Oil sector investments help stability: producers

Massive investments planned by Saudi Arabia and other Arab hydrocarbon producers to expand their production capacity will ensure the world's oil needs and support market stability, their main oil group has said.

Saudi Arabia, which sits atop a quarter of the world's recoverable crude resources, and three other Arab producers have pledged to pump nearly $396 billion (Dh1.45 trillion) into their hydrocarbon sector over the next few years to raise capacity, the Kuwait-based Organisation of Arab Petroleum Exporting Countries (Oapec) said in its monthly bulletin issued this week.

It said energy investments in the Arab world, which controls more than 56 per cent of the global oil wealth, are needed to offset a decline in capital in other producers because of the global fiscal distress.

"The financial crisis had an undeniable impact on investments in general, and on petroleum industry investments in particular from mid-2008 through 2009… [and] the negative repercussions of the crisis are expected to continue for several years. They include a decline in world demand for energy and a sharp drop in energy infrastructure investments because of the shortage of liquidity needed to implement projects," the 10-nation Oapec said.

"This has in turn led to a decrease in energy supplies worldwide. In summary, the initiatives taken by four Oapec member countries to allot about $396bn to investments in the petroleum industry will not only serve to ensure the continued production of oil and gas to meet local and global requirements… They also constitute part of the economic measures taken by countries worldwide to counter the damage wreaked by the global financial crisis, to restore confidence in energy markets, and to enable these markets to meet global energy needs, while upholding the interests of both parties in the equation – the oil exporters and the oil importers."

Oapec, created more than 40 years ago, urged all parties involved in the global energy industry, including producing and consuming countries as well as national and international companies, to work together for a stable global energy market.

It said this would ensure secure energy supplies to all, but stressed that consumers should reassure producers about future demand so they would pursue their investments in capacity expansions.

"Oapec underlines the need for consumer countries to guarantee future demand for oil and gas so as to justify the continued flow of investments that exporting countries need to make," the group said. "A constructive dialogue between producers and consumers will help provide the guarantees that both sides require."

Oapec noted that the world would remain heavily reliant on oil, gas and other fossil fuels despite intensifying global efforts to find alternative energy sources.

It said projections by most international energy agencies and available figures indicate that the world will remain closely tied to liquid and gas fossil fuels for the "first half of this century and beyond".

"The economic sectors of industry, agriculture and services will all remain reliant on fossil fuels, but perhaps those most dependent will be the transport sector, whose engines will continue to burn oil, and the electricity generation sector, whose power stations will continue to operate on natural gas, particularly in developing countries," Oapec said, adding: "As forecasts see a rise in demand for oil and gas until 2030, production capacity must be ensured to meet that demand… investment requirements to develop all phases of the petroleum industry will be vast, by all means, perhaps no less than $26trn in 2008 prices during 2008-2030." Oapec said such a scenario for petroleum demand places "enormous burdens" on the Arab countries, since their oil and gas reserves will not only meet a significant portion of world demand, but will remain a vital component in their industrial make-up and an important source of revenue.

"The Arab petroleum countries will have to continue pumping the necessary investments into the hydrocarbon sector in view of their prominent position with regards to crude oil reserves and production."

Its figures showed the combined proven oil reserves of Oapec member countries stood at around 667.4 billion barrels at the end of 2009, representing nearly 56.6 per cent of the world's total crude reserves.

Their confirmed gas resources were estimated at nearly 52.5 trillion cubic metres at the end of last year, accounting for 28.1 per cent of the world's gas.

"After decades of continuous oil and gas production, Oapec countries now feel obliged to pump more investments into boosting, or at least maintaining, their production capacity, and into developing the infrastructure needed for production, transportation, refining, and petrochemicals," it said, adding: "They feel the need to update, overhaul, and expand their facilities in keeping with the rapid technological developments in the oil and gas industry and to meet the rising global demand for energy, as Opec estimates that world demand for oil will total 105.6 million barrels per day in 2030."

According to Oapec, some of its key members have drawn up ambitious investment plans to keep pace with global energy developments and to respond to their economic and social needs.

Saudi Arabia, the world's top oil exporter, has announced the allocation of nearly $170bn to oil and gas projects over the next five years, including around $90bn to the state-owned Saudi Aramco, the report said.

Algeria's Sonatrach has announced investments of about $69bn in future oil projects, of which 71 per cent will go to exploration and prospecting, 19 per cent to utilisation, and nine per cent to transportation and maintenance. Kuwait has earmarked $87bn for the oil sector while Qatar has allocated $70bn for investments in the natural gas and crude oil sector.

A recent study by the Arab Petroleum Investments Corporation (Apicorp) on investments in the Arab energy sector showed those five countries account for more than 70 per cent of total Arab energy investments with a combined allocation of about $470bn to that sector. According to Oapec, downstream oil industries (refining and petrochemicals) account for about 47 per cent of those investments, while natural gas supplies account for 36 per cent, and power generation for 17 per cent.

"Forecasts by the International Energy Agency show that the world's investment requirements could reach $35bn a year between 2008 and 2030 in order to overcome the world's energy poverty, despite the economic difficulties," Oapec said.

In its study, Apicorp, an affiliate of Oapec, said Arab energy investments had been estimated much higher but the level has been revised down because of lower construction costs and project delays in the wake of the global crisis.

Despite the improvement in oil prices, the global credit tightness has created serious challenges to funding of those projects and this could prompt regional countries to rely more on equity for financing, the Dammam-based firm said.

Its figures showed most regional nations had postponed hydrocarbon projects but the bulk of the investment reductions were in such key oil and gas producers as the UAE, Saudi Arabia, Kuwait, Qatar and Algeria.

"The global financial crisis and the subsequent turmoil in the oil markets have combined to take a toll on the region's macro-economic and energy investment outlooks. To cope with the crisis, Arab energy policy makers and project sponsors have had little option but to reassess their investment strategies. The uptrend momentum achieved in recent years has reversed. Indeed, the current [seventh] review for the period 2010–2014 points to lower capital investment potential," it said.

"It also confirms a further drop in actual capital requirements in the region. We expect the capital investment potential to decrease by nearly 15 per cent to around $470bn,"it said.

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