Strong prices set to last for next four-five years: IEA

Gold Coast, Australia (Platts)--8May2006

The world is facing strong crude and product prices until around 2010,
International Energy Agency Executive Director Claude Mandil said Monday.
"Probably, we will have to live for the next four or five years with very
tight capacities, tight markets and strong prices," Mandil told the Australian
Petroleum Production and Exploration Association's annual conference at the
Gold Coast.
In the longer term, the industry must increase investment to boost its
capacity, but in the shorter term the solution is to be more efficient in
energy consumption and increase the share of the market held by substitutes
such as biofuels.
"Today the world market is well supplied," Mandil said. "Nobody is
lacking oil if he wants, but the fact that [OPEC's] spare capacity is low, the
fact that there is a lot of money on the commodity markets and the fact that
there were a lot of geopolitical concerns in so many countries with risks of
disruptions, all that mixes to make the market very nervous [about] possible
disruptions which could not be offset by a surge in production."
The market forgets, however, that the IEA holds strategic reserves in
case of supply disruptions, Mandil said. The market forgets the reserve works,
as it did when 60 million barrels were released in response to the disruptions
caused by last year's hurricanes in the Gulf of Mexico, he added.
The IEA has 4 billion barrels in strategic reserves, of which 1.5 billion
barrels is held by governments and 2.5 billion barrels by industry, Mandil
told journalists on the sidelines of the conference. Even in the event of a
complete shutdown in a major producing country such as Nigeria or Iran, the
reserve could cover the shortfall for a period of four or five years, he
added. "We can cope with many, many major disruptions."
OPEC's spare capacity until the end of 2002 was more than 3 million b/d
and generally around 4 million b/d. Since then the figure has been under 3
million b/d and generally less than 2 million b/d -- much lower than the
historical level.
The IEA forecasts strong worldwide demand growth for crude of around
1.5-2.0 million b/d each year to 2010, from the current level of 84-85 million
b/d. Demand is set to outstrip projected increases in capacity.
"More or less" OPEC can fill the supply gap until 2010, but it is not
expected to be able to do any more, Mandil said. As a result, spare capacity
would remain very limited until then.
Under a business as usual scenario, the IEA expects global crude demand
to total about 99 million b/d by 2015. "Is there enough oil resources in the
earth for all that? Our answer is yes, provided the price is high enough,"
Mandil said.
At a price of $45/barrel, the world's ultimate resources are up to 4
trillion barrels, including some heavy oil and oil shales which become
available, he added.
"We don't think at the IEA that there will be a lack of resources ...
[but] it is true that there may be a lack of investment and there will be
probably an increasing dependency of the oil market worldwide on a fewer
number of producers in the Middle East, in the former Soviet Union and perhaps
in Canada."
Crude oil prices of around $70/barrel are not sustainable in the long
term, as they are much higher than the estimated $25-30/barrel marginal cost
of an additional barrel, Mandil told journalists.
In the gas market, the IEA estimates that meeting natural gas demand to
2015 will entail an investment of $1.2 trillion, increasingly devoted to LNG.
The IEA expects Australia to move from sixth to third among the ranks of world
LNG exporting countries between now and 2010.

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