Editor's column

The International Energy Agency’s (IEA) new energy outlook paints a generally optimistic view of the supply/demand balance and oil price picture to 2020. The annual report is one of the most widely watched and respected energy forecasts.

The IEA’s World Energy Outlook 2015 offers two possible scenarios for the near future: a tightening supply/demand balance that leads to oil prices rising to around USD 80/bbl by 2020, and a less optimistic view that has oil in the USD 50–60/bbl range 5 years from now. Here are the highlights of the report:

The IEA’s “central scenario” sees oil prices gradually rising to USD 80/bbl by 2020 and continuing to increase after that. On the demand side, that prediction hinges on global consumption increasing by 900,000 B/D per year. The supply side outlook sees declining non-OPEC production as the upstream price cutting that began this year begins to take hold. Some estimates have companies cutting up to 20% of global upstream spending this year. A BP executive last month was quoted as saying that oil majors have canceled 80 projects this year and cut capital expenditures by as much as USD 22 billion.

The agency also believes that OPEC cannot indefinitely keep its current strategy of flooding the market with oil to maintain market share. At some point in the near future, the loss in oil revenue to OPEC states will not be sustainable. The IEA is also somewhat skeptical that output growth from Iran and Iraq will not be a challenge.

Tight oil growth in the US has changed the global oil market because of the short investment cycle of tight oil and its ability to respond quickly to price signals. That means that when oil prices do recover, growth in the US tight oil sector will recover with them and, in addition, producers are becoming increasingly adept at operational efficiency and use of technology. But the sweet spots eventually will be depleted and operations in less productive areas will lead to higher production costs. The IEA predicts that US tight oil production will reach a plateau in the early 2020s at slightly above 5 million B/D before beginning to decline.

A period of “lower for longer” cannot be ruled out because of the possibility of tepid global economic and oil demand growth, OPEC’s continuation of its market share strategy, and resilient supply from US tight oil and other non-OPEC sources. However, the IEA considers this a less likely scenario.

Global concern about climate change will continue to have an impact on the oil and gas industry. Investment and development in alternative energy sources is growing, as is support from government subsidies. The industry will come under additional pressure this month during the United Nations Conference on Climate Change in Paris. “There should be no energy company in the world [which] believes that climate policies will not affect their business,” IEA’s Executive Director Fatih Birol said in November. The conference goal is to reach a legally binding, global agreement to cut greenhouse gas emissions. Earlier this year, 10 major energy companies declared support for a global deal on climate change, with some recommending that governments agree to carbon pricing as a key strategy. JPT

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