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International Energy Agency warns of low oil price danger

Governments should not count on oil prices remaining low when deciding their energy policies the head of the International Energy Agency (IEA) has warned

Energy companies have scaled back investments as oil prices have fallen, which will have serious implications for future projects, Fatih Birol told delegates at Singapore International Energy Week.

Investments in oil projects have dropped more than 20% in 2015. The bulk of spending cuts affect projects in Brazil and North America. Worryingly, the IEA estimates that investments could fall further in 2016.

“If true, it will be the first time in two decades that we see investment declining in two consecutive years and there could be grave implications for future oil markets”, said Birol. "One should think about the medium and long-term implications of this lack of investments."

“Our message is clear, attention to energy security should not be indexed to oil price. It’s such a pity that many governments invest their attention to oil security based on the oil price trajectory, which means when oil prices go down they think energy security is not a problem. This is a myopic way of thinking”, he added.

As a result of low oil prices, the IEA expects US light tight oil to decline considerably next year. US production of tight oil production has peaked and is expected to fall by 400,000 barrels/day (b/d) in 2016, said Birol. And if prices do not rebound significantly then output could fall faster.

He warned that geopolitical risks in the Middle East, in places like Libya, Yeman, Syria and Iraq, could disrupt supplies too, although lifting sanctions on Iran would boost production by some 400,000-600,000 b/d within a year.

Still, the IEA believes the global oil markets will have ample supplies until at least mid-2016. The Paris-based agency does not expect a strong price rebound in the short term.

Talking about the liquefied natural gas (LNG) markets, Birol said they are growing strongly, but not as much as the IEA would like to see. The LNG market is expected to expand to 500bn cubic metres/year (cm/y) by 2020, up from around 300bn cm/y, as production from Australia and the US ramps up, which is encouraging. But the major challenge for LNG markets in Asia is competition from coal, cautioned Birol.

“The (downward) pressure on gas prices is amplified by new supplies, but only very competitively priced LNG has a chance to beat coal in Asia”, Birol told the conference.

Coal-fired power has a significant economic advantage over gas-fired power. To produce 1 kWh of electricity from coal is 70% cheaper than from gas even in the low price environment, as long as there are no environmental restrictions or government regulations on pollution, added Birol. Southeast Asia is one of the few regions in the world where demand for coal is actually growing.

From a gas company’s point of view it is critical that they make themselves more attractive, especially in Asia. There are many alternatives, not just cheap coal, but also renewables, which are becoming cheaper and squeezing the markets for gas, warned Birol.

To cut rising demand for coal, economic instruments, such as carbon pricing, and local government policy to reduce pollution are needed. “But if left to pure economics we shall see a lot more coal in Southeast Asia. More worryingly a lot of the power plants being built are sub-critical, which means they are less efficient”, said Birol.

Investments in renewable energy remains strong as costs continue to fall, but government support will be crucial. “They must keep policies stable otherwise investors get mixed signals”, added Birol.

The IEA was established in 1974 by oil-importing nations as a counter to Opec and is a leading forecaster for energy markets, although major energy consumers China and India are not members.

Birol, who took over the top post at the IEA in September, aims to develop more organic relationships with consumers in Asia. Asked about the possibility of China or India joining the IEA, Birol said he hoped ministers from both countries would be at a November 17-18 ministerial meeting in Paris as special guests "which will strengthen the ties we have with those countries".

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