OPEC Slashes Oil Invest Forecasts As Demand Prospects Weaken

LONDON (Dow Jones Newswires), Jul. 8, 2009

The Organization of Petroleum Exporting Countries on Wednesday gave a fresh warning that its members' appetite for drilling for oil is fizzling. It slashed its five-year forecast for oil-field spending by about a third as the recession and increased energy efficiency led to a steep cut in demand estimates.

OPEC had already said in February that its members had frozen or cancelled 35 longer-term projects. But in its annual outlook report Wednesday, it said that "the estimated OPEC usptream investment requirement for the medium-term over the period 2009-2013 has fallen from $165 billion to around $110-$120 billion."

OPEC is "overreacting but understandably" because of the economic climate and the push to reduce oil consumption, said William Ramsay, director of energy geopolitics at the French Institute of International Relations.

The downward revision is likely to raise new concerns among oil consumers -- first and foremost the International Energy Agency, which has warned that reining in spending on oil-development projects could lead to a supply crunch by 2013. The IEA, which coordinates policies among energy-consuming nations, said in a May report that $170 billion of investment had been delayed or cancelled in OPEC and non-OPEC nations.

The Paris-based agency and OPEC agree that oil prices will continue rising -- after pushing up to $70 a barrel recently -- and they both forecast 2030 demand for oil at about 106 million barrels a day.

That assessment, though, drives them to opposite conclusions. IEA Executive Director Nobuo Tanaka reiterated last month that "huge investment is needed" to meet future Asian demand.

Ramsay, who was deputy executive of the IEA until last year, said OPEC's investment cut, "to my mind, is shortsighted," predicting supply constraints from 2013 and 2014 as India and China exhaust a cushion of extra capacity.

By contrast, OPEC said its "crude oil capacity is nevertheless set to remain at comfortable levels" despite the cuts. Its members have long worried over their spending because speculation on oil futures contracts makes it difficult to predict prices and demand.

But after the fresh bite of the recession and of U.S. and European energy-efficiency laws, the organization says growth in oil demand in developed countries is now over.

In industrialized nations, oil demand is expected to fall continuously through 2030, after reaching a peak in 2005, OPEC said. Emerging markets -- particularly China -- will make up for the decline.

Recovery will gather momentum only gradually, with the economy starting to emerge from the recession by year-end but normal growth not returning until 2012, OPEC said. The statement is at odds with a view held by some in the market that stimulus plans will soon make the economic meltdown history. "The possibility of a lengthier global recession cannot be ruled out," OPEC warned.

The organization also said it sees recent clean-energy laws in the U.S. and Europe having a greater impact than it had assumed last year. The legislation is expected to boost the use of fuel-efficient vehicles and alternatives to oil in order to reduce emissions of greenhouse gases.

The U.S. Energy Independence and Security Act of 2007 is now expected to prompt more biofuel use than OPEC had forecast last year. Meanwhile, the European Union climate and energy package has also been passed into law.

Ramsay said that "if those things (energy-efficiency announcements) are real, then people in the fossil-fuel business will think they are up for a tough time." Factoring these new developments, OPEC cut its global oil demand forecasts by 5.7 million barrels a day for 2013 and by 7.7 million barrels a day for 2030. Crude consumption is still expected to rise by 20 million barrels a day by 2030 and oil is set to remain the main source of energy. But the growth of biofuels, nuclear and coal will outpace oil, whose share in the energy mix will fall to 31% of global needs, down from today's 36%.

OPEC even warned that, based on current trends, "coal could become the dominant fuel by the middle of the century."

The figures have a silver lining for the oil cartel, though. OPEC expects its share of total crude supply to rise from 36% in 2008 to 39% in 2030. Most other estimates, however, put this percentage at a much higher level. In its latest annual energy outlook, the U.S. Energy Information Administration estimates OPEC's output will cover 45% of the world's oil needs two decades from now.  

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