The sharp decline of investment in the oil and gas sector will have serious consequences for the sector as supply fails to keep pace with demand, the head of the International Energy Agency has warned.
“What I am worried about the most is that this year oil investment declined by about 20 per cent compared to previous years and, more importantly, that it is expected to decline by the same amount next year,” said Fatih Birol, executive director of the Paris-based watchdog for the biggest energy consuming countries. “It is the first time since the 1980s that investment will have declined for two consecutive years and it will have serious consequences for the oil market.”
The warning from Mr Birol, a Turkish economist who this year took over as head of the IEA, comes as the agency releases its annual World Energy Outlook, which predicts that oil prices will recover over the next five years to average about US$85 per barrel as the supply-demand balance tightens.
Investment in the industry globally was about US$700 billion this year and is expected to be about the same next year, which based on historic rates is just about enough to replace oil from declining oilfields but is not enough to keep up with expected demand, Mr Birol said.
There are already signs that lower investment is filtering through to lower expected growth by the international oil companies.
“A new phase of cost-cutting is under way,” according to Tom Ellacott, head of company upstream analysis at the industry consultant Wood Mackenzie. “Spending levels in 2017 could be down by around 30 per cent versus [companies’] guidance prior to the oil price crash.”
A research report last week by BMI agrees: “With capex reductions we expect to see slowing investment going into manage decline rates”.
Oil prices have crashed since summer 2014’s high of about $115 per barrel to levels of approximately $50 currently, driven down mainly by a surge in supply from North America, where new technology has allowed exploitation of “tight” oil and gas that was previously trapped in inaccessible geological formations.
But Mr Birol said that lower oil prices look like choking off that production growth. “More than half the world’s oil production growth [since 2008] came from US light tight oil and our analysis shows that if prices remain at these levels, then in five years US oil production will have declined by close to 3 million barrels per day,” he said.
US oil production nearly doubled since 2010 to a high of just below 10 million barrels per day before tapering off this year.
The other major source of production growth has been Iraq but, given the instability in the country, the anticipated growth is not expected there any time soon, the IEA forecasts.
“Of course there may be surprises – the US shale oil sector may be much more resilient that we think, or there may be more stability in Iraq,” said Mr Birol. “But our central scenario is that lower production there will gradually boost prices to $85 a barrel by 2020.”
The demand side of the oil market also is undergoing radical change, according to the IEA’s outlook.
“A very important story in the history of energy demand growth is coming to an end – China,” said Mr Birol. “Energy demand growth and economic growth had been rising in parallel but we expect to see a divorce in those trajectories, mainly because of efficiency improvements in the energy sector and the changing nature of the Chinese economy.”
amcauley@thenational.ae
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