OPEC puts cost of demand uncertainty to 2020 at $240 billion

OPEC puts cost of demand uncertainty to 2020 at $240 billion

Dubai (Platts)--11Apr2006

OPEC's oil producers are committed to spending $100 billion to expand
production capacity to 38 million b/d by 2010 but are reluctant to commit
funds beyond that date because demand uncertainty could mean a difference of
$240 billion in required investments between a low and high demand scenario,
OPEC will tell a producer-consumer gathering in Qatar later this month.
"In line with OPEC's long standing commitment to support oil market
stability, OPEC crude capacity expansion plans already in place are expected
to result in almost 38 million b/d of crude capacity by the end of 2010, an
increase of nearly five million b/d from end-2005," OPEC said in a background
paper it will present at the International Energy Forum of oil producers and
consumers due to be held in the Qatari capital Doha April 22-24.
"Similarly, production capacity of NGLs and other liquids will be
expanded by almost 2-million b/d to reach 6-million b/d by 2010. This capacity
growth is underpinned by over 100 E&P projects totaling $100 billion; these
projects are in addition to all energy infrastructure investments, such as
pipelines, export terminals and downstream expansion."
The theme of the 10th International Energy Forum is: Fueling the Future:
Energy Security, A Shared Responsibility.
The OPEC report, which will be presented alongside a paper to be
submitted by consumer watchdog the International Energy Agency, says energy
security applies not only to supply but also to demand. "Downside risks to
demand are more substantial than upside potential...it says.
The 11-member group has been stressing the need for producers to have
access to demand data since Ali Naimi, oil minister of OPEC kingpin Saudi
Arabia, called on consumers last year to provide a "road map" of future demand
to help producers assess the need for further capacity investments. The
kingdom is expanding production capacity from 11.3 million b/d to 12 million
b/d by 2009. Naimi says capacity could be expanded further to 15 million b/d
if needed.
OPEC's report shows a wide gap between required investments using three
demand scenarios.
In its reference case scenario, the report sees average oil demand growth
of 1.5-million b/d annually to 113 million b/d by 2025 with non-OPEC supply
growing by six million b/d over the period 2005-2010 against demand growth of
7.5 million b/d. After 2015, non-OPEC output will plateau and OPEC producers
will supply most of the incremental barrels. By 2025, OPEC oil production
levels, plus NGLs, are forecast to reach 54 million b/d though non-OPEC
producers will still account for the larger part of world oil production.
"Up to 2025 total upstream investment requirements in the reference case
over the next twenty years amount to $1.9 trillion (in 2005 dollars)," it
said. The reference scenario assumes robust global economic growth continuing
at current levels of an average 3.5 percent annually for the next two decades
with China acting increasingly as the engine of growth. The figure excludes an
estimated $160 billion for downstream investments by 2015 with another $150
billion to maintain and replace lost capacity.
OECD states will account for 37% of total upstream investments. Three
groups, OPEC and non-OPEC developing countries, and Russia and the Caspian
states, will need to invest $100 billion each to 2010 and close to another
$100 billion each in the following five years.
"It is also important to recognize the large degree of uncertainty over
future demand and supply and, hence, the required additional OPEC oil," the
report says. "Given these uncertainties, a key challenge will be to anticipate
the appropriate level of demand to make the necessary investments needed to
maintain and expand upstream capacity, as well as the corresponding downstream
infrastructure."
The lower growth demand scenario shows world oil demand more than 10
million b/d lower in 2025 than in the reference scenario, translating into a
fall in OPEC supply of 8-million b/d.
In the higher demand scenario, average annual growth will be close to 1.8
million b/d annually and the amount of oil and NGLs that OPEC will need to
supply is around 4-million b/d higher than in the reference case.
"...by 2020 an estimated uncertainty of $240 billion for required OPEC
investment can be envisaged, with the Lower Growth scenario suggesting a
cumulative requirement of just under $230 billion, instead of $470 billion in
the Higher Growth case," the report says, adding that the long lead times for
these projects and the need to build new infrastructure made it difficult to
change course in the shorter term though a 2020 time frame was enough to allow
a change in plans.
"Even over the period to 2020, there is an estimated range of uncertainty
of $50 billion for required investment, increasing to $140 billion by 2015.
This clearly demonstrates that there is a real risk of wasting much-needed
financial resources. The issue of security of demand is therefore a very real
one and constitutes a legitimate concern for OPEC member countries."
--Kate Dourian, kate_dourian@platts.com

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