Irrespective of the low oil price environment in which we currently operate, we are satisfied that the long-term market fundamentals are robust – and Petrofac is well positioned to benefit.
Among industry analysts, there is consensus that global energy demand is set to grow strongly over the long term and that hydrocarbons will continue to play a significant role. Large-scale investments in oil and gas infrastructure will therefore be needed to meet this demand and to offset a natural decline in existing production.
In terms of the global appetite for energy, the most recent analysis from the International Energy Agency (IEA) estimates that demand is set to grow by 32% by 2040 – by which time the world’s energy supply mix will divide into four almost-equal parts: oil, gas, coal and low-carbon sources1.
This presupposes that demand for oil will grow by 10 million barrels per day, or 13%, to exceed 100 million barrels per day by 2040:
Meanwhile, demand for gas is estimated to grow by more than 45%. Clearly, in order to meet this demand, continued investment in the exploration and production of hydrocarbons will be required. Indeed, the IEA suggests that its projections to 2040 will entail a cumulative investment in the oil and gas sectors of some US$25 trillion, of which just under 80%, or US$20 trillion, is in the upstream sector. This represents an annual average of US$750 billion for upstream oil and gas 2 (see the table below).
Of course, the future for the oil price environment is far from clear.
In its most recent World Energy Report, the IEA concedes that there is a large element of uncertainty around its analysis, and that much will depend on a combination of economic growth, government policy, and the approach of the main oil producers. The IEA therefore presents an alternative, Low Oil Price Scenario, in which the price of oil remains within a US$50–60 per barrel (bbl) range until well into the 2020s, and only rises towards US$85 by 2040. Under these circumstances, however, the demand for oil would remain higher than would otherwise be the case (meeting 28% of global energy demand by 2040, compared with 26% under the IEA’s central planning scenario)3. Once again, this would necessitate continuing investment in the necessary infrastructure.
Whilst many Independent and International Oil Companies (IOCs) will face ongoing financial pressure, particularly in the short-to-medium-term, we expect that many of the National Oil Companies (NOCs) will continue to invest in long-term strategic projects – especially in regions with lower marginal costs of production.
Meanwhile, we see an in-built need for reinvestment in existing fields in order to arrest their declining production. Indeed, once production has peaked, a conventional oil field can expect to see average declines of around 6% per year 4 – and, especially in a period of lower oil prices, reinvesting in these assets can deliver a more immediate return on capital employed than can more speculative exploration and production projects.
As the IEA puts it: “An annual US$630 billion in worldwide upstream oil and gas investment – the total amount the industry spent on average each year for the past five years – is required just to compensate for declining production at existing fields and to keep future output flat at today’s levels.”5
The Organization of the Petroleum Exporting Countries (OPEC) provides an alternative yet broadly similar analysis. In its 2015 World Oil Outlook report, it estimates that oil demand will reach 97.4 million barrels by 2020, and will grow to almost 110 million barrels per day by 2040. OPEC believes that this will require oil-related investments of at least US$10 trillion, and asserts that, “OPEC Member Countries maintain their readiness to invest in the development of new upstream capacity, in the maintenance of existing fields and in the building and expansion of the necessary infrastructure. This underscores OPEC’s commitment to security of supply for consumers, which needs to go hand-in-hand with security of demand for producers.”6
1 International Energy Agency, World Energy Outlook 2015 (which, under its central New Policies Scenario, suggests that by 2040, coal will account for 4,414 million tonnes of oil equivalent (Mtoe) of primary energy demand, whereas oil will account for 4,735 Mtoe, Gas will account for 4,239 Mtoe and low carbon sources for 4,547 Mtoe) © OECD/IEA 2015 World Energy Outlook, IEA Publishing. Licence: http://www.iea.org/t&c/
4 International Energy Agency, World Energy Outlook 2013
5 © OECD/IEA 2015 World Energy Outlook, IEA Publishing. Licence: http://www.iea.org/t&c/
6 Organization of the Petroleum Exporting Countries, World Oil Outlook 2015