By OGJ editors
HOUSTON, Nov. 20 -- Oil companies will have to invest a whopping $5.3 trillion over the next 30 years to supply the world's increasing demand for oil and natural gas, the Paris-based International Energy Agency said Thursday.
That would include $2.2 trillion for investment in new oil production, as worldwide demand for oil surges to 120 million b/d by 2030 from 77 million b/d in 2002, said IEA officials in their 2003 World Energy Investment Outlook, which was released Nov. 4.
An additional $3.1 trillion will be needed to increase global production of natural gas to 5.3 trillion cu m in 2030 from 2.5 trillion cu m in 2000, they said.
Most of the total projected investment will go to replace current and futures oil and gas wells whose production will be depleted over the next 30 years, IEA officials said.
IEA launched the report early this month and has been unveiling further details in presentations at various venues since then (OGJ Online, Nov. 4, 2003).
Oil investments
Some $205 billion will be needed to finance development of nonconventional oil projects that are expected to supply more than 8% of world oil by 2030. Most of that investment will be in Canada, which has massive deposits of oil sands, and in Venezuela, a pioneer in production of extra-heavy crude in its Orinoco region.
IEA said $412 billion will have to be invested in downstream refining operations, with most of the new refinery capacity to be built in the Middle East and Asia. A further $257 billion will be needed for construction of pipelines and oil tankers, it said.
IEA expects a structural shift towards larger vessels in the oil tanker fleet because of "the lengthening of supply chains, which will result from the Middle East being called upon to supply an increasing share of the world's crude oil and refined products."
Member countries of the Organization for Economic Cooperation and Development are expected to furnish 31% of the total oil industry investment over the 30 years, said IEA. Other contributors will include the Middle East 18%, "transitional economies" 16%, and Africa 13%, it said.
Not surprisingly, IEA expects the biggest increase in oil production over the next 3 decades to be in the Middle East, where exploration and development costs are 75% lower per barrel of oil recovered than in OECD countries.
Gas spending
Exploration and development operations are expected to account for 51%, or $1.7 trillion, of the total investment in natural gas within the 30-year period, said IEA. It projects that $1.4 trillion will be needed to fund high-pressure transmission pipelines, liquefied natural gas facilities, and local gas distribution networks.
The Organization of Petroleum Exporting Countries' news agency Thursday quoted IEA officials as saying, "A more than tripling of physical interregional gas trade by 2030 will call for rapid growth in cross-border supply infrastructure."
Nearly 30% of the total investment in natural gas will be in North America, which is the largest, most mature gas market, they said. OECD countries as a whole will account for nearly 50% of projected gas investments. The investment share among transitional economies is projected at 16%, while "China, as well as East Asia," will account for 9%, IEA officials said.
"Investments in each of these regions are higher than those in the Middle East because unit exploration and development costs are higher and pipelines are longer," said the IEA report.
Majors' investments still low
Despite the high level of spending needed, IEA officials said, "Investment by international oil companies remains low, relative to cash flow and capital flows to other [industry] sectors where margins between investment return and the cost of capital are significantly lower."
They said, "This is probably because the oil companies and the financial markets expect oil prices to decline, or because the risk-adjusted return on investment is not high enough at current prices." The IEA report noted that foreign direct investment in some Middle East countries has practically dried up, and that some publicly traded oil companies have been using cash flow to reduce debt and to buy back their own stock to increase shareholders' equity.
"These trends suggest that there is a lack of new investment opportunities that can generate returns high enough to satisfy shareholders," it said.
However, the report claims that because of high commodity prices and low interest rates, returns on upstream oil investments "comfortably exceed" the current cost of capital. It projected the return on upstream investment averaged 15% at midyear 2003, while the cost of capital among international oil companies was at 8-10%.
A shift in investment towards higher-cost deepwater projects or "emerging areas, such as West Africa, Russia, and the Caspian region," could push up the future cost of capital because of the attendant economic, political, and legal risks, the report acknowledged. Increased volatility in commodity prices also could raise the cost of capital and the risk-adjusted returns required, it said.
But major oil companies are unlikely to face any shortage of capital for upstream investment, the report surmised. "Their healthy balance sheets and strong creditworthiness, based on higher profitability and abundant cash flow, will ensure that they will be able to attract capital for projects [that] show a high risk-adjusted return," it said.
On the other hand, smaller independents operating "in the most-mature producing areas where investment returns could deteriorate quickly" are "more likely to face difficulties in raising funds for future investment," IEA reported.
