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Huge Opec investment in upstream oil capacity needed, says IEA

The world is cutting down on carbon emissions, but it will continue to rely heavily on Opec oil, says the IEA. Tom Nicholls reports

OIL DEMAND is unlikely ever to reach 105m barrels a day (b/d), according to the head of the International Energy Agency (IEA), Nobuo Tanaka. Yet long-term demand for Opec crude is assured and the organisation should invest heavily in new oil projects, he told Petroleum Economist last month.

In a recent interview (PE 3/10 p4), Opec's secretary-general, Abdalla El-Badri, said the cartel's producers need greater assurance that future demand will be robust enough to justify new upstream investment. Although demand for Opec oil could reach 37m b/d by 2020, it might also remain flat – at around 29m b/d – he said. Such uncertainty is hardly conducive to investing the $250bn Opec says would be necessary to reach the higher figure.

However, Tanaka is confident that sufficient demand will materialise and said "huge investment" from Opec is needed. Even if ambitious green-energy programmes are put in place, the world will need another 11m b/d of Opec oil by 2030, he claimed. And because many of Opec's oilfields are in decline, the organisation will have to invest in replacing lost production from existing operations as well as the incremental addition. "There is security of demand," Tanaka said.

However, demand is unlikely to be high enough to lift consumption to the 105m b/d business-as-usual projection set out in the IEA's 2009 World Energy Outlook. That figure "is not sustainable environmentally" and would lead to a 6°C rise in global temperatures above the pre-industrial level, as opposed to the 2°C rise that is generally believed to be the point at which the more extreme effects of climate change would start to occur. It would also be likely to result in prices rising to destructive levels for oil-dependent economies, said Tanaka.

"We don't think [an increase to 105m b/d] will happen and it should not happen. We think the level will be much lower."

Price subsidies on petroleum products – an IEA bugbear – continue to inflate oil demand in some countries (see p24), he said. But there is evidence that changes needed to achieve the agency's 450 parts per million (ppm) case – which envisages a peak in fossil-fuel use before 2020 and a stabilisation of emissions at 450 ppm of carbon-dioxide-equivalent, a level thought to be consistent with a safe 2°C temperature rise – are being made. Consumers are becoming more efficient because of stricter fuels standards and energy requirements for buildings, and the widespread introduction of more efficient devices, such as low-energy lightbulbs. "That's making the difference. This historic transition is happening." Indeed, the IEA believes oil demand in the OECD may have already peaked (see Figure 1).

In addition, natural gas, which has become more abundant following North America's shale-gas boom (PE 2/10 p4), could displace a significant amount of oil demand, albeit indirectly, reducing carbon emissions. While natural gas vehicles will not replace gasoline and diesel cars on a large scale, he said, gas could lower oil's share of the transportation market if electric cars running on electricity generated in gas-fired power stations became commonplace. "That's what we think is necessary to achieve 450 ppm target," said Tanaka.

Indeed, although the UN climate-change meeting in Copenhagen in December may have been a washout (PE 2/10 p22), individual countries have already agreed to make voluntary changes consistent with a stabilisation of greenhouse-gas emissions of 550 ppm, he said. That might sound alarmingly higher than 450 ppm, but, said Tanaka, "at least two-thirds of the necessary reduction is there to achieve 450 ppm". He added: "If this pledge is materialised, oil demand will never reach 105m b/d. It will be much, much lower."

Tanaka was reluctant to comment on whether oil prices – about $80 a barrel at the time the interview took place, during last month's IHS Cera conference in Houston – are at a level that balances the interests of consumers and producers. "The price level certainly helps to induce more investment," he said – making deep-water and unconventional-hydrocarbons ventures economically feasible. But it is unclear how it is affecting consumer economies, he added.

However, he did imply that $70-80/b is not, as Opec suggests, a required price for many of the cartel's developments. "This $70-80/b price is probably necessary for very deep-water oil or Arctic projects. But for conventional, Middle East Opec countries, I think their cost of production is much, much lower" – perhaps $10-20/b.

Opec and the IEA may be unable to agree on what constitutes a fair price, but there appears to be more common ground on what influences oil prices. Two years ago, as crude rose towards $150/b, Opec blamed price inflation largely on speculation in financial markets and a shortage of suitable refining capacity rather than a shortage of crude oil. The IEA argued that high prices were predominantly the result of a tight balance between oil supply and demand.

Now, however, Tanaka admits it is "obvious that there are many elements" – including the influence of financial markets. "It's a mix of these elements and it's very difficult to say which part plays what."

His view has been partly influenced by a February workshop organised by the IEA and the Japanese government to analyse the causes of oil-price movements. Volatility is inevitable and – in moderation – even desirable, the workshop concluded. However, excessive volatility, which can be damaging, could be reduced not only by better oil-market data, but also by more transparent financial-market information.

"Moves to enhance reporting requirements by the CFTC [the US' Commodity Futures and Trading Commission, a regulator] and others need to be continued, and potentially extended to over-the-counter derivatives markets," the IEA said after the meeting.

 

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