(EnergyAsia, June 12 2014, Thursday) — The world will face the twin threats of rising oil prices and production cost in its quest to develop hydrocarbon reserves to meet growing energy demand, said the International Energy Agency (IEA).

It estimates that over the next two decades to 2035, the world will have to invest a total of US$40 trillion to ensure adequate energy supply and another US$8 trillion to improve energy efficiency.

Of the investment in energy supply, US$23 trillion will be spent on fossil fuel extraction, transport and oil refining, said the agency in its latest World Energy Outlook report. Almost US$10 trillion will go into power generation, with renewables (US$6 trillion) and nuclear (US$1 trillion) making up the lion’s share. A further US$7 trillion will be spent on transmission and distribution facilities and services.

“More than half of the energy-supply investment is needed just to keep production at today’s levels, that is, to compensate for declining oil and gas fields and to replace power plants and other equipment that reach the end of their productive life,” it said. The world will have to spend at least US$1 trillion per year just to maintain energy production at current levels as oil and gas reserves become increasingly costly to find, develop, process and distribute.

If the Middle East fails to replenish its reserves, crude oil prices could rise US$15 a barrel in the 2020s from current levels. There will be no help from US shale production as the IEA said its recent spurt will not extend into the next decade.

The IEA is counting on the Middle East to boost production from 28 million b/d today to 34 million b/d by 2035, with Iraq to play a key role.

Citing newly compiled data, the Paris-based agency said annual investment in new fuel and electricity supply has more than doubled in real terms since 2000.
The report also warned that liquefied natural gas (LNG) will not be a cheap solution.

It said “the significant costs” of new liquefaction facilities will slow the rate at which producers can unleash new supplies that might help globalise gas markets.
The IEA is putting the onus on governments of countries which have large oil and gas reserves as well as rising energy demand to help avert a supply crunch.

“While many governments have retained direct influence over energy sector investment, some stepped away from this role when opening energy markets to competition. Many have stepped back in, typically to promote the deployment of low-carbon sources of electricity,” it said.

In the electricity sector, the IEA said administrative signals or regulated rates of return have become the most important drivers for investment. The share of investment in competitive parts of electricity markets has fallen from about one-third of the global total 10 years ago to around 10% today.

“Policy makers face increasingly complex choices as they try to achieve progress towards energy security, competitiveness and environmental goals,” said the IEA’s chief economist, Fatih Birol.

“These goals won’t be achieved without mobilising private investors and capital, but if governments change the rules of the game in unpredictable ways, it becomes very difficult for investors to play.”