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Oil and gas investment crucial – IEA

Progress at the Copenhagen climate-change conference to boost the use of renewables is essential, and so is increased investment in fossil fuels, says the IEA. Ian Lewis reports

THE INTERNATIONAL Energy Agency (IEA) has stressed that the need for significant investment in oil and gas will not change even if a comprehensive climate-change agreement is reached at UN climate-change talks in Copenhagen this month (see p2).

Launching its World Energy Outlook 2009 (WEO 09) in November, the agency said the world needs to tap oil reserves equivalent to four times those of Saudi Arabia just to maintain production at 2008 levels and in the case of gas, four new Russias would be needed. But most oil and gas companies are making cutbacks to capital spending, as well as delaying or cancelling projects. As a result, global investment in oil and gas production will have fallen by more than $90bn in 2009, down by 19% compared with 2008 levels, according to the IEA.

"We are very worried about the results of these trends," Fatih Birol, the IEA's chief economist, told reporters at the WEO 09 launch.

The Paris-based agency, which is funded by OECD countries, predicts that in the unlikely event that no change is made to global climate-change policy in the coming years – its reference case – global primary energy demand would rise by an average of 1.5% a year in the period 2007-30, to 16.8bn tonnes of oil equivalent (toe), up from around 12bn toe (see Figure 1) – a 40% overall rise.

However, the sort of measures likely to emerge from the Copenhagen summit and action after that will have a serious effect on the prospects for fossil fuel use. The IEA also produced predictions based on a "450 scenario", reflecting concerted action to prevent global temperatures rising 2°C above pre-industrial levels by keeping long-term concentration of greenhouse gases in the atmosphere to 450 parts per that of carbon dioxide equivalent. In that prediction, peak demand for oil, gas and coal combined could be reached around 2020. After which, improved energy efficiency and growing use of renewables would reduce overall fossil fuel demand (see Figure 2).

Demand for gas, the cleanest fossil fuel – if potential advances in carbon capture are left out of the equation – would rise until around 2025 under the 450 case. "Gas has a role to play as a bridging fuel to a more sustainable future," says Nobuo Tanaka, the IEA's executive director.

In the IEA's reference case, world gas demand would grow by an average of 1.5% a year, from 3 trillion cm in 2007 to 4.3 trillion cm in 2030, with the largest supply increase coming from the Middle East. Additional output will replace declining supply from existing fields, which the IEA estimates will have fallen by almost half in 2030, as well as expanding demand. The agency claims this could be met by remaining gas resources, which are "easily large enough to cover any conceivable rate of increase in demand through to 2030 and well beyond".

This bullish outlook is partly the result of increasingly successful shale-gas exploitation in the US, which may eliminate the country's need for imports. This has "far-reaching implications for the global gas market", according to Birol, who said construction of liquefied natural gas (LNG) export capacity in recent years, in expectation of a large US import market, together with reduced demand resulting from the global economic downturn, could lead to a gas glut.

Projected global demand suggests there will be around 200bn cm/y of under-utilised inter-regional pipeline and LNG capacity around the world by 2015, more than three times the idle capacity in 2007. "This is a great danger in terms of gas pricing," Birol said.

In the 450 case, a 17% lower rise in gas demand over the 2007-30 period would still represent strong growth. Imports would fall most in volume terms in Europe, while exports from Russia and the Middle East would fall the most. Meanwhile, cumulative global gas investment in the reference case could total around $5.1 trillion in 2008-30 – using the 2008 dollar value – and 13% less than that under the 450 prediction.

Despite the switch to cleaner fuels, oil will remain the leading primary energy source in 2030. In the reference case, an oil-demand recovery begins in 2010. Supply is predicted to reach 88m barrels a day (b/d) in 2015 and 105m b/d in 2030 – slightly down on the 106m b/d predicted a year ago and well below the 120m b/d predicted for 2030 in 2005. In the 450 alternative, demand would be restricted to around 89m b/d by 2030, some 15% lower than under the reference case.

While the implications of flattening demand look severe for producers, the IEA says the effect on countries pumping oil in two decades' time may not be as bad as some imagine. Opec producers, in particular, should fare relatively well, as they raise output for export to compensate for decreased production elsewhere and to service their own economies. Under the reference prediction, the IEA expects revenues for Opec countries in 2008-30 to total $28 trillion and that the figure would slip only to $24 trillion in the 450 case. That would still be four times greater than revenues earned in the same period leading up to 2007.

The agency was forced on to the defensive at the WEO 09 launch by a report in The Guardian newspaper in which an unnamed senior IEA official claimed the organisation had been deliberately understating the severity of a potential oil shortage and over-playing the chances of finding new reserves, under pressure from the US.

"Many inside the IEA believe maintaining oil supplies at even 90m-95m b/d would be impossible, but there are fears that panic could spread on the financial markets if the figures were brought down further," The Guardian quoted the IEA whistle-blower as saying (see p26).

Tanaka called the claims "groundless" and said the IEA was making the data on which it based its predictions freely available for examination on its website. "We are a very neutral organisation and we are very proud of the analysis in these WEOs," he said, adding: "We have always said investment is necessary to achieve the balance of demand and supply. We need 45m b/d more of capacity for 2030."

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