“The global financial crisis has turned the economic landscape upside down, with huge implications for the oil and gas sector”, said Nobuo Tanaka, Executive Director of the International Energy Agency (IEA) today in Paris at the launch of two new IEA publications: the Medium-Term Oil Market Report 2009 andthe Natural Gas Market Report 2009. Since the release of last years’ editions, the context has changed dramatically. Two years of global oil demand contraction in 2008-2009 reflect the worst economic recession in over fifty years. “Oil prices are around half the level seen last year in July, when they peaked at USD 147, even though they have strengthened again recently, partly due to a perception that economic recovery may be just around the corner”, Mr. Tanaka said, warning that if oil prices rose too rapidly it could damage any such recovery. “In the natural gas sector, we have moved from a tight supply and demand balance with extremely high gas prices to an easing one with plummeting prices. Both markets face enormous uncertainty surrounding the timing, pace and extent of any economic rebound, which affects all prognoses for oil and gas market fundamentals over the next five years.”
For the oil sector, the Medium-Term Oil Market Report 2009 deals with this uncertainty through divergent scenarios showing the risk of a rapidly tightening oil market from 2012 onwards on the one hand, counterbalanced by another scenario which shows OPEC spare capacity remaining around a more comfortable 6 million barrels a day (mb/d) for the entire outlook period. “Whether we end up facing a supply crunch again by mid-decade, or with a more comfortable buffer of supply flexibility, depends largely on the pace of economic recovery and government action on efficiency,” said Mr. Tanaka.
Oil demand is seen to grow at between +0.4% and +1.4% annually after 2009, depending on the pace of global economic recovery and mid term GDP trend growth levels. The difference is hugely significant for global oil balances, with the higher growth scenario resulting in 2014 demand of 89 mb/d - fully 4 mb/d above the lower growth case. For either scenario, however, demand contraction so far in 2008/2009, plus early signs of structural shifts result in projections at least 3 mb/d lower for the outlook period than those generated last December. It may be too early to cite a definitive structural downshift in oil use, but events such as GM and Chrysler filing for bankruptcy protection in the US, and further rationalisation affecting transport and power generation fuel use provide some hints that it will occur. However some key trends persist, with Asia and the Middle East generating the bulk of demand growth and non-OECD demand potentially eclipsing that within the OECD by 2014.
Oil supply capacity will grow by 4.0 mb/d during 2008-2014 – around 1.5 mb/d less than in the previous outlook a year ago. However, the bulk of this growth comes from OPEC crude capacity, OPEC gas liquids and global biofuels (output of the latter seen to increase from 1.5 mb/d in 2008 to 2.2 mb/d in 2014, with global biofuel capacity potentially attaining over 3 mb/d). Spending curbs and endemic new project slippage see total non-OPEC supply levelling off at 50-51 mb/d during the outlook period; above-ground constraints, not resource limitations, underpin this sluggish performance. Supply could be lower still were upstream spending curbs to extend beyond 2009. “Yet producer and consumer governments can also influence the path that oil markets take”, Mr. Tanaka said. “A level investment playing field would help ensure the development of sufficient supplies. Consumer governments can also position fuel diversity, energy efficiency and a lower carbon future at the forefront of attempts to kick-start economic recovery. A return to razor-thin crude oil spare capacity and resultant price volatility are in the interests of neither producers nor consumers.”
In the natural gas sector, the year 2008 was also neatly divided into two halves: a tight supply and demand balance with rising energy prices was followed by demand weakening and spot prices plummeting. 2009 bears the legacy of this last period as the world goes through the unprecedented combination of a global recession and financial crisis. After a 1% increase in 2008, OECD gas demand fell by 4% during the first quarter of 2009 and is expected to further decline through the year. The Natural Gas Market Review 2009 projects that for the first time in 50 years, the world will witness a drop in global gas demand.
On the supply side, 60 billion cubic metres (bcm) of LNG capacity are planned to come online this year. Yet with spot prices in the United States bottoming out at below USD 4 per Mbtu , the question for 2009 is how rapidly US unconventional gas production – which is generally higher cost and therefore less competitive – will decline.
The combination of weak demand and lower prices could undermine future investments. Despite the expected relief on engineering, procurement and construction costs, project sponsors face both financing problems and increasing uncertainty about when and at what pace the economy and therefore gas demand will recover. Besides the recession, the increasing awareness of climate change issues puts a question mark on the future role of gas. Increased energy efficiency and renewables could put downward pressure on gas demand; but increased wind capacity calls for gas-fired plants as reserve capacity.
If investments in production and supply infrastructure are delayed, there is a risk in the medium term of tightening markets when demand recovers. While liquefaction capacity will see an unprecedented growth of 50% between 2009 and 2013, there will be a dearth of new capacity in the period after 2013 unless new projects are approved in 2009-10. The world’s largest producer, Russia, faces considerable challenges, both technical and financial, already leading to project delays.
The severe gas disruption in Europe at the beginning of 2009, following a dispute between Russia and Ukraine, highlighted once again the importance of diversified suppliers and supply routes. Storage was key to replacing the missing 5 bcm, along with increased supplies from pipeline and LNG suppliers, and alternative Russian supply routes. “Critical improvements need to be made in developing cross-border interconnections and market functioning,” said Mr. Tanaka. “Despite a new contract between Gazprom and Naftogaz, there are many concerns about the security of Russian gas supplies: the difficult economic situation in Ukraine makes every monthly payment a challenge, and tensions remain high. The IEA is therefore seriously concerned that the flow of Russian gas through Ukraine may be subject to disruption at almost any time.”