Exploring Hydrocarbon Depletion
Page added on June 3, 2014
A top energy watchdog said the world will need more Middle Eastern oil in the next decade, as the current U.S. boom wanes. But the International Energy Agency warned that Persian Gulf producers may still fail to fill the gap, risking higher oil prices.
In its first update to the agency’s energy investment outlook in more than a decade, the IEA—which represents some of the world’s largest consumer nations—said it sees “growth in oil demand [becoming] steadily more reliant on investment in the Middle East.”
Surging American production from tight oil—extracted from shale formations in places like Texas and North Dakota—has led the agency and other oil-market analysts to predict the U.S. could leapfrog the world’s largest oil producers, Saudi Arabia and Russia, by 2020. That has triggered debate in Washington about easing a long-standing ban on most crude exports from American shores. It has also engendered hope of more energy security for the U.S., as well as worry that if American reliance on Mideast oil lessens, so might its military and diplomatic engagement in the region.
In its report, a summary of which was released early Tuesday in London, the IEA predicts that “output from North America plateaus [from around 2020] and then falls back from the mid-2020s onwards.” That forecast is broadly consistent with studies by the Organization of the Petroleum Exporting Countries, a cartel of some of the world’s largest producers.
While most of the oil found in the Middle East is cheap and easy to extract, tight oil requires intensive drilling as discoveries tend to deplete rapidly. When it comes to tight oil, “we are in a sweet spot,” said Gary Ross, chief executive of U.S. market research firm PIRA Energy Group. “But it’s like a treadmill, after a while you get exhausted.”
To fill any gap, the Middle East will “need to invest today if not yesterday” because projects typically take seven years to develop, the IEA’s Chief Economist Fatih Birol said. He said the region will need to spend an annual $90 billion through 2025 to meet global needs for its oil.
Yet, the agency warned the Middle East may fail to fill the gap because of high political risk and social spending. “We see a risk of not enough oil coming from the Middle East,” Mr. Birol said, citing the fact those countries pour a quarter of their $800 billion in annual oil revenue into energy subsidies. The Arab Spring, meanwhile, has forced many governments in the region to increase social spending. Iraq is still facing oil-output disruptions tied to political tensions, while Iran remains under tight international restrictions on its oil sales.
If the Middle East doesn’t cover the predicted shortfall created by declining U.S. output, the average cost of a barrel of oil could climb $15 by 2025, the IEA said.
The agency, which is charged with safeguarding energy security for the world’s most developed economies, often sounds the alarm on what it says is underspending by producers.
Overall, global oil and natural-gas exploration and production spending will rise by some 25% between now and 2035, reaching more than $850 billion a year, the IEA said. That figure will be part of $2 trillion in annual energy needs in the next two decades, up from about $1.6 trillion last year.
The IEA, which will release the full version of the report later Tuesday, had not fully updated its investment outlook since 2003.