IEA Sees Oil Supply Crunch After 2010
9 July 2007
|Medium-term growth in supply and demand. Click to enlarge. Source: IEA|
In its just released Medium-Term Oil Market Report, the International Energy Agency (IEA) anticipates “increasing market tightness” beyond 2010, due to stronger demand and OPEC spare capacity declining to minimal levels by 2012.
The IEA forecasts that global oil product demand will expand by 1.9 mb/d or 2.2% per year on average, reaching 95.8 mb/d by 2012. Growth will be driven by the stronger oil demand growth in non-OECD countries, particularly in Asia and the Middle East, where demand will grow more than three times faster than that of the OECD economies. Transportation fuels will account for the bulk of demand growth in both OECD and non-OECD countries.
These countries [in Asia and the Middle East] are moving towards the threshold level of income (around $3,000 per capita) where their consumers buy cars and energy-consuming white goods.
The IEA projects that biofuels will expand significantly over the forecast period, but will remain marginal in terms of total oil demand.
We anticipate that ethanol (about 78% of total biofuels on average) and biodiesel will displace altogether 1.1 mb/d of oil product demand in 2007, rising to almost 1.8 mb/d in 2012. Ethanol is expected to displace roughly 27% of incremental gasoline demand; by contrast, biodiesel will only displace about 5% of incremental gasoil demand. Despite its rapid growth, however, ethanol consumption will only account for about 6% of global gasoline demand by the end of the forecast period, while biodiesel use will represent even less (slightly more than 1%) as a proportion of global gasoil consumption. Overall, biofuels demand will be concentrated in OECD countries.
On the supply side, the IEA expects net oilfield decline rates to average 4.6% annually for non-OPEC and 3.2% per year for OPEC crude.
Aggregate levels mask much sharper declines in a 15-20% per annum range for mature producing areas and for many recent deepwater developments. All told, the forecast suggests the industry needs to generate 3.0 mb/d of new supply each year just to offset decline.
Nevertheless, IEA projects total non-OPEC supply (including biofuels and OPEC NGL) to reach 52.6 mb/d in 2012 from 50.0 mb/d in 2007. OPEC crude capacity is seen rising to 38.4 mb/d in 2012 from a 2007 average of 34.4 mb/d.
Some 70% of the increase comes from Saudi Arabia (+1.8 mb/d), the UAE and Angola (+0.5 mb/d each). Lesser increments come from Kuwait, Nigeria, Algeria and Libya. Forecast capacity is below OPEC’s own estimates of near 40 mb/d for 2010, largely due to this report’s caution on Iraqi, Venezuelan and Niger Delta capacity, where security and investment risks predominate.
Peak oil? The IEA report notes that “The concept of peak oil production and its timing are emotive subjects which raise intense debate.”
Much rests on the definition of which segment of global oil production is deemed to be at or approaching peak. Certainly our forecast suggests that the non-OPEC, conventional crude component of global production appears, for now, to have reached an effective plateau, rather than a peak.
Having attained 40 mb/d back in 2003, conventional crude supply has remained unchanged since and could do so through 2012. While significant increases are expected from the FSU, Brazil and sub-Saharan Africa, these are only sufficient to offset declines in crude supply elsewhere. Put another way, all of the growth in non-OPEC supply over 2007-2012 comes from gas liquids, extra heavy oil, biofuels (and, by 2012, 145 kb/d of coal-to-liquids from China). As overall non-OPEC liquids capacity increases, this plateau reduces the share of non-OPEC conventional crude supply from 77% in 2000, to 74% in 2006 and 67% in 2012.
While there might be a temptation to extrapolate this trend, citing a peak in conventional oil output, a degree of caution is in order. Firstly, the concept of ‘conventional’ oil changes with time, technology and economics. In the early 1970s, much offshore production was deemed unconventional, but this portion of global supply has since grown to account for 30% of the total. Evolving economies of scale and infrastructure development could do the same for GTL, oil sands and ultra-deepwater reserves in the future, shifting today’s unconventional resource into tomorrow’s conventional supply category.
Moreover, rapidly-growing condensate and NGL supply is scarcely ‘non-conventional’ in a technical sense now. We also note that for certain regions, notably the FSU and West Africa, the turn of the current decade is likely to mark a hiatus in crude supply growth. Strong growth is expected to resume here towards the middle of the next decade. Whether this will be sufficient to offset the declines expected for mature OECD crude supply, preventing overall decline for non-OPEC, is less easy to predict.
Finally, we note that focussing on non-OPEC crude alone is a rather selective way of considering the sustainability of global oil production. Peak or plateau production is frequently taken as shorthand for impending resource exhaustion. While hydrocarbon resources are finite, nonetheless issues of access to reserves, prevailing investment regime and availability of upstream infrastructure and capital seem greater barriers to medium-term growth than limits to the resource base itself.
Refineries. The IEA forecasts global crude distillation capacity to rise by 10.6 mb/d between 2007-2012. New investments add 9.1 mb/d of crude distillation capacity and existing refineries in North America, Europe and the Pacific are assumed to add a further 1.5 mb/d through capacity creep. The Middle East and Asia will account for 6.7 mb/d of new crude distillation.
This exceeds expected regional demand growth as India and Saudi Arabia develop significant export-orientated refining capacity. Consequently, the Middle East will arguably supply the marginal barrel of product to importing regions as well as the marginal barrel of crude.
Along those lines, Iranian President Mahmoud Ahmadinejad said his country will transition from being an importer of gasoline to an exporter of 150 million liters (943,000 barrels) of gasoline per day in five years. Iran, currently undergoing gasoline rationing, is trying to shift its transportation fleet to compressed natural gas fuel. (Earlier post.)
In the US, energy banker Matthew Simmons said in an interview with EnergyTechStocks.com that there is a “real risk” that gas stations in the United States will run dry this summer.
Simmons said that US refineries simply aren’t capable of running at a sufficiently high capacity to produce enough gasoline to meet demand.
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