Home' Trinidad and Tobago Guardian : December 31st 2015 Contents DECEMBER 31 • 2015 www.guardian.co.tt BUSINESS GUARDIAN
ENERGY: YEAR IN REVIEW | BG9
OPEC says that US$10 tril-
lion worth of investment
will need to flow into oil
and gas through 2040 in
order to meet the world s
The OPEC published its World Oil Out-
look 2015 (WOO) in late December, which
struck a much more pessimistic note on the
state of oil markets than in the past. On the
one hand, OPEC does not see oil prices
returning to triple-digit territory within the
next 25 years, a strikingly bearish conclusion.
The group expects oil prices to rise by an
average of about US$5 per year over the
course of this decade, only reaching US$80
per barrel in 2020. From there, it sees oil
prices rising slowly, hitting US$95 per barrel
Long-term projections are notoriously
inaccurate, and oil prices are impossible to
predict only a few years out, let alone a few
decades from now. Priced modeling involves
an array of variables, and slight alterations
in certain assumptions---such as global GDP
or the pace of population growth---can lead
to dramatically different conclusions. So the
estimates should be taken only as a reference
case rather than a serious attempt at pre-
dicting crude prices in 25 years.
Nevertheless, the conclusion suggests that
OPEC believes there will be adequate supply
for quite a long time, enough to prevent a
return the price spikes seen in recent years.
Part of that has to do with what OPEC
sees as a gradual shift towards efficiency
and alternatives to oil.
The report issued estimates for demand
growth five years at a time, with demand
decelerating gradually. For example, the
world will consume an extra 6.1 million bar-
rels of oil per day between now and 2020.
But demand growth slows thereafter: 3.5
mb/d between 2020 and 2025, 3.3 mb/d for
2025 to 2030; 3 mb/d for 2030 to 2035; and
finally, 2.5 mb/d for 2035 to 2040.
The reasons for this are multiple: slowing
economic growth, declining population rates,
and crucially, efficiency and climate change
efforts to slow consumption. In fact, since
last year s 2014 WOO, OPEC lowered its
2040 oil demand projection by 1.3 mb/d
because it sees much more serious climate
mitigation policies coming down the pike
than it did last year.
Of course, some might argue that even
that estimate---that the world will be con-
suming 110 mb/d in 2040---could be overly
optimistic. Coming from a collection of oil-
exporting countries, that should be expected.
Energy transitions are hard to predict ahead
of time, but when they come, they tend to
produce rapid changes.
Any shot at achieving the world s stated
climate change targets will require a much
more ambitious effort. While governments
have dithered for years, efforts appear to be
getting more serious. More to the point, the
cost of electric vehicles will only decline in
real dollar terms over time, and adoption
should continue to rise in a non-linear fash-
ion. That presents a significant threat to
long-term oil sales.
At the same time, OPEC also issued a
word of caution in its report. While oil mar-
kets experience oversupply in the short- to
medium-term, massive investments in
exploration and production are still needed
to meet demand over the long-term.
OPEC believes US$10 trillion will be nec-
essary over the next 25 years to ensure ade-
quate oil supplies. "If the right signals are
not forthcoming, there is the possibility that
the market could find that there is not
enough new capacity and infrastructure in
place to meet future rising demand levels,
and this would obviously have a knock-on
impact for prices," OPEC concluded. About
US$250 billion each year will have to come
from non-OPEC countries.
In a similar but more disconcerting con-
clusion, the Oslo-based Rystad Energy
recently concluded that the current state of
oversupply could be "turned upside down
over the next few years." That is because
the drastic spending cuts today will result
in a shortage within a few years.
To put things in perspective, Rystad says
that the oil industry "needs to replace 34
billion barrels of crude every year; equal to
current consumption." But as a result of the
collapse in prices, the industry has slashed
spending across the board and "investment
decisions for only 8 billion barrels were
made in 2015.
This amount is less than 25 per cent of
what the market requires long-term," Rystad
Energy concluded. The industry cut
upstream investment by US$250 billion in
2015, and another US$70 billion could be
cut in 2016. The latter figure did not take
into account the recent decision by OPEC
to abandon its production target, which sent
oil prices falling further.
So what are we to make of this?
There could be plenty of oil supplies in
the future, but as it stands, the industry is
massively underinvesting. This illustrates a
troubling tension within the oil industry.
Oil prices will be set by the marginal cost
of production, and recent efficiency gains
notwithstanding, marginal costs have gen-
erally increased over time.
Low-cost production depletes, and the
industry becomes more reliant on deep-
water, shale, or Arctic oil, all of which require
higher levels of spending. In many cases,
these sorts of projects are not profitable at
today s prices. The price spikes seen in 2011-
2014 sowed the seeds of the current bust,
but the pullback today could create the con-
ditions of another spike in the future. OPEC
could be a bit too sanguine with its call for
US$95 oil in 2040.
At the same time, future price spikes set
up the possibility of much greater demand
destruction, especially if alternatives become
more viable. This is the difficult balancing
act that the industry must pull off over the
next few decades.
This coming year is shaping up to be a difficult
one for economies that are disproportionately depend-
ent on oil.
Especially for Nigeria, where there s a possibility
of renewed conflict in the country s oil-producing
Niger Delta region, according to SBM Intelligence s
recently published "Nigeria in 2016" report.
The global oil picture is stacked against countries
like Nigeria, in which oil constitutes some 10 per
cent of the country s GDP.
Oil plunged to under US$38 a barrel by December,
with Goldman Sachs raising the possibility that the
price could go as low as US$20 in the coming year.
Nigeria, which is Africa s largest economy and
most populous country with over 180 million citizens,
faces an additional challenge. As the SBM Intelligence
report recounts, "2015 will also mark the end of the
Presidential Amnesty Programme (PAP) which ended
a petro-insurgency in Nigeria s oil-rich Niger Delta
Nigeria was the world s 12th-largest oil producer
in 2014, extracting some 2.4 million barrels a day ---
thanks in large part to oil production in the Niger
The Niger Delta insurgency, which began in 2004,
was a reaction to the government and the oil industry s
perceived exploitation of communities living in oil-
producing regions, which also suffered from the envi-
ronmental effects of oil exploitation.
The insurgency targeted the infrastructure and
occasionally the employees of multinational oil com-
panies, and caused billions in losses for the industry
and the government.
Above all, the insurgency complicated the already
fraught relationship between the oil sector and the
people of the Niger Delta, who saw relatively little
benefit from an industry that accounts for 75% of
Nigeria s government revenue.
At one point in the mid-90s, during an early round
of tensions in the region, parts of the Delta were so
hostile to the oil industry that Shell pulled out from
the region entirely.
As the SBM Intelligence report notes, the end of
the amnesty at least raises the possibility of resumed
instability in the Delta.
"Discontinuing access to state patronage may
prompt militant leaders to resume their insurgency
in the Niger Delta, with the potential to cut crude
oil outputs sharply and further reduce government
revenues," the report states, adding that "Precedent
suggests that militants could resume attacks on oil
installations (both on-shore and offshore) and resume
targeting foreign expatriates." SBM Intelligence includes
Tompolo, the nickname of a former top Delta guerrilla
commander, in its roundup of "key players" to watch
in Nigeria in the coming year.
Disruptions to oil production in the Delta might
not be disastrous for Nigeria, given the dip in global
prices and the resulting disincentive to dump addi-
tional oil into the market.
But Nigeria is almost uniquely dependent on oil
among countries with such a sizeable population.
And the country faces security challenges with both
regional and global dimensions to them.
Although Boko Haram lost territory in 2015 in the
face of a renewed government offensive against the
group, Africa s deadliest Jihadist organisation also
pledged allegiance to ISIS in March of 2015.
Boko Haram waged a number of destructive attacks
in late 2015 and moved into parts of neighbouring
Niger, suggesting the group s setbacks hadn t seriously
harmed its ability to sew violence and chaos. Emerging
tensions between the government and an Iranian-
backed Shi ite group also threaten stability in parts
of the country s north.
The Nigerian government is facing urgent security
pressures at a time when the country s main source
of revenue is becoming less and less lucrative along
with, in SBM Intelligence s view, the renewed pos-
sibility of insurgent activities in the country s main
oil-producing region. Oil price.com
OPEC: US$10 trillion needed
to avoid massive oil price spike
World oil outlook sees $95/bbl oil in 2040
In this photo taken Saturday, May 18, 2013, men walk past an abandoned illegal refinery at the creeks of Bayelsa, Nigeria.
Nigeria to face huge
problems in 2016
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