"Oil and gas markets are starting to show signs of recovery, but the impact of the recession differs across regions,and the outlook remains very uncertain,' said Nobuo Tanaka, Executive Director of the International Energy Agency (IEA). Launching the new combined IEA publication Medium-Term Oil and Gas Markets 2010 today in Paris, he said "In both oil and gas, we see a notable dichotomy between non-OECD and OECD markets, with strong growth in China, India and the Middle East compared to weaker or flat demand elsewhere, especially in the fragile European economy. These contrasting trends cloud efforts to foresee how oil and gas markets will develop into the medium term. But what is clear is that both will need more investment, a greater focus on energy efficiency and improved data."
Taking into account this uncertainty, the IEA report presents two oil demand cases for the next five years: one based on relatively strong GDP growth of nearly 4.5% per year from 2010 onwards (in line with the most recent IMF projections) and a reduction in oil use intensity of 3% annually; the other one based on lower GDP growth at 3%, but with correspondingly slower reductions in oil intensity. Under higher growth, even with ongoing energy efficiency improvements, oil demand increases by an average of +1.2 mb/d annually (1.4%), reaching close to 92 mb/d by 2015. Oil demand recovers to pre-crisis 2007 levels again by 2010. Effective OPEC spare capacity in this scenario begins to decline again as soon as next year, reaching 3.6 mb/d by 2015. While new OPEC capacity should come on stream in 2014, we anticipate a tightening global balance, with surplus capacity falling below 5% of global demand. This could lead to more jittery markets ahead, after what has been a prolonged period of relative price stability over the past year.
But such demand growth is not inevitable. "The projected growth in demand is not set in stone," Mr. Tanaka said. "Greater attention to improved oil use efficiency and diversification of transport fuel supplies could maintain spare capacity at closer to the current 5-6 million barrels per day, while generating a slow but steady increase in demand for OPEC crude." In the lower GDP growth scenario, oil demand growth averages around 1% (840 kb/d), taking global demand to 90 mb/d by 2015 and also effectively prolonging the period of more comfortable markets. Particularly noteworthy is the role of non-OECD countries, where almost all growth in oil demand is to be found under either scenario, and the pivotal importance of the transport sector in driving demand.
In the natural gas area, IEA demand modelling for the OECD region indicates a return to 2008 demand levels by 2012, but with significant variation between regions, with European demand recovery slower than elsewhere. China is seen as an area of strong growth, with demand doubling to 140 bcm by 2015 compared to 2007 now seen as a conservative forecast. This would make China a bigger gas user than any OECD country bar the United States, with suppliers including Turkmenistan, Qatar, Australia, and soon Myanmar, supplementing local output. "The oil supply outlook shows a marked improvement from a year ago," Mr. Tanaka observed. "While non-OPEC supply continues to grow slowly, OPEC crude and natural gas liquids account for the bulk of the 5.4 mb/d of production growth to 2015."
For gas, two major supply trends dominate. The rise of non-conventional gas, first described in our 2008 review, has continued apace, making the United States the world's biggest gas producer in 2009. The increase in liquefied natural gas (LNG) capacity means that a wave of new gas supplies will hit markets over the next few years totalling in excess of 120 bcm per annum, a 50% increase over 2008, and bringing important linkages between regions. "This oversupply of gas put strong downward pressure on prices," Mr. Tanaka said, noting that spot prices for gas were well below half of oil prices for most of 2009.
"While the outlook for gas supplies may thus appear relatively comfortable, we cannot afford complacency - we must push forward now with new investment," Mr. Tanaka warned. Long lead times for oil and gas projects require commitment years in advance to new supply projects. And there are other factors that could impact future supplies, such as the continuing depletion of existing oil and gas production, geopolitical risks in producing countries as diverse as Nigeria, Russia and Iraq, and potential deepwater project delays after the recent Gulf of Mexico disaster. "This is not about an inadequate resource base in either oil or gas," Mr. Tanaka said, "but about timely and adequate investment." For both energy sources, investment is needed through the value chain -- in the upstream and in new hydro cracking capacity in the refining sector for oil, and in pipelines and other infrastructure for gas.
For the first time, the IEA presents the medium-term oil and gas market analyses jointly this year. This new combined report highlights some similarities between the markets, but also an important disparity. The breadth and quality of oil data for example have continued to improve in transparency, global coverage and timeliness, though there is still much to be done for non-OECD market coverage. Gas data however, is much weaker in almost all aspects, especially outside OECD countries. But even in OECD countries, much key data on aspects such as storage and cross border movements is lacking. "Recently, the partners in the Joint Oil Data Initiative (JODI) have decided to extend their work to data on gas markets. We hope that this new effort will improve gas data so markets are better informed, can take more timely investment decisions, and avoid excessive price volatility," Mr. Tanaka said.