Oil markets could be in for another bumpy ride, a new report from the International Energy Agency (IEA) says. The agency’s report also says that a true global gas market is upon us, in addition to the need to invest US$44 trillion in the global energy supply.
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The report, World Energy Outlook 2016, was released by the IEA today (16 November).
According to the IEA, if cuts in upstream spending are prolonged for another year, a near-term risk to oil markets could arise from the opposite direction with a shortfall of new projects.
In 2015, the volume of conventional crude oil resources that received development approval fell to its lowest level since the 1950s and the data available for 2016 show no sign of a rebound, the report states.
“We estimate that, if new project approvals remain low for a third year in a row in 2017, then it becomes increasingly unlikely that demand (as projected in our main scenario) and supply can be matched in the early 2020s without the start of a new boom/bust cycle for the industry,” the IEA reports.
There are few substitutes for oil products as a fuel for trucks and planes and as a feedstock for the chemicals industry; these three sectors account for all of the growth in global oil consumption, the IEA said.
Total demand from OECD countries falls by almost 12 MMb/d to 2040, but this reduction is more than offset by increases elsewhere. India, the largest source of future demand growth, sees oil consumption rise by 6 MMb/d, the report states.
According to the report, OPEC is presumed to return to a policy of active market management, but nonetheless sees its share of global production rising towards 50% by 2040. The world becomes increasingly reliant on expansion in Iran (which reaches 6 MMb/d in 2040) and Iraq (7 MMb/d in 2040) to balance the market. The focus for oil trade shifts decisively to Asia: the US all but eliminates net imports of oil by 2040.
Global gas market coming into view
The IEA’s report says that 1.5% annual rate of growth in natural gas demand to 2040 is healthy compared with the other fossil fuels, but markets, business models and pricing arrangements are all in flux. A more flexible global market, linked by a doubling of trade in liquefied natural gas (LNG), supports an expanded role for gas in the global mix.
According to the report, gas consumption increases almost everywhere, with the main exception of Japan where it falls back as nuclear power is reintroduced. China (where consumption grows by more than 400 Bcm) and the Middle East are the largest sources of growth. But questions abound about how quickly a market currently awash with gas can rebalance, especially with another 130 Bcm of liquefaction capacity under construction, primarily in the US and Australia.
“Our Outlook assumes a marked change from the previous system of strong, fixed-term relationships between suppliers and a defined group of customers, in favor of more competitive and flexible arrangements, including greater reliance on prices set by gas-togas competition. This shift is catalyzed by the increasing availability of footloose US LNG cargoes and the arrival in the 2020s of other new exporters, notably in East Africa, as well as the diversity brought to global supply by the continued, if uneven, spread of the unconventional gas revolution,” the IEA says.
Floating storage and regasification units help to unlock new and smaller markets for LNG, whose overall share in long-distance gas trade grows from 42% in 2014 to 53% in 2040. But uncertainty over the direction of this commercial transition could delay decisions on new upstream and transportation projects, posing the risk of a hard landing for markets once the current oversupply is absorbed.
$44 trillion needed for global energy supply
“A cumulative $44 trillion in investment is needed in global energy supply in our main scenario, 60% of which goes to oil, gas and coal extraction and supply, including power plants using these fuels, and nearly 20% to renewable energies,” the IEA says.
In addition, an extra $23 trillion is required for improvements in energy efficiency. Compared with the period 2000- 2015, when close to 70% of total supply investment went to fossil fuels, this represents a significant reallocation of capital, especially given the expectation of continued cost declines for key renewable energy technologies.
The main stimulus for upstream oil and gas investment is the decline in production from existing fields. In the case of oil, these are equivalent to losing the current output of Iraq from the global balance every two years.
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