IEA: $16 trillion in energy investment needed by 2030

Nov. 10, 2003
The world will have to invest $16 trillion—1% of global gross domestic product—over the next 3 decades just to maintain its present level of energy supplies, said Claude Mandil, executive director of the Paris-based International Energy Agency.

The world will have to invest $16 trillion—1% of global gross domestic product—over the next 3 decades just to maintain its present level of energy supplies, said Claude Mandil, executive director of the Paris-based International Energy Agency.

If current trends continue, that's what it will take to expand present supply capacity and replace existing and future supplies that will be exhausted or become obsolete by 2030, according to a new IEA study, "World Energy Investment Outlook," Mandil said Oct. 28 at the Oil and Money Conference in London.

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According to that study, the electric power sector will dominate future investment requirements, with power generation, transmission, and distribution accounting for $10 trillion, or 60% of projected future investments. Its share increases to more than 70% if investment in fuels for power generation is included, the study said.

The oil and gas sectors will require $3 trillion each, or 19% of global investment, the study projected.

Competing for funds

The world has sufficient energy resources to meet projected demand, said Mandil. The uncertainty is in obtaining the necessary financing to convert resources into supplies, he said. This will depend on the energy industry's ability to compete with other economic sectors for the larger amounts of capital that it will need over the next 30 years.

The study insists that governments will play a vital role in creating preconditions for energy investment. This means adopting policies and setting conditions for private investment, which will increasingly take over from direct state-financed investment or ownership, it said.

It will require government officials to pay greater attention to policy, legal, and regulatory frameworks, identifying the change in risks and ways to lower barriers to investment.

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Investments will be forthcoming only where the economic climate is sufficiently attractive to generate competitive financial returns, said the study. It sees the biggest investment challenge in developing countries where most of the increase in energy demand and almost all the increase in production are expected to occur. Market reforms and new environmental policies, together with technological developments, are "adding to the uncertainties that inevitably face the energy investor," the study said.

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Mandil emphasized that the level and pattern of energy investment would be dramatically altered in those areas where the Kyoto Protocol on Climate Change is to be strictly applied over the next 30 years. This would also be the case if new technologies being developed today—including carbon sequestration, hydrogen fuel cells, and advanced nuclear generation systems—were commercially deployed with the help of fiscal and regulatory incentives, he said.

Regional analysis

The impact of energy investment requirements on regional economies varies greatly. Among member nations of the Organization for Economic Cooperation and Development, it is expected to amount to 0.5% of GDP, or $6.6 trillion, of which more than half will go to North America.

Developing countries will account for over half of total energy investments, or $7.9 trillion, with "transition economies" subject to $1.7 trillion, or 10% of the total.

Energy investments will constitute a larger share of GDP among countries outside OECD. In Russia, for instance, the annual average investment requirement will exceed 5% of GDP, while in Africa it will be 4%, according to the study. More than 40% of total non-OECD investments in oil, natural gas, and coal will go into projects to export those fuels to OECD countries.

Over the next 3 decades, the oil sector will require investments of more than $3 trillion, or $103 billion/year, with the dominant share, about 72%, funding exploration and development of conventional oil, IEA projected. This is expected to grow oil supplies to 120 million b/d by 2030 from 77 million b/d in 2002.

Investments in nonconventional oil, including gas-to-liquids, are expected to amount to $205 billion, or 7% of total oil investment.

The global supply chain for natural gas will require investments totaling $3.1 trillion, or $105 billion/year, with more than half going into exploration and development, the report said. Most of that investment will expand production capacity to meet a near doubling of world gas demand with OECD members accounting for almost half of that investment.

IEA figures global investment in transmission and distribution networks, underground storage, and LNG facilities will amount to $1.4 trillion. The study points out that energy market reforms, more-complex supply chains, and the growth of an international gas market will entail profound shifts in gas-investment risks, required returns, and finance costs, leading to possibly persistent supply bottlenecks.

Projected oil development programs in the US and Canada will require total investments of $545 billion, or $18 billion/year, IEA said. Conventional exploration and development is expected to account for 73% of this spending. Both countries also will absorb well over a quarter of all natural gas investments during this period, the study said.

Middle East needs

To sustain growth in the Middle East oil sector, said IEA officials, some $523 billion in capital spending will be required to 2030. Investment in that area will have to rise substantially to $23 billion/year in the last decade of the projected period from an average $12 billion/year in the current decade, they said. However, exploration and development costs in the Middle East are projected to remain the lowest in the world. The main uncertainties for investments in that region are the growth of global oil demand, the resulting call on supplies from members of the Organization of Petroleum Exporting Countries, and the future production policies among those countries, said the IEA report.

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Nowhere are short-term production prospects more uncertain than in Iraq, it said. In the longer term, there is considerable potential there for expanding capacity. But attracting foreign investment must be balanced against the likely nationalist sentiment of the Iraqi population, said IEA.

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Expanding the natural gas infrastructure in the Middle East for domestic and export markets is projected to cost an estimated $263 billion to 2030, or $8.8 billion/year—twice the estimated amount spent in 2000, with more than half, or $4.7 billion/year, for the upstream sector, said IEA. The region can deal with the projected production increase, but IEA questions whether the required investment can be mobilized. While access to capital has not been a major problem so far, international banks lately are showing more interest in other less risky regions. Some banks have pulled out of the region completely.

Russian investment

The Russian oil industry is expected to require total investments of $328 billion, or $11 billion/year. Over 40% of that money will go into projects to supply OECD markets, IEA said. Exploration and production will account for 90% of the total spending. Investment needs for Russia's gas sector are projected at more than $330 billion, or $11 billion/year. This compares with investments of less than $9 billion in 2000. More than half of future natural gas investments in Russia will be for exploration and development, with transmission pipelines for export markets and local distribution accounting for most of the rest. IEA sees a third of Russia's cumulative gas investments going into exports to OECD countries.

IEA's oil supply projections for the Caspian region are $112 billion over the next 3 decades. Kazakhstan will need the largest amount, primarily to complete development of Tengiz and Kashagan fields, which will account for the lion's share of the region's increased production over the next decade.

The Caspian region also requires investments of $107 billion in its development of natural gas, as well as its transportation infrastructure. IEA projects average capital needs to grow to $4 billion/ year in 2021-30 from $3 billion/year in this decade.

Investments in both oil and gas in that area will depend on the commercial terms offered to private investors and on the legal and political stability of that region, IEA noted. Oil investments also will be impacted by the region's relatively high development costs, it said. An obstacle to gas investments is the inability of the Caspian countries to negotiate transit agreements with Russia's OAO Gazprom to more lucrative European markets.

China outlook

Despite the potential to increase oil production in the South China Sea, IEA said, investment in China's upstream oil sector is expected to decline over the long term because of diminishing commercial opportunities. China's total domestic energy investment needs are projected by IEA at $119 billion through 2030, with upstream operations accounting for 60% of that total. A growing share of investment will be required by China's refining industry, it said, as China's oil production is expected to plateau at 3.4 million b/d through the middle of this decade before declining.

The Chinese government, through China National Petroleum Corp., is seeking to secure direct control over foreign oil resources in Azerbaijan, Kazakhstan, Sudan, Iran, Peru, and Venezuela, but very little of that oil is actually shipped to China.

China's natural gas industry is in early development, and IEA projects cumulative investment of just under $100 billion in supply infrastructure in 2001-30 to meet projected demand growth, with annual capital investments averaging $3.3 billion. However, China's upstream gas investment needs are relatively modest compared to overall investments that are projected to average $75 billion/year. The $6 billion, 3,900 km West-East natural gas pipeline from the Tarim basin to Shanghai is the centerpiece of the government's plan to establish a national gas market.

IEA does not expect a lack of capital to finance natural gas projects in China. It said domestic banks have considerable lending capacity and are likely to meet much of the gas sector's funding needs.

Indeed, despite the uncertainties surrounding policy reforms and how fast demand will grow, large amounts of domestic and foreign capital are already being invested in gas-supply projects in China because of the enormous long-term potential of gas demand growth.