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The return of oil prices to levels more redolent of the pre-2014 era has given the world’s leading oil producing nations some economic respite. But new industry analysis warns they are inviting economic disaster by relying on hydrocarbons income in a future of uncertain energy demand.
These countries will face rising competition from US shale oil and gas production and demand-side restrictions, such as improved energy efficiency and the switch to electric or hydrogen vehicles, wrote the IEA.
IEA executive director Fatih Birol told a media briefing on 25 October that producers could use the opportunities afforded by the industry’s revival to implement change, but that past experience suggests that the improved revenues flowing into government coffers will reinforce the status quo rather than trigger dramatic change, however murky the future outlook.
“Knowing some of the habits in those countries, [higher prices] may well reduce the pressure to diversify their economies,” he told a media briefing on the report in London on 25 October.
The agency’s report also found that a “rollercoaster” in oil prices over the last decade has highlighted the structural weaknesses in many of the major exporters. Since 2014, the net income available from oil and gas has fallen by between 40% (Iraq) and 70% (Venezuela), with a wide-ranging impact on economic performance, according to the agency.
That could exacerbate demographic-related problems in some oil-producing nations. About 54% of the population in Muslim-majority countries is expected to be under the age of 30 in 2030, finds Pew Research. In Nigeria, the median age for males was just 18.3 in 2017, according to the CIA Factbook.
“In many major producers, income from oil and gas will not be large enough to provide for these growing populations, even in scenarios where oil demand continues to grow to 2040 and prices remain relatively robust,” the IEA says.
Improved oil revenues in the short-term ought to provide a platform for reforms, such as the creation of new industries, the expansion of the petrochemicals sector and the further development of renewable energy projects. But more work is also needed in some countries to reduce domestic energy subsidies and the replacement of oil in the power feedstock mix to free up more oil to generate export revenues, the IEA says.
The report also stresses the importance of improving efficiency within the upstream sector itself if production is to remain viable in an era where oil prices may not rise much above current levels and the global markets are set to become more competitive.
Don’t rely on the oil
The dangers of hoping for the best in terms of sustained oil income in the future was underlined by data published in late October by Wood Mackenzie.
The consultancy says global oil and gas development spend needs to increase by around 20% to meet future demand growth and ensure companies sustain production in the next decade. That sounds like just what the producer nations need, but the bad news is that Wood Mac warns that the current recovery in the upstream industry is much slower and shallower than in previous cycles.
Development spending by oil companies is seen as increasing 5% this year, after a 2% rise in 2017. Meanwhile, global upstream development capital expenditure is forecast to rise from a low of $460bn in 2016 to just over $500bn in the early 2020s in Wood Mac’s base case scenario. It’s well short of the peak of $750bn reached in 2014.
Wood Mackenzie calculates that development spending would need to increase to some $600bn a year to meet oil and gas demand through the 2020s. But that the prevailing tendency among companies is to cherry-pick only the most lucrative projects to develop. Meanwhile, investors demand dividend payments and share buybacks, rather than investing surplus capital in projects, potentially making the $600bn target unreachable.
The consultancy sees global capex peaking by around 2022-23, roughly the time when investment in US unconventional oil investment is also likely to peak. The decline in US shale oil output beyond that date could give conventional producers opportunities to make up the shortfall, but if the cautious mood among oil companies persists that seems unlikely.
Although the consultancy sees spending on finding resources slowly rising in the latter part of the 2020s, this is offset by declines in spending on producing fields, with maturing assets unlikely to be fully replaced elsewhere, given present low levels of exploration spending.
All of these forecasts are subject to the vagaries of the oil price and the rate at which energy demand is curtailed by factors such as improved energy efficiency in the automotive industry and elsewhere, as well as the pace of electric vehicle adoption. But if governments of some oil-dependent economies think higher oil prices mean a return to the world as it was prior to the 2014 price crash, then the forecasters believe they need to think again.Source: Petroleum Economist