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$16 trillion investment required

FEARS THAT there may not be enough energy to meet rising world demand over coming decades have been dispelled by experts' repeated assurance that resources are plentiful. But the $16 trillion needed over 2001-2030 to turn the resources into available supplies will be invested in energy only if governments provide a favourable financial, regulatory and tax climate promising satisfactory returns, says the International Energy Agency (IEA).

In its wide-ranging World Energy Investment Outlook, published in November, the IEA calculates that world power generation, transmission and distribution will take 60% of the global bill, or nearly $10 trillion through 2030, rising to 70% if investment in the fuel chain to meet power station needs is included.

The oil and gas sectors will each absorb 19%, or over $3 trillion, but the bulk of the $4 trillion the two sectors will spend upstream will simply maintain production capacity at present levels. Coal, less capital-intensive, will take 2% of the total, or only $400bn, the IEA says.

Examining investment on a regional basis, it is the developing countries of Asia, the Middle East and Africa, whose growth in production and demand will be greatest, which will need nearly half of the global sum—investments of $7.9 trillion. But it is there that the private-sector investors who must provide most of the required capital are likely to be least willing to spend their money.

The industrial countries in the OECD will have a total $6.5 trillion investment bill, divided among North America ($3.5 trillion), Europe ($2 trillion) and the Pacific ($1 trillion). Transition economies will take $1.7 trillion, with Russia alone accounting for $1.1 trillion, the IEA calculates. 

These figures do not include any costly technological leaps. They are based on the report's reference scenario, which takes into account only government policies and measures in effect in mid-2002.

More efforts by OECD countries to practice what they preach, saving energy and reducing greenhouse-gas (GHG) emissions, would lessen their investment bill, while the development costs for new technologies such as carbon sequestration and advanced nuclear would come on top of the $16 trillion, which is principally to maintain present supply levels.

Some 450bn barrels of oil must be discovered in the next three decades to replace reserves in producing fields and to meet growth in demand, implying a decline in the global proved reserves:production ratio from around 40 years now to under 20 years in 2030.

The projected investment of over $3 trillion, or $103bn annually, will permit a rise in world oil supply from 77m barrels a day (b/d) in 2002 to 120m b/d in 2030, with offshore fields supplying nearly one-third of the increase. The low cost of exploration and development in the Middle East explains its small share—under 20%—of total upstream spending compared with its large production of crude oil and natural gas liquids, which is projected to climb to 28.3m b/d in 2010 and 52.4m b/d in 2030.

The risk that the needed investment will not be forthcoming, slowing the development of the Middle East's production capacities, led the IEA to produce another scenario, assessing the consequences.

Under the restricted investment scenario, the oil price would rise to $35 per barrel in 2030, compared with $29/b, lowering demand by 8%, to 110m b/d. This would promote more efficient energy use and switching to other fuels, reducing the share of oil in the global energy mix to 35%, compared with 38% in the reference scenario.

Investment in Russia, the world's second-largest oil exporter, is expected to be $328bn over the 2001-2030 period, or an average of $11bn a year. Over 90% will go into exploration and development and 40% to projects to supply OECD markets. If these investments are made, output could rise to 10.5m b/d in 2030 from 2002's estimated 7.66m b/d.

World gas demand is expected nearly to double, from 2.60 trillion cubic metres (cm) in 2001 to 5.28 trillion cm in 2030. An average of 300bn cm of new gas capacity will have to be provided each year of the period to compensate for declining production at existing fields and others that will be put on stream and decline before 2030. This will take over half of total investment in the global gas supply chain of $3.1 trillion—$1.5 trillion in the three OECD regions, $1.1 trillion in developing countries and $493bn in transition economies—but governments, especially in the Middle East and Africa, will have to lift restrictions on foreign investment and revise their tax policies if they want a share of the bonanza.

Table 1: World energy investment

$bn (in year 2000 dollars)

         

% Share

         

Total

of total

 

2000

2001-10

2011-20

2021-30

2001-30

2001-30

Oil

87

916

1,045

1,136

3,096

19

Gas

80

948

1,041

1,157

3,145

19

Coal

11

125

129

144

398

2

Electricity

235

2,562

3,396

3,883

9,841

60

Total

413

4,551

5,610

6,320

16,481

100

Annual average

413

455

561

632

549

100

 

Source: IEA



The total investment figure includes $1.4 trillion of capital needs in the downstream sector, for new cross-border, high-pressure pipelines and liquefied natural gas (LNG) plants, ships and regasification terminals. Annual investment in the LNG chain will zoom from $4bn over the past decade to $9bn in 2001-2030, supporting a six-fold increase in LNG trade. Total capital requirements are expected to fall from today's $500 a tonne to $420/t by 2010 and to $320/t by 2030, assuming a shipping distance of 4,000 km.

The dizzying $10 trillion required to cover a doubling of the global electricity demand in 2001-2030 is three times higher in real terms than investment in the sector during the past 30 years. Demand in developing countries is due to rise by an average of 4% a year, compared with 1.5% for the OECD. Investment in 4.7 terawatts (TW) of new plant, including 2 TW for the OECD area, will amount to over $4 trillion, while refurbishments of existing plant will require $439bn.

Over $5 trillion, or 54%, of total power-sector spending will go into transmission and distribution networks, where investment has lagged behind generation in the US and several European countries. Higher investments in transmission are needed both to meet increased volumes of trade in liberalised markets and because of the use of intermittent renewables, such as wind under new environmental regulations. Developing countries will need investments of $0.92 trillion in transmission and nearly $2 trillion in distribution, while the sums for the OECD and transition economies are respectively $0.57 trillion and $82bn for transmission and $1.5 trillion and $280bn for distribution.

For coal, the big unknown is future environmental policy, which will determine the level of demand and investments over the 2001-2030 period. Under the report's reference scenario, $400bn must be invested to fund an increase in global coal supply from 4.60bn tonnes in 2000 to 6.95bn tonnes in 2030. But the alternative policy scenario presuming stronger environmental measures cuts demand by 0.52bn tonnes, or 7.5%, and reduces investment needs by $25bn—$13.8bn in the OECD, $6.1bn in the rest of the world and $4.8bn for shipping.

Power generation is the driver of 90% of the increase in world coal demand under the report's reference scenario. If stronger environmental policies are introduced to reduce GHG emissions and the resulting demand for coal is 0.52bn tonnes lower, 96% of the reduction would be in the power sector.

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