Those who get upset as soon as oil prices head north ought to look at the investment required to keep the sector in good health and whether oil producers can afford such investment.

Two weeks ago I said that "many Opec members advocate reasonable pricing policy to help the world economy and at the same time allowing for adequate investment and expenditure to sustain the industry for the future". It is not benevolence on the part of Opec to help the world economy but self-interest. We have seen what the recent world economic crisis did to oil demand and especially to the demand for Opec oil and prices. But the industrial countries unfortunately do not fully recognise the need for reasonably good prices to allow for investment and the expansion of the oil industry.

In its ‘World Oil Outlook', Opec estimates world investment to 2030 in the upstream sector alone (exploration, development and production) to be around $2.3 trillion (Dh8.4 trillion), the majority of which is in the OECD (Organisation for Economic Cooperation and Development) countries to slow the decline in ageing oil fields. Opec's share is estimated to be $550 billion (in 2009 $), which is close to Opec oil exports revenue last year.

Perhaps $170 billion is required for the expansion in production capacity and the rest for replacing or stabilising the capacity in existing fields. As if this is not enough, the operating cost of the fields will be substantial.

I estimate Opec to produce close to 245 billion barrels to 2030 according to the production profile given by the above source. Operating costs could range between $1 and $12 per barrel and a $5 per barrel average could be in order. This will put Opec operating costs at $1.25 trillion.

Exports from Opec are estimated at around 173 billion barrels in the period under consideration after deducting Opec countries' domestic consumption. On average oil price of $90 a barrel, cumulative Opec revenue could be $15.6 trillion. Therefore, the sum of the investment and operating cost of $1.8 trillion is about 11.5 per cent of revenue, very high indeed for a depleting resource in essentially developing countries that depend to a large extent on oil revenues for their economic development.

Global investments

The above does not include investment in pipelines, export terminals, gas-treating facilities and petroleum refining. Opec estimates the global investment in refineries to be $860 billion and Opec's share is estimated at $140 billion.

Capital costs of engineering projects doubled between 2003 and mid-2008 as oil prices shot to $150 per barrel. Although costs declined for a while, they started rising again as oil prices rose to their current levels.

Looking at the huge number and size of projects needed, costs are unlikely to decline soon.

The above analysis is not just estimates coming out of rough calculations. For example, Kuwaiti officials recently announced in a conference in Kuwait that investment in their oil industry is now estimated at $90 billion to the year 2030. This includes the delayed Al Zor refinery (615,000 barrels a day), the clean fuel project to raise the quality of products from all refineries, the initiative to increase oil production capacity by one million barrels a day and to expand natural gas production and use. The above figure is double Kuwait's oil revenue for 2009.

In Iraq, four refineries of total capacity of 750,000 barrels a day are being planned which are likely to cost $25 billion in addition to probably $100 billion for the planned expansion of oil production capacity and more to come in gas development and infrastructure.

The risk in all these cases is not just the high cost but the uncertainty surrounding economic growth, oil demand, oil price and consuming countries policies.

If economic growth is higher or lower, there could be a case of under- or over- investment due to the long lead times in completion of projects.

If the price of oil is low, demand could be higher and investment must be more to meet the demand at revenues that are lower.

Environmental policies

If environmental policies succeed in curtailing oil consumption, Opec could end up with a high proportion of surplus production capacity.

It is indeed very difficult for Opec countries to make timely decisions to expand capacity but the key is prudence and to proceed with modular step-by-step projects to avoid over investment.

 

- Saadallah Al Fathi is the former head of Energy Studies Department at the Opec Secretariat in Vienna.