Prices likely to rise over fears of 'serious oil supply crisis'

A prominent Arab energy analyst has warned of a serious oil supply crisis that could trigger a fresh price spike in the absence of sufficient investments in crude capacity development projects.

Nicolas Sarkis, Director of the Paris-based Arab Oil Research Centre, which acts as a consultant to the 11-nation Organisation of Arab Petroleum Exporting Countries (Oapec), echoed concerns by the International Energy Agency (IEA) and other groups that insufficient capital in oil capacity expansions because of low oil prices could create a sharp supply gap.

"The slowdown in capital spending and the cancellation or postponement of a growing number of oil projects have finally sharpened awareness of the grave dangers now facing the development of world oil supply," Sarkis wrote in the centre's monthly bulletin, Arab Oil and Gas.

He said in Opec members alone, the sharp drop in prices since the all-time high of $147 (Dh540) a barrel attained last July has already led operators to cancel or put on hold some 35 exploration-production projects.

These figures, he added, point in the same direction as the conclusions of many other recent reports warning about a fresh supply crisis, including one by Cambridge Energy Research Associates (Cera).

"Whereas Cera was firmly aligned on the side of the optimists until last summer, taking the view that world production capacity would be stepped up from its current level of 94.5 million bpd to 109 million bpd by 2014, its latest report reduces the projection for 2014 by fully 7.6 million bpd to 101.4 million bpd," Sarkis said.

"The same concern is now being voiced by the IEA, which has nevertheless been accused in the past of looking on the bright side. At a conference in London last week, the IEA's Deputy Executive Director, Richard Jones, sounded the alarm when he said that unless sufficient companies have the will and financial ability to invest through the downcycle, there is a real risk that supply growth may lag the eventual rebound of demand, leading to substantial price increases, possibly as early as this year."

Sarkis also quoted the IEA's latest monthly report, in which the agency reduced its forecast for the increase in non-Opec production in 2009 to zero, due to, among other things, problems being encountered in the development of crude production capacity in Azerbaijan.

Elsewhere in the world, the exploration-production projects that have been most affected by the drop in prices and investments are those involving fields in the Gulf of Mexico and in deep offshore in Angola, tar sands in Canada, ultra-heavy crudes in Venezuela, and other projects in Nigeria, Norway, the United Kingdom and Russia, not forgetting biofuels and gas-to-liquids.

"These new realities are starting to be of concern even to those who until very recently ruled out any risk that the fall in prices and investments might lead to a supply shortage. The most striking example is that of the Saudi Oil Minister, Ali Al Naimi, who has just warned against a catastrophic energy crisis if sufficient investments are not made quickly," Sarkis said. "In the view of Al Naimi, painful consequences will be felt earlier than expected and that could exacerbate the derailing of the economy. This is the first time that a senior Saudi official has used such language, whereas last September Al Naimi was voicing satisfaction in the face of the downturn in oil prices, which were still at $109 a barrel at the time."

Sarkis also cited similar comments by the IEA's Executive Director, Nobuo Tanaka, early this month, when warned of a possible shortage, pointing out that additional oil production capacity equivalent to seven times the current capacity of Saudi Arabia needed to be developed between now and 2030.

"Despite these fears, the last Opec conference preferred not to reduce the organisation's production ceiling further to bring about a recovery in oil prices and stimulate output," Sarkis said.

"That decision was essentially the result of pressures exerted on exporting countries by all those who argue that an increase in energy prices would be harmful in the current world economic crisis. But whatever the soundness of that argument, it does not provide an answer to the increasingly urgent need for a recovery in oil investments to avert a serious supply shortfall."

In a separate study, a London-based energy centre run by former Saudi oil minister Sheikh Ahmed Zaki Al Yamani urged crude producers to invest in fresh crude capacity expansion projects to ensure enough supplies after the end of the global crisis and avert a repetition of the "damaging" price spike.

The Centre for Global Energy Studies (CGES) rebuffed arguments by Middle East crude producers that the sharp fall in prices has made such investments unfeasible, saying that production costs in the region are among the lowest in the world, not exceeding $10 a barrel.

"The oil industry does not need a price of $75 a barrel in order to invest in new capacity, although it would clearly like it. Once oil companies have secured more reasonable prices from service providers, they will be able to invest profitably at the current level of prices, even if they expect them to persist," CGES said in its monthly report, sent to Emirates Business. "Oil-producing countries, for their part, ignore their own long-term interest in investing to maintain adequate oil-production capacity at their peril."

CGES described the short-term outlook for global oil demand as weak, noting that crude prices have fallen by almost $100 a barrel from their peak level last year and that they are struggling to remain above $50.

"At the moment there seems to be no end to the gloom, but the current economic woes will abate and in due course oil demand growth will return, albeit probably at a lower trend rate than before the current crisis," it said. "The falling demand for oil is creating additional spare production capacity, as Opec cuts its output, which is down by three million bpd since September 2008."

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