Cheap oil risks future supply

VIENNA // Expansion of global oil capacity could grind to a halt if crude prices remain at current levels, putting the world at risk of future shortages, the secretary general of OPEC warned yesterday. Oil prices have fallen by 70 per cent since hitting a record of US$147 last July as demand has slumped with the collapse in global economic growth. "We are worried about new investment. I don't think at a price of $45 we can invest in any additional capacity," Abdulla el Badri told delegates at OPEC's International Seminar in Vienna. "We need a higher price." On Sunday, the 12-nation oil exporters' group agreed to forego a further cut to its production target to give the fragile world economy a better chance to recover. But yesterday, the OPEC chief reiterated the group's concerns about the impact a prolonged oil price downturn could have on energy supplies. "We all want to see the global economy back on its feet as soon as possible, but we need to ensure it is sustainable," he said. "I know 2009 may be the most difficult year we have seen, but we would hope for a better price." Non-OPEC oil production is already in decline, leaving the task of bringing new crude supplies to market when demand recovers disproportionately to the group that already produces 40 per cent of the world's oil. But the price drop has even put investment in OPEC's large oil resources at risk. "There is a consensus that $40 is not enough for developing the fields," said Gholamhossein Nozari, the Iranian oil minister. "The oil market could experience another shock." Iran, the second-largest OPEC oil exporter, might not be able to increase its production capacity beyond the country's current 3.4 million barrels per day (bpd) without improved prospects for a sustainable recovery in oil demand and prices, he said. "We believe that in the long term, with this price, many development projects will be suspended." Dr el Badri said that 35 of about 150 oil development projects within OPEC countries had been deferred until after 2013. Mr Nozari called for energy-consuming countries to provide financial resources to "stricken projects" to get oil development back on track. "In the absence of contributions from consumers, producers will not be able to deliver the required supplies," he said. Nobuo Tanaka, the executive director of the International Energy Agency (IEA), which represents the energy interests of 28 industrialised countries, said that by 2030, two thirds of world oil production would come from fields that were either awaiting development or have not yet been found. "This will require substantial investment," he said. The IEA head also said the world needed "a new clean energy deal". Mr Tanaka acknowledged that the era of "cheap oil" was over, but stopped short of naming his ideal price. OPEC's most influential member, Saudi Arabia, has called $75 a "fair price". Global oil demand was expected to fall by a million barrels a day this year, but demand for OPEC oil would increase over the next two decades even under the most conservative scenario for carbon emissions, Mr Tanaka said. Even if that happens, Mr Tanaka forecast that demand for OPEC oil production would rise by 12 million barrels over the next two decades. OPEC now pumps about 28 million bpd of crude oil. For now, Dr el Badri said, there was no viable alternative energy source that could be developed quickly and cheaply enough to remove the burden from fossil fuel producers of supplying most of the world's energy needs until 2030. "With this industry being the backbone of the global economy, it points to increasing demand," he said. "So we need to invest." Chakib Khelil, the Algerian oil minister, said the world had plenty of oil reserves, but needed more investment to produce them. At present crude prices, industry investment was being hampered by stubbornly high development costs, he added. "These costs do not seem to be coming down." Injecting a positive note into the otherwise sombre discussion, Mr Tanaka said energy companies were at least more willing than bankers to spend money. "The financial sector is totally pessimistic. They lost their business model. But the energy sector is optimistic. Everyone is investing through the cycle," he said. "Energy-sector optimism suddenly has a very important role in recovery from this downturn." tcarlisle@thenational.ae