Monday, 19 January 2015

Saudis feel oil pinch as IEA predict long term gains

After dropping more than 50% in 2014, new data from Saudi Arabia’s biggest company suggests low oil prices are hurting the petro-state.

However, a recent report from the International Energy Agency (IEA) suggests that over the long term (out to 2040) the price of fossil fuels should trend back up. Although this will be little comfort for petroleum exporting countries this year.

Early this morning, Saudi Basic Industries Corp (SABIC) reported a 29% dive in fourth quarter net income, missing analysts’ forecasts by an enormous margin. Low oil prices are being blamed for the drop.

The Gulf’s largest listed company earned 4.36 billion riyals ($1.49 billion) in the three months to December 31, 2014. Compared with the year prior when SABIC earned 6.16 billion riyals ($2.11 billion) over the same period.

SABIC chief executive Mohammad al-Mady says the company’s outlook for 2015 depended on oil prices and is therefore unpredictable.

“This hiccup of lower crude oil prices is not the first time and will not be the last time - so this country will continue marching,” he says.

Agreeing with this long-term view, a recent report from the IEA says there will be an increase in demand for fossil fuels over the next few decades regardless of current trends.

The World Energy Report 2014 reports that world primary energy demand could be 37% higher by 2040, putting more pressure on the global energy system, before slowing “to a near halt” during the 2040s.

“The scenario shows that world demand for two out of the three fossil fuels – coal and oil – essentially reaches a plateau by 2040, although, for both fuels, this global outcome is a result of very different trends across countries,” it says.

World oil supply could rise to 104 million barrels per day in 2040, but will hinge critically on investments in the Middle East. As tight oil output in the United States levels off, and non-OPEC (Organisation of the Petroleum Exporting Countries) supply is predicted to fall back in the 2020s, the Middle East becomes the major source of supply growth.

IEA chief economist Fatih Birol says a well-supplied oil market in the short term should not disguise the challenges that lie ahead.

“The apparent breathing space provided by rising output in the Americas over the next decade provides little reassurance, given the long lead times of new upstream projects.

“The world is set to rely more heavily on a relatively small number of producing countries,” he says.

On the other hand, the world demand for natural gas could be more than 50% higher by 2040, and will be the only fossil fuel class growing at that time.

The United States remains the largest global gas producer, although production levels off in the late-2030s as shale gas output starts to recede.

“A key uncertainty for gas outside of North America is whether it can be made available at prices that are low enough to be attractive for consumers and yet high enough to incentivise large investments in supply,” the report says.

As for coal, its future use is constrained by measures to improve efficiency, tackle local pollution and reduce CO2 emissions.

Coal demand is 15% higher in 2040 with growth almost stopping in the 2020s. Regional trends vary, with demand reaching a peak in China, dropping by one-third in the United States, but continuing to grow in India.

By 2040, world energy supply will be divided into four almost equal parts: low-carbon sources (nuclear and renewables), oil, natural gas and coal.

And as the demand for fossil fuels plateaus, the IEA predict nuclear power will see an installed capacity grow to 60% with the increase concentrated heavily in just four countries – China, India, Korea and Russia.

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