IEA warns of tighter oil markets if Middle East investment fails to pick up

London (Platts)--3Jun2014/704 am EDT/1104 GMT


* Supply shortfall would see oil prices $15/b higher in 2025
* Uncertain prospects for timely investment increase
* Producer governments have competing spending priorities
* Political, security, logistical hurdles could constrain output


World oil markets will be tighter and more volatile and oil prices will be $15/barrel higher in 2025 if Middle Eastern producers fail to increase the level of investment needed to ensure sufficient supply, the International Energy Agency warned Tuesday.

Reliance on countries that restrict access to their resources will grow as North American production plateaus and starts to fall back in the middle of the next decade, the IEA said in its World Energy Investment Outlook special report, part of its World Energy Outlook series.

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"The focus for meeting incremental demand shifts towards the main conventional resource holders in the Middle East as the rise in non-OPEC supply starts to run out of steam in the 2020s," it said.

However, it added, "the prospects for a timely increase in oil investment in the Middle East are uncertain...[with]...competing government priorities for spending, as well as political, security and logistical hurdles that could constrain production."

Indeed, the IEA said, "if investment fails to pick up in time...the resulting shortfall in supply would create tighter and more volatile oil markets, with prices that are $15/barrel higher on average in 2025."

More than $2 trillion of investment will be needed to supply China and India with imported oil and gas over the period to 2035, "a level that helps to explain the push by their national oil companies to secure investment opportunities abroad," it said.

$40 TRILLION INVESTMENT

The IEA estimates that some $40 trillion of cumulative investment will be needed over the next two decades to ensure that the world has sufficient energy supply, more than half of which will be required to offset declining production from existing oil and gas fields and to replace power plants and other infrastructure.

In the report, the IEA says energy supply investment is dominated by the needs of the power sector ($16.4 trillion), followed by oil ($13.7 trillion) and gas ($8.8 trillion).

"Many of our hopes and our worries about the future of the global energy system boil down to questions about investment," IEA Executive Director Maria van der Hoeven said in remarks at the launch of the report.

"Will policies and market conditions create enough investment opportunities, in the regions and sectors where they are needed? Will financing be available so that investors can take up these opportunities? And will policy makers succeed in steering investment towards a cleaner, more secure energy system -- or are we locking in technologies and patterns of consumption that store up trouble for the future?" she asked.

Total world energy investment last year amounted to more than $1.6 trillion, a figure that has more than doubled in real terms since 2000. Over the period to 2035, the agency said, "the investment required each year to supply the world's energy needs rises steadily towards $2 trillion."

Fossil fuel extraction, transport and refining will require a cumulative $23 trillion, with upstream oil and gas spending rising by a quarter to more than $850 billion annually by 2035 and with gas accounting for most of the increase.

OIL DEMAND

In the report, the IEA also predicts that global oil demand will rise from around 4.16 billion mt (83.5 million b/d) in 2012 to 4.47 billion mt in 2020, 4.55 billion mt in 2025, 4.6 billion mt in 2030 and 4.67 billion mt in 2035.

This is a slower rate of growth than for gas, nuclear and renewables, but oil still accounts for the biggest energy demand category through 2035.

Investment in oil will peak between 2014 and 2020 at an average of $637 billion per year, while annual spending between 2021 and 2030 is expected to average $610 billion/year and between 2031 and 2035 $621 billion/year, the IEA said.

--Margaret McQuaile, margaret.mcquaile@platts.com
--Stuart Elliott, stuart.elliott@platts.com
--Edited by Maurice Geller, maurice.geller@platts.com

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