Oil sector may need $3.08trn investments

Oil prices could stay in the range of $70 (Dh257) to $80 a barrel for the next 10 years and expand to $70 to $100 in the longer term as the market is likely to be well-supplied by both Organisation of Petroleum Exporting Countries (Opec) and other producers, according to the 12-nation oil group.

In a study to be presented at an oil conference in Mexico later this month, Opec, whose members control over 70 per cent of the world's proven crude deposits, estimated investments totalling $3.08 trillion would have to be made in the hydrocarbon sector for the next 20 years, of which $2.3 trillion would be needed in the upstream sector and $780 billion would have to be pumped into the downstream sector.

Opec, which groups the UAE, Saudi Arabia and other Gulf Cooperation Council (GCC) and non-GCC oil producers, said it currently controls nearly six million barrels per day (bpd) in spare crude oil capacity and that such capacity would remain comfortable even if there was a shortage in investment in the next few years.

The study, to be presented at the 12th International Energy Forum (IEF) meeting in Cancun, Mexico, being held on March 30 and 31, blamed market speculation, the global economic crisis and other factors for the recent sharp volatility in oil prices, which rocketed to their highest level of close to $150 a barrel in late July 2008 before collapsing to just above $30 towards the end of that year.

Analysts said they believed a $70 to $80 per barrel price of oil would be good for GCC producers in the next five to 10 years, but doubted they would accept such a price in the longer term because of an expected surge in their domestic development needs. They noted that while GCC nations were seeking to expand sources of income, hydrocarbon exports were likely to remain the dominant factor in the economy.

Recognising role of speculators

"Since the 11th IEF in April 2008, there has been unprecedented turbulence in energy markets in general and oil markets in particular. Oil prices have roller-coasted: Starting 2008 at $92 per barrel, the Opec Reference Basket rose to a record $141 per barrel in July before falling to $33 per barrel by the end of the year, the lowest level since summer 2004," Opec said in the study, published by the Riyadh-based IEF. It said the price swings of recent years have led to more scrutiny from governments into the functioning of markets.

Opec, which pumps just below 40 per cent of the world's crude supplies, stressed the importance of recognising the role played by futures markets and unregulated exchanges in driving the crude oil price, in particular through increased speculative activity.

It said non-commercial investor activity in oil futures does provide liquidity to markets, which is a healthy feature for price discovery and risk transfer functions. But it added that, when left unchecked and with no position limits, it was likely to exacerbate price movements and weaken their correlation with fundamentals.

The central element linked to price volatility has been the global financial crisis, the ensuing deep and widespread recession in Organisation of Economic Co-operation and Development (OECD) countries and the sharp slowdown in economic activity in developing countries, the study said.

It said the implications of this have stretched far and wide and have been felt on every front globally, with a contraction in economic activity, a decline in world trade and an erosion in wealth.

"This includes choking oil demand. Against this backdrop of extreme oil price volatility, the global financial crisis and an economic crisis unseen since the Great Depression, a host of new challenges have arisen in preparing an outlook for oil. One of these challenges relates to assumptions for future price developments," Opec said in its study.

"For Opec's Reference Case, the key to the oil price assumption is the perception of the behaviour of marginal supply costs in the medium- to long-run. For the next decade, nominal prices are assumed to stay in the $70 to $80 range, while longer term they are assumed to remain in the $70 to $100 range.

"This assumption reflects the current, broadly accepted view that prices that are too low are not sustainable as they limit the flow of upstream investment, while prices that are too high could hamper global economic recovery and medium- to long-term growth prospects.

"However, these assumptions do not reflect or imply any projection of whether such a price path is likely or desirable," the Opec study added. Oil prices, which are vital for GCC economies and the states' financial resources, have averaged above $70 a barrel so far this year and are projected to be around $70 a barrel through 2010, compared with $60 a barrel in 2009 and a record average $95 per barrel in 2008.

GCC budget considerations

High oil prices during 2003-2008 allowed the six GCC countries to accumulate a budgetary surplus of more than $600bn, most of which was recorded in 2008. Saudi Arabia accounted for more than half the surplus and around $160bn of it was recorded in 2008.

The Saudi fiscal position reverted to a relatively small deficit in 2009 as crude prices receded by nearly 30 per cent and the kingdom, the world's oil powerhouse, slashed output by more than one million bpd in line with Opec's collective agreement to trim supplies to keep prices firm.

"Saudi Arabia and other GCC countries can be more than comfortable with an oil price of $70 to $80 per barrel because all of them assume a price of around $50 a barrel for their annual budgets," said Ihsan bu Hulaiga, a Saudi economist.

"But most of them customarily exceed their budgeted spending and that is why sometimes they record a shortfall. I think a price of $70 per barrel to $80 a barrel is good for their budgets in the next five to 10 years but in the longer term, I believe they need higher prices because of a steady rise in their domestic development needs, mainly due to the sustained growth in their populations," he added.

According to Opec's estimates, GCC countries and other oil producers need to pump nearly $2.3trn into their upstream hydrocarbon sector until 2030. "The Reference Case points to the need for investments along the entire supply chain. Up to 2030, cumulative upstream investment requirements are estimated to amount to $2.3trn (2008 dollars). Costs have been sharply inflated since 2003, but a reversal, albeit still slow, has recently been observed, which might indicate a shift towards a new cost cycle. This has been factored into estimates for upstream investment requirements," the study said.

"In downstream capacity, the global refining system will require $780bn (2008 dollars) of investment leading up to 2030. The Asia-Pacific region should attract the highest portion of these investments," it added.

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