Some comments from the International Energy Agency

The most authoritative organizaion in terms of energy markets recently did a field by field study with some notable results. Due to the recession, it looks like energy is plenty, but this doesn’t look to be the case for long… We provide some consequences for InterOil as well.

  • In the WEO-2008 Reference Scenario, which assumes no new government policies, world primary energy demand grows by 1.6% per year on average between 2006 and 2030 – an increase of 45%
  • China and India account for over half of incremental energy demand to 2030 while the Middle East emerges as a major new demand centre.
  • “One thing is certain”, stated Mr. Tanaka, “while market imbalances will feed volatility, the era of cheap oil is over”.
  • “A sea change is underway in the upstream oil and gas industry with international oil companies facing dwindling opportunities to increase their reserves and production.
  • In contrast, national companies are projected to account for about 80% of the increase of both oil and gas production to 2030“, said Mr. Tanaka. But it is far from certain that these companies will be willing to make this investment themselves or to attract sufficient capital to keep up the necessary pace of investment.
  • The production-weighted average decline rate worldwide is projected to rise from 6.7% in 2007 to 8.6% in 2030 as productions shifts to smaller oilfields, which tend to decline faster.
  • Investment of $26 trillion, or over $1 trillion/year, is needed, but the credit squeeze could delay spending, potentially setting up a supply-crunch once the economy recovers
  • “Despite all the attention that is given to demand growth, decline rates are actually a far more important determinant of investment needs. Even if oil demand was to remain flat to 2030, 45 mb/d of gross capacity – roughly four times the current capacity of Saudi Arabia – would need to be built by 2030 just to offset the effect of oilfield decline“, Mr. Tanaka added.

Sources: IEA, and IEA.

A few conclusions:

  1. The world already need a trillion dollars of investment a year to keep oil supplies where they are today, and in fact, a good deal more is needed as world energy demand is prospected to rise by 1.6% a year
  2. However, the low energy prices, the credit crisis, and the fact that by far the most promising energy development projects are in the hands of nationalized companies who’s (political) incentives to invest and/or access to credit and technology make it very questionable whether the investments are forthcoming in sufficient quantities
  3. Which is setting us up for an energy crunch and much higher prices when the world economy, and (temporary depressed) energy demand recovers.

Some additional points to consider:

  • For all but transport purposes, natural gas and oil are close substitutes
  • As natural gas is cleaner and cheaper than oil, demand for it rises faster than that for oil, clean (and cheaper) energy has a tendency to drive out dirtier (and more expensive) energy
  • Investment project in the most expensive, ‘marginal’ projects suffer the most. For instance, like oil from tar sands in Canada and unconventional gas like US shale gas. The latter seems to be a major victim of the present crisis, as it needs close to $8 per Mcf prices to be profitable (on average) and current US prices are half that. Canadian tar sands need about $80 per barril of oil to be profitable

With respect to LNG (liquid natural gas) markets, it works out quite different.

  • Investment horizons are 25-30 year periods
  • LNG prices in Asia, apart from being a multiple of those in the US, are also far less fluctuating
  • LNG price deals are usually in long-term contracts, spot-price volatility has less grip on these

InterOil’s Elk/Antelope is most definitely not a marginal project

  • It is a conventional (that is, not needing expensive special drilling methods or treatments) on-shore gas resource, with wells that flow profusely
  • So profusely, in fact, that from just three wells, it can already supply 120% of the daily needs of an LNG facility, and those three wells have already been drilled
  • Comparing that to Australian coal seam gas, in which tens of billions of dollars are invested today, there thousands of wells need to be drilled, treated, and manned to achieve a similar output (Conoco/Origin project is on record as saying 20,500 wells need to be drilled to supply it’s facility). The treatment (with large quantities of water) bears environmental risks (it has run into severe problems in Canada for these reasons)
  • InterOil is also situated near the most lucrative LNG markets (Asia pacific) and having other noteworthy locational advantages in terms of labour, tax, and regulation cost
  • It’s planned capital outlay for the LNG facility is much cheaper ($5-7bn) compared to even a similar project led by Exxon and OilSearch ($11-12bn) enjoying some of these locational advantages because InterOil needs less than half the pipeline, it can tap gas from a single resource in the lowlands versus having to do so from multiple resources in the highlands (OilSearch/Exxon), and it has some important infrastructure already in place (InterOil does not have to build a harbor, housing, power facilities, water facilities, deep water jetty system, InterOil already has land rights).
  • Any liquids production, which seems increasingly likely, will further significantly enhance these cost advantages and provide valuable funds for the LNG facility.

One might also have noticed above in the IEA quotes that oil majors, are on the lookout for reserves because they are facing declining existing fields and reserves. One problem, most of the new reserves are under control of nationalized companies, the PDVSA’s of this world (Venezolan state oil company).

Accessible non-nationalized reserves are difficult to get as a result, especially those that are as cheap as InterOil’s..

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