The IEA thinks a supply crunch is coming
Production will not keep pace with demand within a decade unless drillers start spending money again, the agency says
A dearth of upstream investment is threatening global energy security and could lead to a 16m b/d supply shortfall by 2025, according to the International Energy Agency (IEA). The result would be more oil-price volatility.
"We may be in trouble in a few years," says the IEA's executive director Fatih Birol. The agency represents the interests of Western energy consumers but its warning echoes those from Opec and other producers.
As oil prices crested in 2014, upstream investment reached a record high of $0.78 trillion, the IEA's latest World Energy Outlook (WEO) says. Oil price weakness last year cut this to less than $0.6 trillion. The IEA expects another $140bn to go unspent in 2016.
If so, it will leave investment well below the $0.7 trillion the IEA reckons is needed every year to keep supplies rising in tandem with demand - or replace output lost to depletion. Birol reckons just a third of companies' upstream outlay accounts for supplies to meet extra demand, while the rest just compensates for declines in producing fields.
Natural field declines cost the world about 2m barrels a day of supply - almost half of Iraq's annual production. So even without a rise in consumption, those barrels need to be replaced. Last year, spending on fields already declining fell by almost a quarter. If that's a trend, it will shave 450,000 b/d off global oil output by 2020, the IEA says.
The agency's New Policies Scenario (NPS) - which assumes current policies to curb fossil-fuel subsidies and reduce greenhouse gas emissions remain in place - reckons global oil demand (excluding biofuels) will reach 100.8m b/d by 2020, up from 92.5m b/d last year.
That's well beneath the kind of oil-demand levels the IEA once expected. Its WEO of 2006 forecast oil demand would have reached 99.3m b/d in 2015; and 116m b/d by 2030. Last year's number came in at 7% less than the 2006 forecast.
However reliable - or not - its latest longer-term outlook, medium-term supply security is troubling the agency. Last year, it says, new oil discoveries plunged to a 70-year low and approvals for new projects also slumped. To plug what it thinks will be an impending gap, the IEA says producers need to push on with 16bn barrels worth of extra crude supply every year between now and 2025. If 2017 doesn't see an investment revival, that amount will rise to 21bn barrels.
"We're entering a period of greater oil-price volatility," says Birol. "It's very important that countries take measures to protect themselves." Energy security, he says, will be a problem for policy-makers for years to come.
It makes sense for the IEA to be stressing the depletion rate as it urges producers to keep spending more, because the demand outlook is wobbly. Cheap oil prices led to a 1.8m-b/d rise in consumption in 2015, the fastest rise in five years. But that pace has now eased: the IEA expects consumption in 2016 and 2017 to rise by just 1.2m b/d each year. By 2040, oil demand will reach just 103.5m b/d- compound annual growth of just 0.5%. In the 450 Scenario, the IEA's version of the future in which climate-change policies take root "consistent with a 50% chance of limiting global warming to 2°C", oil demand would fall to 89.9m b/d in 2025 and to 73.2m b/d in 2040.
As for supply, the NPS expects global oil production to reach about 95.7m b/d in 2025 - 2.5m b/d below projected global demand for that year. By 2040, the gap between global oil production (100.5m b/d) and expected demand will widen to 3m b/d.
US tight oil cannot be relied upon to make up the difference, says the IEA. The agency expects its supply, which hit 4.3m b/d in 2015, will peak at just over 6.1m b/d in the late 2020s before declining sharply. That leaves Opec as the makeweight, in the IEA's view. The group will account for half of global supply by 2040, up from around 35% this year.
The IEA's main argument is that heavy investment is needed - starting soon. Fully $44 trillion must be spent in global energy supply by 2040, it reckons, or $1.8 trillion a year. Around 60% of this will be needed for oil, gas and coal; 20% for renewable energy; and the remaining 20% needs to be spent on electricity networks.
More energy efficiency could help prevent shortages, the agency says, but longer-term energy security will depend on investments made now. To match supply with demand, oil prices must rise to $80 a barrel, reckons Birol. Rising stocks, record production from Opec and impressive supply resilience from some other producers - which have all left Brent prices below $50/b - make the dizzy heights of $80/b look a distant hope.