Oil sector prospects promising
Business Times
ALTHOUGH the oil industry is in dire straits because of the prevailing low prices, the consensus
of many studies (including the Opec World Energy Model -OWEM) is that, in the medium to long
term, the prospects are promising.
"If we look beyond the present low price regime as short-term fluctuations, as experienced a little
over a decade ago, then it should become economically sensible to start investing in future
supplies now.
"One logical extension of this point is that, failure to start making the necessary strategic
expansion investments now, may lead to serious price shock consequences in the medium term
when oil demand as projected, begins a steep rise, without a corresponding level of supplies,"
secretary general of Organisation of the Petroleum Exporting Countries (Opec), Dr Rilwanu
Lukman said.
In his address presented at the Second Oman International Economic conference which was also
published in the Opec Bulletin (December issue), Lukman said that according to OWEM forecasts
and similar studies by researchers around the world, the good news is that there is no shortage of
capital for investments in the energy market, especially for oil.
"However, there is increasing competition for that capital. Coal is considered as basically a
domestic energy source since only a small portion of global output contributes to international
trade.
"Meanwhile, the nuclear sector, which contributed about 2.7 per cent to global primary energy
requirements in 1997, has for some years now been grappling with acute problems of high risk
perceptions by both private investors and the public, particularly environmentalists.
"One fuel within the energy mix that is generally considered to be environmentally friendly is gas.
However, it has some drawbacks of its own. The development of gas requires vast capital outlay,
but before any such scheme is established, a firm buyer must first be found," he said.
Lukman added that gas is cumbersome and expensive to transport and at the end of the day, it is
less profitable than oil on a comparative basis.
Nevertheless, gas projects that have established or committed buyers have little difficulty in
attracting capital. Some experts have calculated that within the next 20 years, gas development
projects would require between US$1,000 billion to US$2,500 billion (US$1 = RM3.80).
"If we discount the seriously cyclical price slides that occur once in a long while, the oil sector
has the best prospect for attracting investment capital within the energy mix.
"Until some years ago, oil had singularly been responsible for propelling the engine of the
world's economy. Although oil has some disadvantages, it also has many advantages. Along
with other fossil fuels, oil has been under attack because of greenhouse gas emissions.
"However, through ongoing research and development projects, more efficient engines and
cleaner, more environmentally friendly fuels are being developed," Lukman said.
He added that among the advantages of oil is that it is a very versatile source of energy and it is by
value the largest traded commodity worldwide.
"Barring low oil price periods that are cyclically experienced at infrequent intervals, it has a
reasonable rate of return for producers and investors.
"According to OWEM projections, there is a market for oil in the energy mix, especially in the
medium to long term," he said.
Specifically, OWEM's reference case scenario suggests that worldwide oil demand will increase
from 69.9 million barrels per day (bdp) in 1995 to 77.8 million bpd in 2000, on to 90.2 million
bpd in 2010 before climbing to 100.7 million bpd in 2020.
Lukman said that most of this additional oil will inevitably come from Opec member countries,
which are known to possess about 76 per cent of the world's proven oil reserves.
Presently, non-Opec producers are supplying more than 60 per cent of the world's crude oil, even
though they have only about 24 per cent of the world's remaining proven oil reserves.
"Certainly, this disproportionate market share, in terms of the oil production-to-reserves ratio,
cannot continue indefinitely.
"Opec will need to invest heavily in order to expand its oil production capacity so as to
accommodate future demand growth.
"For example, to maintain its 1995 production level and add an estimate 11.75 million bpd by
2010, Opec would require an investment of about US$159 billion, while to again increase output
by 14.6 million bpd by 2020 would entail an investment of US$250 billion," Lukman said.
He added that with such an estimated huge demand for oil in the medium to long term and given
Opec's lion share of the world's oil reserves coupled with very low production costs, it behoves
investors to avoid under-investment and its frightening consequences by pumping sufficient
capital for oil and gas expansion to cater for rising demand in future.
(Copyright 1999)
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Publication Date: March 05, 1999
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