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IEA repeats warning of possible new oil price spike
VIENNA
Petroleumworld.com, May 28, 2009The International Energy Agency on Wednesday repeated its warning that reduced investment in energy could result in future supply shortages and a new oil price spike in a few years' time.
In a report prepared for last weekend's meeting of G8 energy ministers in Rome, the IEA said it saw "clear evidence" that energy investment across the world would drop sharply this year, with global upstream oil and gas investment budgets already cut by around 21% or almost $100 billion from 2008 levels.
"Between October 2008 and end-April 2009, over 20 planned large-scale upstream oil and gas projects, valued at a total of more than $170 billion and involving around 2 million b/d of oil production capacity and 1 bcf/d of gas capacity, were deferred indefinitely or cancelled," it said.
A further 35 projects, involving 4.2 million b/d of oil capacity and 2.3 bcf/d of gas capacity, had been delayed by at least 18 months, the agency said.
IEA chief economist Fatih Birol had already told Platts in a May 20 interview that lower investment as a consequence of the global economic crisis threatened future energy security as well as the effort to combat climate change.
The paper prepared for Rome, entitled "The impact of the financial and economic crisis on global energy investment," said the sharpest cuts in spending were likely to be focused on exploration.
SHARPEST SPENDING CUTS TO BE IN EXPLORATION
"It is likely that the upstream industry will reduce spending on exploration most sharply in 2009--largely because the bulk of spending on development projects is associated with completing projects that had already been launched before the slump in prices," the IEA said.
Canadian oil sands projects account for the bulk of the postponed oil capacity, the agency said, with the drop in upstream spending most pronounced in regions with the highest development costs and where the industry is dominated by small players and small projects.
"For these reasons, investment in non-OPEC countries is expected to drop the most. In addition, cuts in spending on existing fields risk pushing-up decline rates," the IEA said.
The agency said falling investment would have "far-reaching and... potentially grave effects on energy security, climate change and energy poverty."
It said cutbacks on infrastructure spending "will only affect capacity with a lag, often amounting to several years," so that the current demand weakness was likely to see spare production capacity increase in the near term.
REAL DANGER OF NEW SPIKE
"But there is a real danger that sustained lower investment in supply in the coming months and years could lead to a shortage of capacity and another spike in energy prices in several years time, when the economy is on the road to recovery," the IEA warned.
"The faster the recovery, the more likely that such a scenario will happen." The IEA said that while the financial crisis was generally thought to be the main immediate cause of 2008's sudden, sharp economic downturn, other factors--including the run-up in oil prices between 2003 and the middle of last year--"arguably played an important, albeit secondary, role."
"High oil prices certainly helped to render the economies of oil-importing industrialized countries more vulnerable to the financial crisis by damaging their trade balances, reducing household and business income, putting upward pressure on inflation and interest rates, and dampening economic growth," it said.
The paper referred to its 2006 analysis which concluded that the rise in oil prices over the previous four years had lowered average world GDP growth by an average of 0.3 percentage points per year and which drew attention to the fact that not all of the effects of higher prices had fully worked their way through the economic system.
"Nonetheless, the actual speed and the depth of the resulting economic and financial crisis took almost everyone by surprise," the IEA said.
"It follows that if there to be a sharp rebound in oil prices in the months to come, this would risk causing the economic recovery--when it comes--to stall."
The agency said a likely consequence of the current crisis could be consolidation across the energy sector, "as small and medium-sized firms that are struggling to meet their ongoing financial needs are taken over by or merge with competitors with stronger balance sheets."
It said falling share prices were likely to encourage this trend.
Story from Platts
Platts 05/27/2009
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