Oil market uncertainty hampers investment
Posted: 20 August 2007
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Uncertainty in the oil market outlook is allying with environmental measures in consuming countries and other factors to limit demand for OPEC crude and create obstacles for future investment in capacity expansion, according to OPEC.
In a report on the oil market, the 12-nation Cartel said there is a need for stronger energy security to reassure producers and encourage them to pump sufficient investments in expansion projects to meet any increase in global demand.
 “The need for enhanced energy security has to be seen from the mutually supportive supply and demand perspectives. Uncertainty over future demand (and, indeed, non-OPEC supply) translates into large uncertainties over the amount of oil that OPEC Member Countries, playing the role of residual suppliers, will eventually need to supply, signifying a heavy burden of risk. Investment requirements are very large, and subject to considerably long lead-times and pay-back periods. Security of demand is a major concern for producers,” it said.
“Demand can, of course, be affected both positively and negatively by alternative rates of economic growth to those assumed in the reference price case.
However, there are a range of important drivers, in particular energy and environmental policies in consuming countries, as well as technological developments, that tend to push in one direction: a reduction in demand. It is to be expected, therefore, that uncertainties over possible future demand patterns are skewed towards the downside, with corresponding risks to the demand for OPEC oil.”
The report cited various scenarios for growth in world oil demand, assuming different price cases and growth rates in global economies. In the lower growth scenario, world oil demand could be almost five million bpd lower than in the reference case by 2015.
“By 2020 the difference reaches eight million bpd, and the gap continues to widen in the longer term. The only source of growth in this scenario is developing countries, although demand here by 2015 is still down by two million bpd from the reference case, and close to four million bpd lower by 2020,” OPEC said.
“As previously mentioned, uncertainties concerning demand exist in both directions, and even stronger growth than in the reference case can also be readily conceived.
Stronger economic growth could emerge if geopolitical and economic conditions give an even stronger impetus to world trade, as well as to capital flows and technology transfer…. The stronger resulting growth in oil demand is assumed to eventually lead to some consumer reactions and energy policy responses that limit the pace of demand growth. It is also possible in such a scenario that environmental concerns, both local and global, would precipitate a wave of additional policy measures to limit oil demand growth.”
The report noted that by 2020, the amount of crude oil OPEC is expected to supply could lie in the range 32–41 million bpd according to different price scenarios.
“These OPEC production scenarios have been used to estimate a range of possible investment needs in OPEC Member Countries over the coming two decades.
Clearly, this involves not only accounting for net expansion in capacity, but also compensating for production declines that would occur in existing facilities without such investment.
Moreover, investment needs in OPEC Member Countries are additionally burdened by the objective of maintaining sufficient spare capacity,” it said.
“For example, by 2020 an estimated uncertainty of $270 billion for required OPEC investment can be envisaged, with the lower growth scenario suggesting a cumulative requirement of just under $230 billion, instead of the $500 billion in the higher growth case. Of course, the time frame to 2020 is sufficiently long to adjust expansion plans in accordance with evolving demand patterns. But the types of investment that are required vary substantially, and pay-back periods can be long, particularly if the necessary infrastructure is not in place.”
It added:” Even over the period to 2010, there is an estimated 78 range of investment uncertainty of $50 billion, increasing to $160 billion by 2015.
It should also be noted that these estimates do not include necessary investments in infrastructure such as pipelines, storage, terminals and ports. This clearly demonstrates that there is a real risk of wasting much needed financial resources.
“The issue of security of demand is, therefore, a very real one, and constitutes a legitimate concern for OPEC Member Countries. Moreover, it is intrinsically linked to the issue of security of supply. Without the confidence that demand for its oil will emerge, the incentive to undertake investment can be reduced, which, in turn, can exacerbate concerns over eventual sufficiency of capacity, and thereby hamper the drive towards long-term oil market stability. “The report warned that heavy investments could lead to a large idle capacity in key producers and this could depress prices and consequently OPEC’s income.
“The emergence of large levels of unused capacity would lead to downward pressures upon oil prices, as it has in the past,” it said.
“This would result in a huge loss of revenues, and OPEC Member Countries, as developing countries with keenly felt competing needs for financial resources, would be adversely affected in terms of available resources in such areas as education, healthcare and infrastructure. Moreover, lower revenues would, in turn, negatively affect available resources for future investment, with further subsequent market instability a distinct possibility.” |
