The price of oil has plummeted from US$145 per barrel in 2008 to on average $35 in the first quarter of 2016. The benchmark Brent Crude oil has picked up recently, trading near $50 p/b at the time of writing. The oil price crash has sent shockwaves through the industry and resulted in a realignment of investments and project progression across international oil production.
According to the April 2016 oil outlook from the International Energy Agency, The Organization of Petroleum Exporting Countries (OPEC) produced 32.76 million barrels per day (mb/d) in that month, its highest levels since August 2008, contributing to the global supply glut. RGN spoke to outgoing OPEC Secretary General Abdalla Salem El-Badri to see OPECs views on the current energy mix, where the next demand base is going to come from and what the future looks like for the energy industry…
Jack Kennedy: How significant has the downturn in oil prices been for the overall industry?
Abdalla Salem El-Badri: The past two years or so has been one of significant readjustment for the oil industry. Between July 2014 and the start of this year, prices fell by more than 70 per cent, before picking up slightly in recent months. Many investments have been deferred and some cancelled, with investment levels falling by around 20 per cent last year, compared to 2014, and expectations are for a 15 per cent drop this year, compared to 2015. And a significant amount of manpower has been laid off. The pain of this readjustment has been felt across the industry. These are tough times.
We also need to appreciate the potential knock-on impacts in the future. There is no doubt the world will need more oil. OPEC sees oil demand increasing by around 17 million barrels a day (mb/d) between now and 2040, reaching close to 110 mb/d by then. Moreover, new barrels are needed not only to increase production, but to accommodate for decline rates from existing fields. It is estimated that oil-related investment requirements are around $10 trillion over this period. However, with investment levels declining, it is clear that recent price levels are not at a level where all of the necessary future investment is viable.
Nonetheless, I remain optimistic about the industry’s future. ‘Tough times’ are nothing new. The industry has been here before. Its history is one of many cycles, both up and down. The focus now is on returning stability and balance to the market, so that the necessary future investments can be made.
JK: What are your views on the development of unconventional oil production? Do you see it continuing to expand?
AEB: OPEC has welcomed developments in unconventional oil production. We see these developments as part of a diverse production mix. With oil demand continuing to expand, as I mentioned in response to your first question, the world will need all sources of oil.
However, it is evident that many unconventional oil producers have been significantly hit by the downturn in oil prices. For example, there has been a lot of talk in recent years about US tight oil supply growth. There is no doubt that this supply has seen considerable growth in the past few years, but in 2016 we expect it to see a fairly substantial contraction. In fact, a lot of unconventional oil is high cost supply, and thus sensitive to lower prices, as we are now witnessing.
Unconventional oil will see further growth in the future when prices reach levels that make it economic. It is also important to stress that many OPEC Member Countries have substantial reserves of unconventional oil, but for most of them the focus remains on lower cost conventional oil production.
JK: How do you see the Paris climate change agreement impacting the oil industry, and OPEC, in the coming years and decades?
AEB: The environment and climate change is a concern for us all, and all our Member Countries were part of the ‘Paris Agreement’, submitting their Intended Nationally Determined Contributions (INDCs).
OPEC will work towards the goals set out in the agreement, and in this regard, we need to be realistic about our energy future. For the coming decades, it is expected that fossil fuels will continue to provide the majority of the energy mix. By 2040, we envision that they still make up more than three-quarters of the energy mix.
It is important to stress that environmental protection and the use of oil and gas are not mutually exclusive. We can still use oil and gas and have a cleaner environment. And this means focusing on technologies. At OPEC, we recognize the importance of continually looking to advance the environmental credentials of oil, both in production and use.
For example, in OPEC Member Countries, technology-related initiatives, in terms of research, development and deployment, are being carried out every day. These include investing in carbon capture and storage, reducing gas flaring, developing hybrid solar-gas power stations and solar-powered desalination units, and producing cleaner petroleum products.
In addition, we should not forget that today around 2.7 billion people or more still rely on biomass for their basic needs, and 1.3 billion have no access to electricity. These people need access to reliable, safe and secure modern energy services to live and prosper. We need to keep in mind that the three pillars of sustainable development – ‘economic, environmental and social’ – mean different things to different people.
JK: In recent years the oil market has seen increasing production from non-OPEC producers? Do OPEC producers feel threatened by this?
AEB: Yes, the market has seen increasing production from a number of non-OPEC producers. In fact, in the period from 2013-2015, non-OPEC production increased by over 5 mb/d, which was a major factor in supply outstripping demand, and in turn, falling prices. Over the same period, OPEC crude production stayed fairly steady.
It should also be noted that much of this non-OPEC increase was from high-cost production, and given the current market environment, it is anticipated that there will actually be a contraction of 700,000 b/d in non-OPEC supply in 2016.
Let me stress that OPEC does not feel threatened by non-OPEC producers. We appreciate that the world needs all producers. It is also important to recognize that the main contributor to crude supply growth after 2020 is OPEC. In the 20-year period between 2020 and 2040, OPEC crude is expected to expand by 10 mb/d to a level over 40 mb/d.
JK: Where do you (OPEC) see the base of future oil demand growth?
AEB: It is the Asian region that will continue to see the largest demand growth in the coming decades. Asia is anticipated to see oil demand of close to 46 mb/d by 2040, an increase of almost 16 mb/d from 2015, as its population expands, economies grow, and given the huge potential to ease the plight of many of those billions in Asia who continue to suffer from energy poverty. Putting this into some perspective, the demand increase in Asia by 2040 is projected to be more than double the increase in all other growing regions combined.
And with the region’s supply assumed to decline to just over 7 mb/d by 2040, it means that Asia will need to import close to 40 mb/d of crude oil and refined products by then. To meet this demand, Asia will see oil imports increase from almost all regions – but mainly from the Middle East, where many OPEC Members are located.
JK: What is OPEC’s outlook for the future energy market?
AEB: Global energy demand is expected to expand by around 47 per cent by 2040. Much of this growth will continue to be concentrated in the developing world as industrialization, population growth and the unprecedented expansion of the middle class propels the need for energy. By 2040, the developing world is expected to make up 63 per cent of total global energy consumption, a marked increase from 50 per cent in 2014.
In terms of the energy mix, renewables – from wind, solar, small and large hydro and geothermal – will continue to see the fastest growth, but globally their share of the energy mix will be just under 7 per cent by 2040, given their low initial base. The share of biomass and nuclear is expected to remain at steady levels throughout the period 2015-to-2040, at around 9 per cent and 6 per cent, respectively.
It means that fossil fuels will continue to play a dominant role in meeting energy demand, although their overall share will fall from around 82 to 78 per cent during this period. In the next 20 years, oil will remain the fuel with the largest share of global energy use. However, its relative weight will decline in the coming decades. By the 2030s, oil is expected to drop below 28 per cent. A similar trend is expected for coal. By 2040, natural gas is expected to have the largest share, making up close to 28 per cent of global energy demand. Combined, oil and gas are expected to supply around 53 per cent of the global energy mix by 2040, similar to current levels.