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Middle Eastern oil investments key to global supply security

The International Energy Agency have said global demand will increase to 104m b/d by 2040

Global energy security will be at risk over the next three decades unless significant investments are made in bringing new supplies online from the Middle East, the International Energy Agency (IEA) has said.  

In the IEA's World Energy Outlook 2014 (WEO), released in London on 12 November, the agency said that increasing demand for oil in the transport and petrochemical sectors will drive global crude demand, from 90 million barrels a day (b/d) last year to 104m b/d by 2040. Meanwhile, over the next 26 years the world will become more reliant on Middle East crude as both US tight oil output and non-Opec supply reaches a plateau and then declines from the 2020s.

This presents huge risks for global energy security over the next three decades because of geopolitical instability in the Middle East, which could deter investors, the IEA said. "There is a growing risk at present from a number of parts of the world that are strategically important from an energy perspective (such as) Iraq, the Middle East, Libya, North Africa and Russia," Fatih Birol, the IEA's chief economist, said at the launch of the IEA report in London. "Volatility in the Middle East puts questions on investment plans and therefore may create challenges around 2020 for supply. I believe energy security is set to move up high on the international agenda." Birol added that the turmoil in the Middle East is especially worrying because the bulk of growth in oil production between now and 2040 is expected to come from the region. 

Whether the region's output will be able to increase sufficiently to meet global demand needs will depend on whether enough investment is made in new upstream projects between now and 2040. The WEO said that upstream investment of about $22.5 trillion will be needed to meet the expected 37% increase in global energy demand between now and 2040. This breaks down to annual upstream spending of more than $900 billion by the 2030s - 80% of which will be needed to maintain output at today's levels.

Political and security problems in Iraq in particular could see investment fall short of the levels required. The IEA expects Iraqi oil output to rise from 3.2m b/d in 2013 to 4.6m b/d by 2020. It will reach 7.6m b/d by 2035. However these volumes would need around $15bn a year to be spent in Iraq's upstream, the IEA said. The Islamic State insurgency in the north of the country, combined with major political and institutional obstacles significantly threatens the country's long-term investment and oil production outlook, the WEO said.  

Instabilty

Investment in Iran and the UAE's upstream is also under threat, the WEO said, because of political uncertainties relating to international sanctions or concerns over the renewal of concession contracts, which expired in 2014.   

The IEA said instability in the Middle East is a particular concern for Asian countries, which are expected to import two of every three barrels of crude traded internationally by 2040. "If these investments aren't made today, we may see huge energy security problems in the future," Birol said. "According to our numbers 90% of Middle East oil (output) will be exported to Asia (by 2040). Oil security is not only a problem for the western world but for China and the rest of Asia."

The IEA said conventional crude production from existing fields will fall by 58% by 2040 meaning that 38m b/d of production will have to come from fields that either await development or discovery. The IEA expects global crude production levels in 2040 to be below today's levels. 

Production growth in the Americas - lead by US tight oil, Canadian oil sands and Brazil's deep-water output - will push non-Opec output higher until the 2020s. This will then fall back to 51m b/d by 2040. To make up the shortfall, Opec's Middle East members will need to increase production in the 2020s by more than 6m b/d and by almost as much again in the 2030s. Threats to global oil supply will be exacerbated by US tight-oil output reaching a platueau in the early 2020s before beginning long-term declines.

All of the net growth in total, global oil production by 2040 will come from a combination of unconventional tight oil and natural gas liquids output, predicts the WEO. Total global tight oil production is expected to rise from 2.9m b/d last year to around 5.3m b/d by 2040. The US is expected to supply around 85% of this growth until 2025 when steep well decline rates will begin to weigh on output.

The US Energy Information Administration (EIA) expects domestic tight-oil output to rise from around 2.3m b/d in 2012 - around 35% of total US crude production - to 4.8m b/d in 2021 (51% of the total). After 2021, the EIA expects output to fall due to high well decline rates and as development moves into less-productive areas. "Around the 2020s, when US production loses steam there's only one region in the world which can provide the shortfall: the Middle East," Birol said. "We need to invest in new projects now." 

Global crude prices will also determine the pace of tight-oil output, particularly in the US, said the agency. In mid-November Brent prices fell to four-year lows below $80 a barrel, as surging non-Opec output, notably from the US, boosted global supply while demand growth remained weak. Global oil output in October rose to 94.2m b/d, 2.7m b/d higher than a year earlier, said the IEA. Both Opec and non-Opec produced more oil. 

Low Brent prices are a double-edged sword, the IEA said, as they encourage higher consumption while discouraging investment in capital-intensive upstream projects. "Today's price level may offer some comfort for consumers but it may not last very long," Birol said. "At the same time $80/b gives a boost to oil demand growth, compared to $100/b, increasing upwards pressure on oil demand growth and downwards pressure on investments, especially for high-cost areas." The IEA said if Brent prices remain around $80/b investment in US light, tight oil projects would fall by around 10% next year.

Meanwhile, the complexity and capital-intensity of developing Brazil's deep-water fields, the difficulty of replicating the US tight-oil experience at scale outside North America, unresolved questions about the outlook for growth in Canadian oil-sands production and sanctions that restrict Russian access to technologies and capital markets were also long-term threats to non-Opec supply.  

Gains in energy efficiency would help address this. The WEO predicts that despite global population and economic growth over the next three decades, the pace of oil demand growth will slow, from above 2% per year over the past two decades to 1% per year after 2025.

New energy efficiency policies, particularly in the transport sector, will curb total oil demand growth by an estimated 23m b/d in 2040, the IEA said. New fuel efficiency standards would see demand for oil in the transport sector rise by just a quarter by 2040, despite an expected doubling in the number of vehicles on the world's roads by then.  

Oil demand in many of today's largest consumers, such as the US, Japan and the EU, will already be in long-term decline by 2040. For countries such as China, Russia and Brazil, demand will have reached a plateau. 

The growth in oil demand to 2040 will come entirely from non-OECD countries, with China becoming the largest oil consumer by the early 2030s. However, efficiency and slower industrial activity, as population growth levels off in the 2030s, mean that China's oil demand growth will come to a halt in 2040. India will then emerge as a key driver of growth, alongside sub-Saharan Africa, the Middle East and southeast Asia.

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