When oil prices fell sharply in the second half of 2014, the thought switched immediately to what will happen to investments in the energy sector as a whole and in oil and gas particularly.

The fear is now confirmed as outlined in a recent report of the International Energy Agency (IEA) titled “World Energy Investment 2016”, where it says that “ ... investment in 2015 amounted $1.8 trillion [Dh6.6 trillion], down 8 per cent [in real terms] from 2014 mainly due to a sharp fall in upstream oil and gas investment”.

Investors faced and continue to face macroeconomic uncertainties that “affects demand patterns” at a time of “accelerated technological change” and “increasing inter-fuel competition”.

The oil and gas industry reacted sharply to the decline of oil prices by cutting investment budgets and workforce as well as shelving or cancelling projects. Even then, oil and gas represent the largest portion of global energy investment in 2015 at 46 per cent, though it declined by 25 per cent from 2014 to $583 billion after peaking in 2014 at $780 billion.

The expected decline in 2016 is perhaps another 24 per cent which would make for the longest investment decline period in this vital sector for a long time.

The fall in oil and gas investment could have been sharper except for the fact that producers always aim first at replacing ageing assets to maintain their domestic and export markets and assure consumers of supply security. The IEA says that 40 per cent of oil and gas investment in 2015 went into this purpose.

Currency movement

The investment situation in oil and gas is not even across regions as the Middle East and Russia actually ploughed in more capital compared to 2014, reflecting the lower development costs in the region and the currency movement of the rouble against the dollar in the case of Russia.

Thus the Middle East actually increased production while Russia stabilised at its highest post-Soviet production. This is in contrast to the situation in the US where investment fell sharply due to the higher cost of further development of shale and tight oil, and overall oil production actually fell. The investment in US shale is dependent on lending from banks, which are now reluctant to do so. This led to a sharp fall in investments by 52 per cent over the past two years despite the partial recovery in oil prices.

The same goes for offshore developments in all regions as the fall in oil prices affected outlook significantly.

Therefore, the share of national oil companies “reached 44 per cent of global upstream investment, an all-time high.” But the IEA goes on to say that “North America remains the largest investor in 2016, although at $138 billion, its upstream investments are less than half of those in 2014.”

The reduction in investment has not yet affected overall oil and gas production globally because there has been a huge cost deflation as investors immediately turned on contractors and suppliers to reduce costs of their services, materials or equipment. This effort was met positively.

At the same time efficiency improvements contributed to a fall of upstream oil and gas development costs. While cost reduction explains “almost two-thirds of the fall in investment”, the IEA report questions whether this trend is “sustainable in the case that demand for services and equipment picks up rapidly.”

Conversion projects

Needless to say, low oil and gas prices have not only affected fields development but also storage and transportation infrastructure. Major projects are facing delays or deferment.

Conversion projects in refining and LNG are facing the same situation. Investment in LNG liquefaction is expected to plunge in 2016 by 30 per cent after peaking at $35 billion in 2014 and 2015. Even the surplus capacity in oil refining is now less what it was few years ago due to project deferment and closure of some facilities.

So where does all this lead us when the IEA is saying “At its current level, investment may be insufficient to maintain oil and gas production, indicating tighter markets ahead with different time horizons.”

Are we to face a cycle of boom and bust again in oil prices? A cycle that has proven time and again against the long term interests of both producers and consumers? How can we avoid such a vicious circle except by a cooperative approach among producers and an acceptance by consumers to stabilise the oil market at a level that will be of advantage to all?

I must be dreaming to wish for such an outcome. Readers may ask about the investment situations in other energy sources but that’s is for next week.

The writer is former head of the Energy Studies Department at the Opec Secretariat in Vienna.