From credit crunch to energy crisis?

SHAWN MCCARTHY
Globe and Mail
November 12, 2008

OTTAWA — Global oil companies are sowing the seeds of a new supply crisis and a return to record-high prices by cutting back on current investments in response to the global slowdown, the International Energy Agency warns.

Four months ago, economists warned of “demand destruction” as record prices and a slumping economy slowed the growth of global crude consumption. But now, the IEA is worried about “supply destruction” as producers delay expensive projects, including some in Canada's oil sands, that would bring much-needed supplies to market.

“We think that the investment decisions that are being made now are of crucial importance, not only to meet future growth in demand, but to compensate for the decline in existing fields,” the agency's chief economist, Fatih Birol, said in an interview.

“If the investments are postponed, which is happening now, [then] when the demand rebounds we will see a supply crunch which may exceed the situation we saw this summer.”

Mr. Birol noted that producers across the globe – from multinationals tapping Canada's oil sands to national oil companies operating in the Middle East – have been cutting back their capital budgets as oil prices slumped from record highs this summer to a 20-month low Tuesday of $59.33 (U.S.) a barrel.

In a report released Wednesday, the Paris-based agency – which advises rich countries on energy policies – warned that the world's energy system is on an unsustainable path that could lead to both oil shortages and, eventually, in “catastrophic and irreversible damage” to the planet's climate.

To meet rising energy demand over the next 22 years, the industry would have to invest a minimum of $26-trillion – half of which is needed just to maintain current levels by replacing declining oil fields and aging power plants.

The IEA projects oil demand will climb to 106 million barrels a day in 2030, from 85 million barrels today. Despite concerns raised by some economists that the world has reached peak oil production, the agency said there is plenty of oil available to meet that rising demand, so long as the investments are made to boost productive capacity.

It expects prices to rebound from their current level of about $60 a barrel to average more than $100 between 2008 and 2015, rising to $200 by 2030.

That longer-term bullish outlook is widely shared in the industry. In Calgary yesterday, an executive at Canadian Natural Resources Ltd. agreed that prices will rebound once the economy turns around. “I'm quite optimistic that once we get over the current financial crisis we will get back to having healthy demand,” said Réal Cusson, the company's senior vice-president for marketing.

Still, Canadian Natural has slashed its investment budget by nearly half in response to slumping crude prices, notably by delaying planned expansions in the oil sands.

“There's definitely capital expenditure cutbacks happening among oil and gas companies of all sizes,” said Peter Tertzakian, chief energy economist at ARC Financial Corp. in Calgary. Mr. Tertzakian said companies are proceeding with projects that are near completion, but are postponing any new developments.

“We may take comfort in the low prices we are seeing today but the lower the prices go, the less expenditure you are going to see. And then two years from now, when we're out of this [economic] mess, that is when you'll see the problems on the supply side.”

Virtually all the growth in oil consumption will occur outside the leading industrialized countries of the 30-member Organization for Economic Co-operation and Development.

With files from reporter Norval Scott in Calgary

AGENCY CALLS FOR ‘ENERGY REVOLUTION'

The world is hurtling down an energy path that will lead to “catastrophic and irreversible” damage to the planet's climate unless the United States and China lead in a “major de-carbonization” of global energy supplies, the International Energy Agency says.

In a report to be released today, the IEA says that under a “business as usual” scenario, greenhouse gas emissions will rise 35 per cent between 2005 and 2030, a track that would lead to a 6 degree Celsius increase in average global temperatures by the end of the century.

“What is needed is nothing short of an energy revolution,” said the agency, which advises rich nations on energy policy.

The United States and China are the leading emitters of greenhouse gases in the world – with the U.S. as the largest source per capita and China representing the fastest growth in emissions. As a result, both will have to show a leadership role when countries meet in Copenhagen a year from now to negotiate a climate change deal for the post-2012 period. (The Kyoto Protocol contained no commitments beyond that year.) The IEA said the world will need to spend some $4-trillion (U.S.) over the next 22 years for conservation and energy-efficient technologies, such as low-carbon sources of energy and carbon capture and storage. But the resulting reduction in energy use could actually save $7-trillion, it added.

Shawn McCarthy