The good news is that the world knows it cannot go on like this

For all the current talk about an imminent end to the petroleum age, hydrocarbons will continue to play the leading role in meeting the world’s growing hunger for energy for at least the next quarter of a century, and probably well beyond.

In the Reference Scenario of the IEA’s World Energy Outlook (WEO) 2005, which assumes that governments stick with current policies, the world’s energy needs would be 25% higher in 2015 and more than 50% higher in 2030 than today, an average annual growth rate of 1.6%. Global demand is projected to grow from 10.7 billion tonnes of oil equivalent (toe) today to 13.4 billion toe in 2015 and 16.3 billion toe in 2030. More than two-thirds of this increase will come from developing countries, where economic and population growth is highest.

Fossil fuels continue to dominate energy supplies in this scenario, meeting more than 80% of the projected increase in primary energy demand. Oil remains the single largest fuel throughout the projection period. Its share will nonetheless fall marginally, from 35% in 2003 to 34% in 2030. Natural gas demand grows faster, driven mainly by power generation, overtaking coal as the world’s second-largest primary energy source before 2015.

Whilst the world’s energy resource base is more than sufficient to meet these demand trends, if they are realised it would raise several serious concerns: climate destabilising carbon-dioxide emissions would continue to rise and dependence on imports from a small number of energy-rich countries would increase worries about the security of energy supply. Thankfully, many governments around the world have already demonstrated their intention to steer the world into a more sustainable energy future.

Crude oil trends

World oil supply in the reference scenario is projected to grow from 82 million barrels a day (mb/d) in 2004 to 99 mb/d in 2015 and 115 mb/d in 2030. Non-OPEC countries contribute most of the increase in global production over the rest of the current decade. High oil prices have started to stimulate increased development of reserves in those countries in recent years. Production is expected to continue to grow particularly strongly in transition economies, West Africa and Latin America. The output of the transition economies, which has soared in recent years thanks to rapid growth in Russia, will continue to rise, with Caspian countries making a larger contribution.

In the longer term, oil production in OPEC countries, especially in the Middle East, is expected to increase more rapidly than in other regions — particularly in the second half of the projection period — because their resources are much larger and their production costs are generally lower. In the near term, the cartel’s share, which currently stands at 36%, will remain roughly stable owing to rapid production increases in several non-OPEC regions.

As prices return to a level closer to the average of the last two decades, incentives to raise output in non-OPEC regions will diminish, increasing the call on oil from OPEC producers. The second half of the projection period will see more rapid growth in OPEC’s market share. It is projected to reach 42% in 2015 and 50% in 2030, slightly above its 1973 historical peak.

Global oil production is not expected to peak before 2030, although output in most regions will already be in decline by then. OPEC’s market share will be lower if its members’ policies have the effect of limiting production and driving up prices, thereby stimulating non-OPEC production of conventional and non-conventional oil, and encouraging alternative energy technologies.

The growing regional mismatch between oil demand and production will result in a major expansion of international oil trade, both in absolute terms and as a share of supply. The volume of oil traded will almost double, growing from 36 mb/d in 2004 to 43 mb/d in 2010 and 60 mb/d in 2030. As a result, 52% of all the oil consumed worldwide will be traded between regions in 2030, compared with 44% in 2004. Trade between countries within regions will also expand (see chart above). 

Natural gas trends

Primary demand for natural gas will grow by 2.1% on average in 2003-2030. Demand will increase by 34% between 2003 and 2015, reaching 3,650 billion cubic metres (bcm). By 2030, it will have reached 4 ,789 bcm, an increase of over three-quarters of current levels. The share of gas in world energy demand will rise from 21% in 2003 to 24% in 2030 — mostly at the expense of coal and nuclear energy.

Power generation will account for most of the increase in gas demand over the projection period because in many parts of the world, gas is expected to be the preferred fuel in new power stations for economic and environmental reasons.

Stronger government support for nuclear power than assumed here — an option currently under discussion in many countries — could significantly lower the need for gas in power generation. The forthcoming World Energy Outlook 2006 will contain a timely analysis of the potential role of nuclear power.

A small but increasing share of gas demand will come from gas-to-liquids plants, which convert natural gas into distillate and other oil products, and from hydrogen plants to supply fuel cells. Gas demand will grow fastest in developing countries.

Natural gas resources can easily meet the projected increase in global demand through the projection period, as proven reserves are now equal to about 67 years of production at current rates. Despite substantial unit cost reductions in recent years, gas transportation remains very expensive and usually makes up most of the overall cost of gas delivered to consumers. Production is projected to grow most strongly in volume terms in the Middle East, Russia and the other transition economies, which between them have most of the world’s proven reserves.

Natural gas production by region

Russia is projected to remain the leading supplier of gas to Europe, which will remain the biggest gas importer, and is expected to emerge as an important supplier to Asian markets. These projections hinge on adequate investment in exploration and development and in building long-distance transmission lines and Liquified Natural Gas facilities.

The volume of marketed Middle East and North Africa (MENA) gas production is projected to continue to grow rapidly over the projection period, at an average rate of 4.3% per year.

More than two-thirds of this increase will come from the Middle East alone, which will see the largest growth of any world region. Part of the increase in capacity required to offset declining output from fields already in production will come from further development of those fields. 

Oil and gas investment needs

The global oil and gas projections described above will call for cumulative infrastructure investment of around $6 trillion (in year-2004 dollars) over 2004-2030. Of this investment, $2.4 trillion will be needed before 2015. Worldwide investment over the entire projection period will amount to $3.2 trillion ($118bn per year) in the oil sector and around $3 trillion ($108bn per year) in the gas sector.

Developing countries will require 45% of global oil and gas investments because their production and exports will increase most rapidly. These investments will be needed to expand supply capacity and to replace existing and future supply facilities that will be retired during the projection period. Capital spending will have to increase steadily through the period as existing infrastructure becomes obsolete and demand increases.

Exploration and development will dominate global oil-sector investment, accounting for more than three-quarters of the total over the period 2004-2030. Only a quarter of upstream investment will go to meet rising demand. The rest will be used to make up for the natural decline in production from wells already in production and those that will start producing in the future.

At a global level, investment needs are, in fact, far more sensitive to changes in decline rates than to the rate of growth of oil demand. Overall oil investment will be highest in North America, the transition economies and the Middle East.

Exploration and development of gas fields will absorb 62% of global gas investment. Building downstream infrastructure — high-pressure transmission pipelines, local distribution networks, storage facilities, LNG liquefaction and regasification plants and LNG carriers — will account for the rest. An increasing share will go to LNG supply.

The OECD as a whole will account for almost half of global gas investment. North America alone will claim more than a quarter. The main exporting regions — Russia, the Caspian region, the Middle East and Africa — will need to attract most investment outside the OECD.

Financing the required investments in non-OECD countries will be a major challenge, especially in non-OECD countries. Globally, there is enough money to finance projected oil and gas investment needs. Domestic savings alone are much larger than the capital required for energy projects. But in some regions capital needs represent a large share of total savings.

Although sufficient capital will be available overall from domestic and international sources, it is far from certain that the entire infrastructure needed in the future will be fully financed in all cases. The World Energy Outlook 2006 will reveal whether investment is on track. Mobilising the investment required will depend on whether returns are high enough to compensate for the risks involved and whether governments offer an attractive investment framework and climate.

An alternative scenario

But the trends presented in the graph above, from the reference scenario of the World Energy Outlook 2005, point to several serious concerns in addition to those related to financing. CO2 emissions would continue to rise, calling into question the long-term sustainability of the global energy system. And the sharply increased dependence of consuming regions on oil and gas imports from a small number of producing countries would exacerbate worries about the security of energy supply.

Fortunately the future is not set in stone. More vigorous government policies in consuming countries could, and no doubt will, steer the world onto a different energy path. The leaders of the G8 and several large developing countries, meeting at Gleneagles in July 2005, acknowledged as much when they called for stronger action to combat rising consumption of fossil fuels and related greenhouse-gas emissions. This momentum is being maintained with this year’s G8 Summit in St Petersburg having its focus on energy security. Most OECD governments have declared their intention to do more and other countries around the world can be expected to follow suit.

Energy efficiency will be a key option for helping to meet environmental and energy security targets at once, particularly in the transport sector, where fuel efficiency can play an important role.

But efficiency alone will not be sufficient. If emissions are to be stabilised, fuel efficiency must be combined with CO2-free fuels and with demand management in transporting people and goods. Such a combined approach could actually reverse the significant increase of oil production needs over the coming decades. But without technological progress and effective government energy and environmental policies this reversal will not become a reality.

Claude Mandil is Executive Director, International Energy Agency.