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IEA Report Underlines Long Term Supply Side Challenge for Oil Markets

Posted on: Tuesday, 4 November 2008, 09:00 CST

The IEA World Energy Outlook has highlighted longer term supply side constraints, despite the precipitous correction in world oil prices of late, as current depletion rates outstrip future demand. Rather than a shortage of physical reserves, the report focuses on a slowdown in necessary investment, which political stability and falling prices could exacerbate.

The IEA World Energy Outlook highlights long-term supply side constraints, showing that current depletion rates outstrip future demand. On the face of it, this is welcome succour for 'peak oil' theorists, who have long been arguing that the world is actually running out of physical reserves. However, the IEA is not focusing on a shortage in the physical element, but rather in the necessary levels of investment that will be needed to meet energy demand going forward, amid high rates of depletion. According to the report, conventional production will effectively remain static, rising from 70.4m barrels per day (b/d) in 2007 to just 75.2m b/d in 2030, as 'new gains' and 'old losses' balance out.

The agency uses data from the 500 largest fields and extrapolates its findings to smaller fields, leading to estimated annual decline rates of 9.1% to 2030, under a business as usual scenario. Greater investment prevents decline accordingly, but the North Sea provides a striking example of the problem highlighted by the IEA; production is expected to drop from 1.7m b/d today, to around 500,000 by 2030.

In order to meet this demand, oil companies and governments need to spend $360 billion a year, with investment particularly critical in the Middle East. OPEC is expected to account for 51% of the world oil market by 2030, compared to 44% today, with Saudi Arabia predicted to comfortably surpass 15m b/d production, depending on its attitude towards exploration and production investment.

Herein lies a major problem, as falling prices will undoubtedly affect investment in production, as seen with Shell's termination of Canadian tar sand in light of price corrections. It is not only price, however, but the political outlook and stability of producer states that impacts investment prospects. International oil companies (IOCs) are currently only able to vie for around 10% of global reserves, due to a heavy concentration of proven reserves (over 50%) residing in a small number of states. Those waiting for national oil companies (NOCs) to fill longer term supply by virtue of reserves could be disappointed. Even producer states that remain committed to increasing output, as opposed to active depletion policies, will find it difficult to extract sufficient reserves.

Yet the relative merits of IOCs and NOCs are not the central issue. Rather, the IEA's report highlights the fact that without a seismic shift in political capping of reserves, supply-demand fundamentals will tighten again considerably. Without renewed investment in oil production, the credit crunch could prove to be the calm before the storm as far as pain at the pumps is concerned.

Source: Datamonitor

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