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UPDATE 1-Shortfall in Middle East oil investment could push up prices -IEA
June 3, 2014 / 1:42 PM / 3 years ago

UPDATE 1-Shortfall in Middle East oil investment could push up prices -IEA

* $40 trln needs to be invested in energy supply by 2035

* $53 trln needed to prevent significant climate change

* Spending on oil output more than doubled in 2013 from 2000

* Upstream spending dominated by LNG (Adds quotes, details)

By Simon Falush and Nina Chestney

LONDON, June 3 (Reuters) - A potential shortfall in investment in production in the Middle East could create a $15 increase in the oil price by 2025, the energy arm of the Organisation for Economic Cooperation and Development (OECD) said.

The world will need to invest $40 trillion in energy supply and $8 trillion on energy efficiency by 2035 to meet growing demand and falling output from mature sources of energy, the International Energy Agency (IEA) said in a report

A large proportion of the investment to increase output will need to come from the Middle East as a rise in non-OPEC production such as U.S. shale oil starts to lose steam in the mid-2020s.

But the IEA was wary about the outlook for investment in the region due to factors including security concerns and government spending priorities outside the energy sector.

“If investment doesn’t pick up as needed, we will have much more volatile oil markets, and in the 2020s we will have higher oil prices,” Maria van der Hoeven, IEA executive director, told reporters at the launch of the report.

Furthermore, the report said, if the world is to keep the rise in the average global temperature below 2 degrees Celsius, a total of $53 trillion will need to be spent, more of that amount on energy efficiency and less on fossil fuels.

INVESTMENT DOUBLED

In 2013, investment in energy production was over $1.6 trillion, more than double the level in 2000 in real terms, and spending on improvements in energy efficiency was $130 billion, the IEA said.

Investment in renewable sources of energy rose to a peak of $300 billion in 2011 from $60 billion in 2000 but has since fallen to $250 billion for 2013.

More than four times this level, or $1.1 trillion per year, was spent on the extraction and transport of fossil fuels, oil refining and the construction of fossil fuel-fired power stations, the report said.

Of the $40 trillion that will need to be spent by 2035, less than half will be spent on meeting growth in demand.

“About 80 percent of all oil investments are made to compensate for the decline in existing fields, so it means that oil investments have little to do with oil demand growth and much more to do with the decline of existing oil fields,” Fatih Birol, the IEA’s chief economist, told reporters.

GAS SURGES, POWER STRUGGLES

Of the total investment in upstream oil and gas spending of more than $850 billion per year by 2035, gas will account for most of the increase. Over $700 billion is expected to be invested in the liquefied natural gas (LNG) sector alone by 2035.

The IEA warned that more gas might not lead to much lower prices.

“The expectation that a surge in new LNG supplies will totally transform gas markets needs to be tempered by recognition of the high capital cost of LNG infrastructure, with transportation typically accounting for at least half of the cost of gas delivered over long distances,” the report said.

For Europe’s power markets, the IEA warned that a shortfall of investment could threaten reliability of electricity supplies.

“The investment required to maintain the reliability of Europe’s electricity system is unlikely to materialise with the current design of power markets,” the report said, adding that wholesale prices were around 20 percent too low to make investment attractive.

“Europe requires more than $2 trillion in power sector investment to 2035 ... If this situation persists, the reliability of European electricity supply will be put at risk,” the IEA said.

Van der Hoeven highlighted more fundamental problems in some developing economies.

“Even if all the projected investment comes in on time, almost 1 billion people will be left without access to energy in 2035,” she told Reuters. (Editing by William Hardy and Jane Baird)

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