There is no doubt that investment is key in energy supply ... and any reduction or reluctance to invest may cause untold problems, especially with shortages and their impact on economic growth. This is why future energy balances are viewed with consideration to the level of investment needed to ensure supply.
The International Energy Agency in its “World Energy Outlook 2017” discussed extensively the need for investments regionally. Just to recap on my last two columns, between 2016 and 2040, global primary energy demand would grow from about 13.8- to 17.6 billion tonnes of oil equivalent (btoe), gas demand from about 3 to 4.4-btoe and oil from 95.5- to 109 million barrels a day (mbd) in the New Policies Senario (NPS).
The fall in oil prices during 2014 jolted companies and government investments in projects and the IEA tells us that, “With projected demand growth appearing robust, at least for the near term, a third straight year in 2017 of low investment in new conventional projects remains a worrying indicator for the future market balance, creating a substantial risk of a shortfall of new supply in the 2020s.”
The IEA may be specifically referring to oil, but this is equally applicable to other sources of energy where prices are connected to oil one way or another. To meet the above outlook for energy, the IEA forecasts investments at about $60 trillion (in 2016 dollars) in the NPS.
Given the noticeable shift to the increased share of electricity in final energy consumption from the current 20 per cent to 23 per cent by 2040, investment in that sector would account for “nearly half of total energy supply investment in the New Policies Scenario, up from an average of 40 per cent in recent years.”
Renewables take a share of almost $8 trillion due to the desire of governments to meet commitments to reduce emissions and because of the increasingly favourable economics of wind and solar energies. “Costs of new solar PV have come down by 70 per cent, wind by 25 per cent and battery costs by 40 per cent,” according to the Outlook. For that reason, “renewables capture two-thirds of global investment in power plants.”
As for oil and gas, the IEA says that “upstream oil and gas investment remains a major component of a secure energy system, even in the carbon-constrained world of the Sustainable Development Scenario.” Therefore, in the period under consideration, investment in oil and gas development is anticipated at $20.6 trillion, of which $15.4 trillion was in upstream, $1.3 trillion in downstream and $3.9 trillion in mid-stream.
The average annual investment in oil and gas upstream is therefore $640 billion, the equivalent of the revenue of 27-mbd at today’s prices. It is judged that the industry will never be able to meet this without a gradual increase in oil and gas prices, especially as demand growth for oil is modest.
Therefore, it is not surprising that IEA says that “in the New Policies Scenario, the balance of forces suggests some upward pressure on the oil price, which reaches $83/barrel by the mid-2020s”. The investment in upstream is “mostly to make up for declines at existing fields rather than to meet the increase in demand.”
The natural capacity decline in existing oilfields could be between 5-6 per cent and therefore almost two-thirds of current world capacity would be foregone by 2040 if no new investment in maintaining current and developing new fields is made.
In the Middle East, investment in oil and gas is forecast at just over $3 trillion or about 15 per cent of world’s total. This reflects the relatively lower production cost in the region. The investment in upstream would be $2.3 trillion and the rest for mid-stream and downstream.
Middle East electricity investment is forecast at $773 billion. Electricity demand is to grow at close to 3 per cent a year and consumption would almost double by 2040.
Considering other peripheries, Middle East energy investment could be close to $4 trillion or about $167 billion a year, which at today’s oil prices amounts to a revenue of almost 7-mbd. Planners must do everything possible to reduce this burden, including reforming domestic prices and improving energy efficiency.
The writer is former head of the Energy Studies Department at the Opec Secretariat in Vienna.