Nice Valves

With 260 billion barrels of oil, Saudi Arabia has more than double the proven reserves of Iran, its nearest competitor within OPEC.

In an interview in Dhahran, in the Kingdom’s Eastern Provence, the veteran energy minister Ali Al Naimi said the country is ready step back in as the swing oil producer if sanctions undermine Iran’s exports of 2.2 million barrels a day.

“We have the capacity to produce 12.5 (million barrels a day) and we are idling now between 9.4 and 9.8. So we have substantial spare capacity,” he said.

Naimi also suggested it could happen much faster than the market was anticipating. “I believe we can easily get up to 11.4, 11.8 almost immediately, in a few days. Because all we need is to turn valves. Now to get to the next 700 (thousand) or so, we probably need about 90 days.”

The CNN interview took place after Saudi Arabia signed a third joint venture, with Sinopec of China, to supply 400 thousand barrels a day from Saudi’s west coast port of Yanbu by 2014.

That refinery on the Red Sea will avoid tanker passage through the Strait of Hormuz, which Iran has threatened to close if Europe and the United States intensify sanctions.

Naimi said that half of the nearly ten million barrels a day pass through the Strait but it has options to divert more crude via pipelines to Red Sea facilities. He was however sceptical that Iran could close the vital sea lane for a sustained period of time.

“I personally do not believe that the Strait, if it were shut, will be shut for any length of time. The world cannot stand for that.”

This view was shared by the Secretary General of the United Nations, Ban Ki Moon during a CNN interview in Abu Dhabi Monday. He said the important transport artery needs to be protected and that Iran must abide by the international laws of the sea.

Saudi officials, speaking on background, said it was a country’s sovereign right to protect the interest of its customers and to stabilise the market. The comments preceded Iran’s warning that if other producers from the Gulf came in to replace crude on the market “these countries would be the main culprits of whatever happens in the region,” said Iranian OPEC Governor Mohammad Ali Khatibi.

Saudi Arabia and others within OPEC express concerns that a spike in prices could undermine demand, which is the scenario that played out in the second half of 2008. Oil peaked at $147 in July 2008 only to cascade down to the mid-$30 level by December of that year.

Naimi believes that with added production from the Kingdom and others in the region such as Kuwait and the United Arab Emirates, keeping prices near where they are today can be defended.“Our wish and hope is we can stabilize this oil price and keep it at a level around $100.”

That is a departure from its target two years ago of $75-$80 a barrel, but one that he says producers and consumers can live with in today’s climate.