Published On: Fri, Dec 25th, 2015

oil will remain central to the global energy mix over the next 25 years

Oil-PumpingPenetration of alternative fuel vehicles will increase in the next decades but will remain at low levels: By 2040, only 6% of the passenger car stock and 5.3% of commercial vehicles will be running on non-oil fuels. Without a technology breakthrough, battery electric vehicles are not expected to gain significant market share in the foreseeable future. Besides the high purchase price, there are serious challenges in terms of convenience, such as range limitations and poor battery performance during very hot or cold weather conditions. Similarly, anticipated high purchase costs, the lack of refuelling infrastructure, and relatively expensive hydrogen fuel will make fuel cell electric vehicles less likely to become a global breakthrough technology over the forecast period. Natural gas vehicles will be the most attractive option.

However, high price premiums and a scarce network of refuelling points in most countries will limit the large-scale adoption of this technology. The overall picture is not too different in the commercial vehicles segment.

A crude awakening in 2015: The impact of the price drop on upstream investments and supply is already apparent in the market. The effect is most visible on tight crude production, given its faster reaction to price changes compared to other liquids supply. Although the most prolific zones within some plays can break even at levels below 2015 prices (and are thus likely to see continued production growth), month-on-month growth in total tight crude production has started declining. In the presence of reduced drilling activity, the steep decline rates of tight oil wells imply that annual output growth slows and could potentially become negative. On an annual basis, tight crude supply growth in the US & Canada was 1.1 mb/d in 2014. It is expected to be 0.5 mb/d in 2015 and then 0.1 mb/d in 2016. (It should be noted that in OPEC’s Monthly Oil Market Report (MOMR) for October 2015, expected 2016 production from the US & Canada turned negative, as did that for overall non-OPEC supply.) In addition to the US & Canada, slowing supply growth in 2015 took place in Latin America, OECD Asia Pacific and the Middle East & Africa region, while moderate declines were observed in Mexico, Other Eurasia and in some developing countries.

Impacts in the medium-term supply outlook: Global liquids supply is projected to increase by 5.2 mb/d in the mediumterm, rising from the level of 92.4 mb/d recorded in 2014 to 97.6 mb/d projected for 2020. Liquids supply in the US & Canada reaches 19.8 mb/d by 2020, an increase of 2.5 mb/d over 2014, with tight crude amounting to 5.2 mb/d. Supply from Latin America increases to 6.2 mb/d, providing an additional 1.2 mb/d of supply, while production from Russia stays level at about 10.6 mb/d over the period. Total non-OPEC supply increases from 56.5 mb/d to 60.2 mb/d over the period 2014–2020, which is an increase of 3.7 mb/d. This includes increases from oil sands in Canada (0.7 mb/d), biofuels (0.3 mb/d) and nonOPEC natural gas liquids (NGLs) (0.6 mb/d). The largest supply reduction, almost 0.4 mb/d of crude, is projected for Mexico as the new energy reforms there are not expected to reverse the declining trend over the medium-term.

Current medium-term supply projections represent a downward revision of 1 mb/d compared to last year’s Outlook, primarily due to the lower oil price environment and resulting investment cuts.

Non-OPEC supply and tight crude: inverted-U profile in the long-term: Total non-OPEC supply reaches 61.5 mb/d in 2025, but then declines to 59.7 mb/d in 2040, a reduction of 2.2 mb/d in 2040 compared with last year’s Outlook. Major additions are expected from oil sands in Canada, as well as other non-conventional oil (combined increase of 3.1 mb/d between 2014 and 2040), biofuels (1.6 mb/d) and NGLs (0.8 mb/d).

However, overall non-OPEC crude oil supply is set to decline by 3.1 mb/d over the forecast period. Total tight crude growth to 2040 is expected to face limitations that lead to a plateau of approximately 5.6 mb/d, starting around 2025, followed by a slight decline towards the end of the forecast period. The main long-term increases in non-OPEC crude supply come from Latin America and the Caspian region.

OPEC crude rises through to 2040 in the Reference Case: This year’s Reference Case sees OPEC crude supply increasing from 30 mb/d in 2014 up to 30.7 mb/d by 2020. Then, in the 20-year period between 2020 and 2040, OPEC crude expands by 10 mb/d to a level of 40.7 mb/d in 2040. The share of OPEC crude in the total world liquids supply is projected to increase to 37% in 2040, compared to current levels of around 33%.

Almost $10 trillion of investments in the oil industry are required up to 2040: At a global level, oil-related investments required to cover future demand for oil over the forecast period 2015–2040 is estimated at almost $10 trillion (in 2014 dollars).

In particular, the investments needed for the upstream sector are estimated at $7.2 trillion. Most of this will be made in non-OPEC countries, and over the medium-term, they will need to invest around $250 billion each year. OPEC, on the other hand, will need to invest an average of more than $40 billion annually in the remaining years of this decade, and over $60 billion annually in the long-term.

Average annual upstream investment requirements for non-OPEC in the long-term will decline to around $210 billion on the back of declining crude supply. The OECD’s share in global investment will be more than half of the global total given the high costs (for both conventional and unconventional crudes) and decline rates.

The investments needed in the midstream and downstream sector combined are estimated at around $2.7 trillion between 2015 and 2040 (in 2014 dollars).

The Outlook is clouded with uncertainty stemming from economic growth risk in particular: To account for uncertainties related to this Outlook, and similar to previous years, alternative economic growth scenarios have been developed. In the Reference Case, world GDP grows at 3.5% p.a. on average in the period 2014–2040. Under a combination of a set of different factors, average GDP growth, as considered in the higher economic growth scenario, could be 3.7% p.a. Alternatively, if negative factors prevail, then in the lower economic growth scenario GDP could drop to 3.1% p.a.

Accordingly, demand reaches 114.6 mb/d by 2040 in the higher economic growth scenario – 4.9 mb/d higher than in the Reference Case – and 102.4 mb/d by 2040 in the lower economic growth scenario – 7.3 mb/d lower than in the Reference Case. Under the same assumption that OPEC crude absorbs all the gains or losses in demand in the higher economic growth scenario, OPEC crude increases steadily during the forecast period to reach 45.4 mb/d in 2040. In contrast, the lower economic growth scenario sees OPEC crude decline in the next few years to reach 28.1 mb/d by 2024, then rise to 33.5 mb/d in 2040.

Uncertainty is also associated with non-OPEC supply prospects: Above- and/or below-ground factors could result in upside and downside outcomes for non-OPEC supply. Aggregate non-OPEC liquids added to the Reference Case in the upside supply scenario amounts to approximately 6.1 mb/d by 2040. Around 62% of this comes from tight crude and unconventional NGLs, both in North America and in other assessed countries (Russia, China, Mexico and Argentina).

In the downside supply scenario, 3.3 mb/d from non-OPEC supply is assumed to be lost by 2040 with respect to the Reference Case. Much of the reduction comes from major types of crude and NGLs, which together account for over 64% of the total reduction in 2040.

In the downside non-OPEC supply scenario, OPEC crude rises to 43.9 mb/d in 2040, which is 3.2 mb/d higher than in the Reference Case. In the upside non-OPEC supply scenario, OPEC crude is estimated at 34.5 mb/d, which is 6.2 mb/d lower than in the Reference Case. As the uncertainty in non-OPEC supply is skewed to the upside, the uncertainty for OPEC crude is therefore skewed to the downside.

Demand for light products and middle distillates grows but residual fuel is set to decline: Over the forecast period, significant demand increases are expected in diesel/gasoil (8 mb/d) and gasoline (3.7 mb/d). This highlights the importance of the road transportation sector as a source of growing oil demand. Rising income and the expansion of the middle-class, together with strong demand for travel services favoured by the establishment of low-cost airline carriers, will support demand for jet/kerosene. Combined together, the demand for middle distillates (diesel/gasoil and jet/kerosene) is expected to increase by 10.4 mb/d between 2014 and 2040, accounting for 57% of the demand growth in refined products.

During the same period, demand growth in ethane/LPG and naphtha is also expected, especially due to strong demand growth from the petrochemicals sector.

In contrast, demand for residual fuel will decline by 1.7 mb/d between 2014 and 2040, on the back of International Maritime Organization (IMO) regulations and continuous competition from alternative sources in the electricity generation sector.

New refining capacity is concentrated in locations where demand is growing, notably the Asia-Pacific: Ongoing investment activity in the refining sector once again re-emphasizes the trend evident over the past several years wherein observed and projected increases in demand for refined products in developing countries are the primary driver of investments in this sector. This year’s review of existing projects indicates that 7.1 mb/d of new distillation capacity will be added globally in the period 2015–2020, the vast majority of it in the Middle East, China and Other Asia-Pacific. Over and above the 7.1 mb/d of assessed projects, the 2020 model case indicates a further 1.2 mb/d will be required (primarily due to ‘capacity creep’) for total distillation capacity additions to 2020 of 8.3 mb/d. The 2025, 2030, 2035 and 2040 cases add, respectively, an additional 3.6 mb/d, 3.1 mb/d, 2.8 mb/d and 2.2 mb/d over and above the previous case’s total. Combined together, the cumulative total additions – assessed projects plus total model additions – are projected to reach 20 mb/d by 2040. Over the longer term, capacity additions maintain a pattern of being focused in regions where demand growth is significant. For additions over firm projects from 2020–2040, the Asia Pacific takes the lion’s share of capacity additions at 63% of the global total, driven by regional demand growth.

Surplus medium-term refining capacity has eased, but continues to point to a period of competition for product markets: The incremental distillation capacity resulting from existing projects, at 7.1 mb/d from 2015–2020, is appreciably below the 8.3 mb/d assessed a year ago for the period 2014–2019, primarily as a consequence of project delays resulting from the recent oil price drop. Adding in an allowance for minor ‘capacity creep’, the total medium-term addition to crude distillation units is projected to be close to 8 mb/d. On this basis, potential incremental crude runs average approximately 1.2 mb/d annually through to 2020, leading to cumulative potential incremental runs of 7.2 mb/d. Compared to the potential from refining, demand for crude-based products from refineries is estimated on average at around 0.85 mb/d p.a. The net result is that the outlook for incremental refinery output potential and incremental refinery product demand are projected to be closely in balance through to 2017. Thereafter, however, a gap opens up and by 2020 the cumulative 7.2 mb/d of refinery production potential is 2.1 mb/d in excess of the 5.1 mb/d projected as required from refineries.

While the degree of the overhang has dropped compared to previous years, the conclusion remains that these projections point to a period of rising international competition for product markets, as well as the need for continuing refinery closures on a significant scale, if depressed refining margins are to be averted.

Continued capacity rationalization is still needed: In last year’s Outlook, the need for additional closures was assessed at some 5 mb/d between 2014 and 2020. Since 1.2 mb/d of closures occurred during 2014, this meant that a further 3.8 mb/d of closures were assumed as needed between 2015 and 2020. It is clear that closures are essential to avoid a return to the excess capacity levels of the 1990s. Over the longer term, further closures will be needed because of the continuing demand decline in the industrialized regions. These closures could be potentially in the order of another 3 mb/d from 2020–2040, on top of the closures of 5 mb/d expected during 2104– 2020. Of course, whether these will occur is open to question, but this should be viewed as a long-term game. The pressures for closure will mount rather than go away because of the diminishing need for net new additions and the continuation of demand decline in industrialized regions.

Global marine fuel regulations could shock refining and oil markets: IMO regulations call for global standards for sulphur content in marine fuel to be tightened to 0.5% from its present 3.5%. There is uncertainty over this regulation, however, because there is the possibility that the implementation date could be dropped back from 2020 to 2025, and because it allows for the use of on-board exhaust gas scrubbers with high sulphur fuel as an alternative compliance mechanism.

The uncertainty of the timing is a deterrent to both shippers and refiners to invest in facilities, either to scrub fuel or to convert high sulphur supplies to low sulphur. Also, as of today, on-board scrubbers remain at the testing stage and there are doubts over whether, and when, they will prove successful and be adopted en masse. With scrubber penetration in 2020 now considered by many observers as likely to be low, the volume of high sulphur and mainly heavy marine fuel that would need to be converted to 0.5% sulphur marine distillate or other formulations could lie in the range of 2 mb/d to more than 3 mb/d. This requirement would be on top of the incremental volume and quality demands relating to diesel/gasoil, jet fuel/ kerosene and other fuels.

The IMO intends to issue a recommendation on timing of implementation – whether 2020 or 2025 – by late 2016. However, if the date remains at 2020, this will leave only limited time for refiners to make what could ultimately be substantial investments and/or for scrubbers to be retro-fitted to thousands of ships. A risk is emerging that the implementation of the rule could lead to a period of strained refining markets with substantial price premiums versus crude oil for low sulphur distillate and residual fuels and severe discounts for high sulphur fuels. The impacts would not be limited to marine fuels, but would spread across all sectors and world regions. Complex refineries, especially those oriented to distillates, would potentially benefit but simpler refineries, especially those processing higher sulphur crude oils, would be adversely impacted, with possible implications for closures.

Long-term capacity requirements are ‘frontloaded’; the pace of needed refinery capacity additions inexorably slows: Although the pace of refinery projects has slowed in the aftermath of the recent crude oil price drop, the 8.3 mb/d of projected total additions by 2020 (which comprise 7.1 mb/d of firm assessed projects plus model-based ‘creep’ and limited additions beyond projects) still represent over 40% of the 20 mb/d cumulative total additions projected as needed by 2040. They are also 35% higher than the total demand growth in the period from 2014–2020, an excess that increases once NGLs and other non-crude supply additions are taken into account. Moreover, rational capacity additions post-2020 are expected to be no more than half the 1.4 mb/d p.a. expected between now and 2020, and less than one-third in the last five years of the forecast period.

Projections highlight a continuing need to increase conversion capacity relative to distillation: The assessed projects to 2020 broadly maintain the existing base capacity ratio of 40% conversion to distillation. However, the distillation capacity additions to 2020 include approximately 0.7 mb/d of condensate splitters spread between the US and the Middle East. These have little or no associated secondary capacity. Consequently, the period post-2020 embodies a degree of ‘catch up’ with conversion additions running at somewhat above 70% of new distillation capacity. These additions, both existing projects and beyond, include coking, fluid catalytic cracking (FCC) and hydro-cracking.

Compared to a year ago, the proportion of hydro-cracking has moderately dropped and that of FCC has risen. This has been driven by the higher demand seen for gasoline. But the demand effect is mainly in the first half of the forecast period, so the FCC additions are ‘front-loaded’ in the period up to 2030. Over the total period from 2015 to 2040, including assessed projects, nearly 5.5 mb/d of hydro-cracking additions are projected as needed, approximately 4 mb/d of FCC and 3 mb/d of coking. Due to the projected sustained increases in gasoil/diesel demand, hydro-cracking additions are maintained over the forecast period, 0.9 mb/d in 2015–2020, 2.2 mb/d in 2020–2030 and 2.3 mb/d in 2030–2040. Coking additions also occur at a steady pace. The gradual heavying of the global crude slate, combined with flat to declining residual fuel, support these sustained coking additions.

Flat medium-term crude oil trade expands substantially long-term; Middle East leads export growth: Medium-term crude oil movements between the seven major regions are projected to stay essentially level at around 36 mb/d through to 2020, before growing to over 44 mb/d by 2040. The projections underscore the continued future role of the Middle East as the major crude oil exporter. Despite flat medium-term crude exports, engendered in large part by the rapid increase in regional refinery capacity by 2020, total crude exports from the Middle East are projected to reach 24 mb/d by 2040, over 6 mb/d higher than in 2013. In terms of destination, the dominant flow and major increases are to the Asia-Pacific, attracted by this region’s rising demand. Crude oil exports from Latin America and from Russia & Caspian are projected to remain relatively stable while those from Africa decline longer term because of rising regional demand. Subject to planned pipeline expansion being realized, crude oil exports from Russia & Caspian countries to the Asia-Pacific come close to tripling by the end of the forecast period, compared to 2013 levels.

During the same period, exports to Europe are expected to be significantly reduced, from more than 5 mb/d in 2013 to around 3 mb/d by 2040. While this Outlook does not assume the US crude oil export ban is lifted, total exports from the US & Canada are projected to grow.

Falling crude oil imports to the US & Canada and to Europe contrast with a steady increase to the Asia-Pacific: Declining crude oil imports are most visible in the case of the US & Canada. Because of higher domestic crude oil production and reduced demand in the region in the long-term, crude oil imports are set to decline from 5.8 mb/d in 2013 and a projected 4.6 mb/d in 2020 to below 4 mb/d by 2040. Moreover, it is the significant decline in US crude imports (since Canada is a net crude exporter) that is a leading factor in shifting the patterns of global crude trade as recent events have already signified. Higher medium term production of light and extra-light tight oil will continue to displace imports from Africa and the North Sea, other than relatively limited volumes of heavier and acidic crudes. Crude oil imports to Europe and to Japan/Australasia also decline over the forecast period.

In marked contrast to the declining imports to the US & Canada and to Europe, crude oil imports to the Asia-Pacific rise steadily and substantially. The region remains by far the largest crude importing region over the entire forecast period.

Import volumes are set to increase by over 11.5 mb/d between 2013 and 2040, reaching a level of 30 mb/d by 2040.

Combating climate change: a global challenge: In 2010 at the COP16 in Cancun, Mexico, the Parties to the United Nations Framework Convention on Climate Change (UNFCCC) agreed to contain global warming to no more than 2?C above the average pre-industrial period atmospheric temperature by 2100. To achieve this goal, significant greenhouse gases (GHGs) reduction is required. While the potential for emissions reduction exists in many human activities, a number of factors – most importantly, the availability of appropriate technologies and the financial resources associated with emissions reduction – are considered necessary. At the same time, reducing GHGs while enabling the continuation of economic development is a challenge to be addressed.

Decarbonizing electricity generation is seen as a key mitigation measure. Given that coal is a highly carbon-intense energy source and a significant share of global electricity generation is based on this fuel, emissions from coal-based electricity generation require particular attention. Additionally, the electricity sector offers the most promising and cost-effective mitigation opportunities, on both the supply and demand sides.

Energy access as part of a new development agenda: In September 2015, the UN Sustainable Development Summit adopted the post- 2015 development agenda. One of its sustainable development goals focuses on energy and calls for nations to “ensure access to affordable, reliable, sustainable and modern energy for all”.

Energy access remains a crucial global challenge as over one billion people are still lacking access to electricity. The vast majority of these are found in SubSaharan African and South Asian countries. Moreover, expanding energy access can enhance income and welfare, generate equitable employment, develop the sectors of agriculture, health and education, as well as improve quality of life and increase local resilience and self-reliance. Enhancing international cooperation to facilitate access to clean energy research and technology, investment and expansion in energy infrastructure, and upgrading technology will be crucial to achieve energy access for all.

Dialogue and cooperation is one of OPEC’s priorities: Today’s increasingly interdependent world necessitates the existence of dialogue and cooperation between all groups, stakeholders and entities in all sectors – especially in the energy industry. OPEC is continually engaged in international dialogue and global cooperation synergies via various high-level meetings, workshops, conventions and inter-regional summits. In 2015, OPEC has held several high-level dialogues. These include with the International Energy Agency (IEA), the International Energy Forum (IEF), the G20, the Joint Organisations Data Initiative (JODI) and its partners, China, the EU, Russia, Siemens AG and the Vienna Energy Club.

Additionally, OPEC organized the 6th OPEC International Seminar, held in Vienna on the 3–4 June 2015 with the theme ‘Petroleum – an engine for global development’. The event brought together Ministers from OPEC Member Countries and other oil-producing and oil-consuming nations, as well as heads of intergovernmental organizations, chief executives of national and international oil companies, in addition to other industry leaders, academics, energy experts and the specialist media.

Dialogue and cooperation is appreciated for its role in strengthening relationships among stakeholders, and the ensuing benefits for market stability in the short- and long-term. This holds especially true amidst the various challenges and opportunities that await the industry.

Source: Emirates news agency

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