Investment in the oil sector has dropped by more by 20% in 2015, representing the steepest decline in history. And spending is expected to drop again in 2016, Fatih Birol, executive director of the IEA, told CNBC from the sidelines of the Paris Climate Summit. He said that oil prices could not remain this low forever due to this decline in E&P investment, which will eventually tighten supply. But don’t look for this to happen next year.
Also Wednesday, Rystad Energy released a report indicating that E&P investment fell by $250 billion this year and is forecast to drop a further $70 billion in 2016. While global E&P firms need to replace 34 billion barrels of oil every year in order to meet consumption demand, the companies’ investment levels will result in only about 8 billion barrels this year. “This amount is less than 25% of what the market requires long-term,” Rystad said.
A Bear In The Crystal Ball
“We have never seen, in the last 30 years, two years in a row of oil investments declining and this will have a impact on production in the next few years…We may well see some surprises down the road as a result of lack of investments in oil production,” Birol said from Paris.
The culprit of this plunge in investment is, of course, low oil prices. Speaking to the global oil market going into next year, Birol said, “Looking to 2016, I see very few reasons why we can see growth in prices. I think 2016 will be a year where we will have a lower price environment.”
Iran Returns As Demand Seen To Weaken
Tomorrow and Friday, OPEC and the IEA will release their respective monthly reports. The 13-member group’s decision last Friday to jettison the quota system and maintain output at current levels (~31.5 M/bpd) at least until next June’s meeting sent prices falling to seven year lows earlier this week.
Expect both reports to project higher oil exports from Iran, which is set to return to the market early next year after the lifting of sanctions (~500 K/bpd by March, 1 M/bpd by early summer, according to Iran).
In addition to Iran’s return, Birol also sees weaker demand in 2016. “There is a lot of oil in the market now and 2016 demand in the market will be weaker,” he said. “And at the same time we may well see Iran to come to the market if sanctions are lifted, which is going to increase oil in the markets.”
Low Fossil Fuel Prices Hamper Renewables Push
Speaking to concerns voiced at the climate summit, Birol said low prices for fossil fuels will hamper the renewable energy push pursued in some countries.
“We see the cost of renewables going down, but in a low oil price environment, we may well see that some governments may weaken their support for renewable energies or efficiency improvements,” he said. “We have been telling governments that it would be an historical mistake to lessen the support on renewables and efficiency as the price of fossil fuels become cheap. Let me be clear, lower oil prices are a risk for the transformation of energy.”
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