David Knott and Rafiq Latta report from Rome
High oil prices, energy security and concerns over the environmental repercussions of spiralling energy demand were among the problems debated at the 11th International Energy Forum (IEF) in Rome on 21-22 April, and investment was seen as one of the keys to tackling them all.
Current oil prices are too high, IEA Executive Director Nobuo Tanaka declared in a keynote address, especially for developing countries, which face other significant cost increases, and considering the threats to global economic growth at the moment. While there was no single explanation for higher oil prices, the IEA maintains that the run-up in prices is primarily due to fundamental factors, in particular strong demand growth in the developing world coupled with constraints in bringing new oil to market. During the past five years, spare capacity has fallen below the 3-4mn b/d typical of the past decade. Unfortunately, our analysis shows that there is no quick fix on the supply side, and spare capacity is likely to remain tight. This underscores the need for more investment.
While the oil market outlook remains tight short-term, Mr Tanaka told reporters on 21 April that, according to IEA estimates, if producers maintained current supply levels, inventories would eventually be replenished. While there was no consensus between IEA and oil ministers during the closed IEF meetings on whether current oil prices were too high, ministers of producing countries were without exception committed to investment. Sometimes there is slippage in bringing new capacity on-stream, but this commitment sends the right message to the market. High prices were pushing consuming countries to improve energy efficiency and develop alternative technologies, he added, raising the issue of security of supply. IEAs outlook says that, even when consumer countries are taking steps to improve efficiency and develop alternatives, there is still growth in the demand for fossil fuel, and so there is still security of demand. But we must continue to reduce uncertainty for the market and improve transparency.
Saudi Arabia Plans Upstream And Downstream Capacity Expansion
Saudi Arabias Minister of Petroleum and Mineral Resources Ali Naimi told the forum that limited capacity along the entire supply chain was the real source of current global supply tightness. This was not an energy resources problem but primarily an investment issue. The kingdom has always stood as a force for moderation in the petroleum markets, and that stance continues, he said. We work very hard to make sure that the global oil market is well supplied and well balanced, and to that end we continue to maintain a spare production capacity of roughly 2mn b/d, to be used when there is an unexpected need. Maintaining that spare capacity requires considerable investment on our part, but in recent years the value of that cushion has been proven in the face of unforeseen supply disruptions, and I believe it has had a very beneficial impact on easing market volatility.
Mr Naimi said Saudi Arabia supplied oil, condensate and natural gas amounting to more than 11mn b/d of oil equivalent, and planned to increase supplies further: We recognized the need for additional investment and have committed over $90bn over the next five years to expand our capacity to supply energy to global markets. As part of our commitment, we are undertaking a massive expansion program to raise our production capacity to 12.5mn b/d by year-end 2009. We have also made an unprecedented commitment to expand our worldwide refining capacity by doubling it to 6mn b/d, to meet growing demand in key markets and to help correct the current imbalance between crude quality and refinery capabilities.
OPEC Would Not Hesitate To Meet Supply Shortfall
OPEC Secretary-General ?Abd Allah al-Badri said: There is a common understanding on supply and demand [between producers and consumers]. It has nothing to do with the prices. OPEC would not hesitate to increase supply if we thought higher prices were caused by a shortage in supply. Speaking to MEES, Lawrence Eagles, Head of the IEAs Oil Industry and Markets Division, said the agencys latest forecast showed that at the moment we think stocks will be replenished over the course of the second quarter. When refineries are in maintenance, when demand is weaker, we should start to see a natural replenishment of stocks, if output stays steady. There are many factors influencing the price. For the market it is not just a matter of replenishment of stocks, but also a matter of being confident that supplies are going to be there when they need them in the future. That is something that replenishment of supplies will help, but it is not the only answer to the question.
Mr Eagles added that current levels of investment in the upstream and downstream sectors were unprecedented: Investment is being seen but there are a lot of upstream constraints, and those constraints mean that perhaps we are not delivering that investment sufficiently quickly to change the supply profile. You have constraints in the service sector. You have constraints in commodities, and to the extent that more investment is being created it helps generate cost inflation as well, and is helping to push up prices. High prices are good for energy efficiency, but only if they are felt by the consumer. One of the big issues we are seeing at the moment is that for a large proportion of the developing world people are being insulated from market prices. Therefore you can have high oil prices, but you are not seeing that price effect [on demand].
Market Perception Of Oil Resources Not In Line With Reality
The IEFs closing statement said there was an increasing disconnection between oil and financial markets. The high volatility of oil prices complicates the interpretation of market signals, the forum concluded, and may adversely affect investment. Ministers called on relevant organizations to further explore the understanding of energy market fundamentals and the impact of financial markets on the level and volatility of oil prices. World energy demand is set to increase significantly in the coming decades, with strong growth projected in emerging economies and developing countries. The forum noted that the availability of oil and gas resources is sufficient to meet world needs over the next decades. However, public and market perceptions are not in line with the geological oil and gas realities. IEF countries were invited to work together to realign public and market perceptions with market fundamentals.
The IEF also said that bringing available resources to the market required adequate and timely investment throughout the entire oil and gas chain: Due to the staggering cost increase, estimates show that accumulated investment in oil and gas up to 2030 would require almost $10 trillion. Uncertainties related to energy demand and supply are a significant obstacle for planning investments. The free trade principles should be maintained and enacted. Importing countries were asked to define clear energy policies and programs to frame their energy demand in the short and long term. On the supply side, transparency of energy markets, more stable legal and regulatory frameworks and more predictability of energy policies are critical in reducing uncertainties and unwarranted political influence that may affect investment and its profitability.
Fuel Subsidies Encourage Demand Growth, Says IEA
The IEAs long-term view is that, unless government policies change, world energy demand will grow by 50% by 2030. Despite all the attention that is given to biofuels, wind and solar, said Mr Tanaka, the reality is that we are still heading for a fossil fuel future. Oil, natural gas and coal will remain the largest sources of energy worldwide, accounting for 84% of the overall increase. Most of the increase in consumption will come from developing countries, whose economies and populations are growing fastest, and which are starting from much lower per-capita usage. While OECD demand growth has flattened off in recent years, the IEA says that non-OECD demand growth has actually increased despite higher oil prices. A major factor at play here, said Mr Tanaka, is that prices in many of these countries remain subsidized. Oil subsidies in China, India and the Middle East totalled $50bn last year. In many cases, this is becoming an unsustainable economic burden.
Mr Tanaka saw investment as a continuing challenge facing the energy industry, estimating that $22 trillion in investment would be needed by 2030 in energy infrastructure, of which $10 trillion would be in the oil sector. Although spending has recently increased, he said, supply growth could remain sluggish, because of increasing costs and a proliferation of above-ground risks, such as more frequent access limitations and tighter fiscal and regulatory regimes. We believe these are currently more of a constraint than below-ground risks like depletion and decline rates. Governments and industry need to do all they can to increase the output response of new investment. This means tackling the multitude of factors that hinder capacity additions along the entire value chain. Likewise, there is a clear need to enhance cooperation between national and international oil companies.
IEA Preparing New Proposals To Tackle Climate Change
While the themes of oil prices, energy security and producer-consumer dialogue were consistent with previous meetings of the IEF, formed in 2000 to foster debate and data sharing between producers and consumers, this meeting saw a new emphasis on the urgency of tackling climate change. Mr Tanaka told the IEF that in the short-to-medium term, increased energy efficiency could yield substantial savings in energy consumption and help improve consumers energy security, while also reducing carbon dioxide emissions. He announced that the IEA was preparing longer-term proposals to reduce emissions, which would be presented to the G8 summit in Hokkaido on July 7-9, and would also outline possible post-Kyoto scenarios in the 2008 edition of the IEAs World Energy Outlook, due for publication in November.
Our work has identified actions needed to meet the IPCCs most ambitious scenario for cutting emissions by 50% by 2050, Mr Tanaka told the forum. Meeting such a target would entail a huge amount of investment. Just in carbon capture and storage, we would need to build at least 20 demonstration plants by 2020, at a cost of $1.5bn each. Such a construction program should be viewed as a litmus test of our seriousness towards combating climate change. But, even in this extremely ambitious scenario, demand for oil in 2050 would still be around 73% of current levels, at around 60mn b/d. Of course, in order to accurately assess the level of supply that is possible in such a timeframe, there is a need to improve the reliability of oil reserves data. The uncertainty that surrounds such data is an area that needs immediate action. After all, it affects crucial decisions that governments need to take to ensure their future energy and economic needs.
Biofuels Take-Up Quicker Than Expected
Enel CEO Fulvio Conti told the IEF meeting that the 3rd International Energy Business Forum, held by oil ministers and industry CEOs on 20 April, ahead of the IEF meeting, debated the rise of biofuels. While biofuels can help satisfy energy demand growth, delegates identified two problems: increased land use and food price escalation. The IEA predicts that biofuels production will amount to 1.5mn b/d by the end of 2008, and says that a conservative estimate would see supply rising to 1.75mn b/d by the end of 2012. IEA Deputy Executive Director William Ramsay told MEES that the take-up of biofuels had been quicker than expected, and that supply growth was predicted to be 500,000 b/d this year.
Mr Eagles told MEES: We have expressed concern that the projected growth in biofuel production plants seemed to be out of line with the projected growth in biofuels, particularly in grains and oil seeds. We were concerned that if it started to come on-stream it would start to have an impact on food prices, and I think that is where we are now. We have seen any even more rapid increase in biofuel production than we initially expected. But it is also wrong to concentrate solely on the increase in biofuels as being responsible for the rise in food prices. The reason that we have an increase in food prices is primarily because of poor crops and because of much stronger demand, and it is the increase in structural demand that is driving this. Biofuels may be a small part of equation, but it is wrong to focus exclusively on them and demonize them. But the IEA does think that second generation biofuels do have a place in the overall fuel mix.
Shell CEO Jeroen Van Der Veer told MEES: The essential point about biofuels is that over time they will play a role, but there are too high expectations about what role they will play in the short term. Biofuels are all about how you can develop them without unintended consequences, and I mention two. There is not only the competition for food, but also the competition for sweet water in the world; maybe more so. Secondly, no biofuel is CO2 free. Biofuels will come, probably as a component blended into other fuels, but we should not think that they will solve the world energy problem. Biofuels are simply one type of energy that we need.
Copyright MEES 2008.
