reserves. He says the area is still under exploration.

But a Western oil analyst said "informed speculation" was that the area could contain up to 30 billion barrels of oil. Sydney Bowers, a geological consultant for Saudi ARAMCO, said it was too early to provide figures, and analysts stressed it would take years and major investments on infrastructure to bring the fields into operation.

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