IEA prescribes $630b oil, gas investment by 2040

The International Energy Agency (IEA) has prescribed yearly $630 billion in worldwide upstream oil and gas investment – the total amount the industry spent on average each year for the past five years to compensate for 14 declining production at existing fields and to keep future output flat at today’s levels.

The IEA, which made this disclosure in its World Energy Outlook 2015 executive summary, said that the short investment cycle of tight oil and its ability to respond quickly to price signals is changing the way that the oil market operates, but the intensity with which the tight oil resource is developed in the United States eventually pushes up costs.

It noted that a more prolonged period of lower oil prices cannot be ruled out. “We examine in a Low Oil Price Scenario what it would take for this to happen – and what it would mean for the entire energy sector if it did. The oil price in this scenario remains close to $50/bbl until the end of this decade, before rising gradually back to $85/bbl in 2040.

“This trajectory is based on assumptions of lower near-term growth in the global economy; a more stable Middle East and a lasting switch in OPEC production strategy in favour of securing a higher share of the oil market (as well as a price that defends the position of oil in the global energy mix); and more resilient non-OPEC supply, notably from US tight oil. With higher demand, led by the transport sector, pushing oil use up to 107 mbpd in 2040, the durability of this scenario depends on the ability and willingness of the large low-cost resource-holders to produce at much higher levels than in our central scenario. In the Low Oil Price Scenario, the Middle East’s share in the oil market ends up higher than at any time in the last forty years”, it added.

It stated that the plunge in oil prices has set in motion the forces that will lead the market to rebalance, via higher demand and lower growth in supply.

This, IEA noted, may take some time, as oil consumers are not reacting as quickly to changes in price as they have in the past. “Although the rise of tight oil has created scope for more short- term flexibility on the supply side, there is still a significant time lag in the response of most sources of production to a change in price.

“In the New Polices Scenario, demand initially grows at an average of 900 kb/d per year until 2020, but this subsequently slows, with global demand reaching 103.5 mb/d in 2040, up nearly 13 mb/d on 2014 levels. By 2040 OECD consumption has fallen by 11 mb/d but this is almost exactly cancelled out by the twin pillars of demand growth: India and China (up 6 mb/d and 5 mb/d respectively).

Elsewhere the Middle East sees oil demand climb by 3.5 mbpd, other non-OECD Asian countries by 2.7 mbpd, and Africa by 2.5 mbpd. The transport and petrochemicals sectors add 16.5 mbpd to 2040, offset only partially by slight reductions in the power sector and use in buildings. Oil demand for aviation grows faster than any other sector, with the industry’s goal of carbon-neutral growth post-2020 out of reach without offsets from other sectors”.