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MENAFN - Arab News - 12/12/2008

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(MENAFN - Arab News) Oil continued its dismal performance, despite assertions from OPEC bigwigs that an output cut — and a severe one — is just round the corner. OPEC President Chakib Khelil said earlier the week the group could announce a "severe" production cut and suggested the grouping could seek to surprise the market with the size of the reduction in a bid to bolster the weakening prices.

However, oil prices edged down Tuesday as investors continued to question whether the anticipated big production cut would be able to curb crude's stunning fall over the last five months.

And the ongoing crisis in the crude markets is definite to have both, the long term and immediate ramifications. The first and the foremost casualty of this market downturn seems to be the emphasis on producer-consumer dialogue. In the immediate aftermath of the oil market peak attained mid this year, there were continued stress on political level dialogue between the producers and the consumers, regarded as so essential to keep the globe well oiled. While Saudi Arabia convened the 'energy summit' in Jeddah to give a push to the process of dialogue, Prime Minister Gordon Brown of the UK announced to follow up on the Jeddah deliberations with an even higher level summit in London, 'sooner' rather than later. And after some initial delays, the summit was finally scheduled to be held before year end — in December to be specific.

And until a couple of months earlier, I knew that a dear friend of mine, a very senior and respected Western energy diplomat was associated with the project in one way or the other. He was keen and following up the developments on the front. However, things seem to have quietened over the last few weeks. There seems a lull now on the issue. We are already in December and one doesn't hear any noise about the scheduled meeting. Perhaps the changing market environment and the necessity and urgency to hold any such meeting has evaporated.

Texas oil tycoon T. Boone Pickens, known for making his fortunes in oil business, said this week he was "anxious" for his company's announced multibillion dollar plans to build a giant wind farm in Texas.

The company Mesa Power LLC was planning to build the world's largest wind farm in the Texas Panhandle, but financiers for the project have disappeared in the economic downturn. Mesa Power began the first phase of the project, which was expected to cost 2 billion, earlier this year when it purchased over 600 wind turbines.

Wind power and natural gas are integral parts of the "Pickens Plan," a 10-year project to wean the United States off of foreign oil imports.

The billionaire launched the plan this summer, when crude prices peaked over 147 a barrel and interest in alternative energy surged. The project now seems in doldrums — another casualty of the market weakness, it seems.

And in the meantime, the solar industry, whose future seemed so bright just a few months ago, suddenly looks like it's headed for a shakeout. Falling oil prices, supply issues and the evaporation of financing for solar projects have moved away like clouds over the industry, just as it was poised for unprecedented growth.

Even as new solar factories opened in places like Austin, Texas, and greater Atlanta in recent weeks, several big solar companies in China and Canada warned that they'll pull back on expansion plans and preserve cash, after customers cancelled projects and credit markets dried up. Shares of many publicly held solar companies have fared even worse than the overall stock market. The British energy group BP Plc is closing its Australian solar-cell factory by end-March 2009 to focus on bigger, lower-cost operations offshore, because of the changing market economics.

The growing financial crisis and plunging energy prices have forced companies to scale back spending and delay projects, with expensive ventures in the Canadian oil sands hardest hit. Many in the industry in recent months have been pointing at the Canadian oil sands as the rising star of the industry. All this appears to have changed — at least for now.

Earlier this month Norway's StatoilHydro scrapped plans for a C16 billion upgrade for its Canadian oil sands holdings. For the time being the company is going ahead with plans to produce 200,000 barrels per day of bitumen but sell it on the open market instead of turning into more valuable synthetic oil.

Meanwhile Irving Oil Ltd is slowing construction on its planned C7 billion refinery at Saint John, New Brunswick, breaking work into two C4 billion phases of 150,000 bpd each and stretching construction over as much as eight years from 2011 instead of four. Royal Dutch Shell Plc. has also decided to delay investment decision on second expansion of Athabasca oil sands project. Petro-Canada has also deferred the upgrading of its C21 billion Fort Hills oil sands project.

Canadian Natural Resources Ltd has decided to slow down spending on second phase of Horizon oil sands project for 2009 after first phase costs rose to C9.7 billion, up 42 percent from 2004 estimate. It also scrapped timelines for phase 2, which would lift output to 250,000 bpd from 110,000.

Suncor Energy Inc. has decided to delay the C20.6 billion Voyageur expansion by one year to 2013. Expansion boosts production from Suncor's oil sands operations near Fort McMurray, Alberta, to 550,000 bpd from 350,000.

Nexen Inc has also delayed the second phase of Long Lake oil sands project to 2009. Expansion would double production of synthetic crude to 120,000 bpd, while the Value Creation Group's C4 billion Heartland project near Edmonton, Alberta has reportedly been halted. First phase of the project on completion was to process 77,500 bpd of bitumen into synthetic crude.

Saudi Aramco is also continuing to review development projects in the light of the global financial crisis. It has already postponed plans for a 1.2 billion project to restart production from its historic Dammam oil field. In addition, Saudi Aramco has also chosen to delay several other projects in the wake of the global financial problems. The list includes the 400,000 bpd Yanbu Refinery, the 900,000 bpd Manifa oil field development and the 400,000 bpd refinery project at Jubail.

Diversifying away form the Middel Eastern oil, the pet objective of the politicians in the West, is still miles away. Whether one likes it or not, the world would continue to depend on Saudi Arabia and the likes for many more decades.

And when viewed in the backdrop of the above-mentioned emerging scenario, it becomes all the more apparent. Whether, the abysmally low oil price is good or bad for the world — I leave it to your ingenuity, ladies and gentlemen!


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