The Hindu Business Line : World Energy Outlook

As development triggers increasing demand for energy, the producing and using countries will have to do a balancing act so that economic growth remains unaffected. G. Srinivasan cites the just-released World Energy Outlook 2005 that the role of the Middle East and North Africa region will critical to meeting the global energy appetite. These countries have vast resources, but need investments to tap them. That is the key.

THE YEAR 2005 saw the crude prices hitting a new high at $70 a barrel in late August, before settling down. The oil price spiral has severely hit most of the developing countries, including India, that are dependent on imported crude. In its World Economic Outlook, released in September, the International Monetary Fund (IMF) pointed out that even as robust demand continues to play a key part in oil market developments, recent price pressures appear to reflect burgeoning concerns about future tightness in oil markets.

Stating that the impact of higher oil prices may not continue to be as benign as it had been in 2005, the IMF said that if the increase is permanent — as the futures market suggests — budgetary subsidies and consumer behaviour would need to re-adjust. With the members of the OPEC (Organisation of Petroleum Exporting Countries) having limited head-room, the oil market remains vulnerable to shocks.

It is in this context that the oil and gas resources of the Middle East and North Africa (MENA) would be "critical to meeting the world's growing appetite for energy," says the Paris-based International Energy Agency (IEA). "The importance of the Middle East and North Africa to global oil and gas markets cannot be underestimated. These countries have vast resources, but they must be further developed. Investments should not be delayed," the IEA Deputy Executive Director, Mr William C. Ramsay, said while presenting in London on Monday, the findings from the Agency's World Energy Outlook 2005: Middle East and North Africa Insights.

Mr Ramsay attributed the lack of investment in upstream and downstream capacities to the extreme tightness in the global oil market in recent months that led to crude prices reaching stratospheric levels and highlighted the critical role that the MENA region would play in meeting the growing global energy demand.

The WEO-2005 expects the global energy markets to remain vibrant through 2030. If policies remain unchanged, the world energy demand is projected to rise by over 50 per cent between now and 2030. Over 60 per cent of that spurt would be in the form of oil and natural gas. By 2030, the world will be consuming 16.3 billion tonnes of oil equivalent (TOE) — 5.5 billion TOE more than today's levels.

More than two-thirds of the growth in world energy use would be by the developing countries, where economic and population growth remains at high level. Oil remains by far the single most crucial fuel, with two-thirds of the increase in its use accounted by the transport sector. The lack of cost-effective substitutes for automotive fuels would only raise the oil demand.

The natural gas demand would grow faster, driven mainly by power generation. It would overtake coal as the world's primary energy source around 2015, the IEA said, adding that the share of coal in world primary energy demand would fall a little, with demand growth concentrated in China and India. While the annual oil demand is expected to grow at 1.4 per cent per annum to 92 million barrels a day in 2010 and to 115 mbd in 2030, that of gas is forecast to rise by 2.1 per cent every year to 4,800 billion cubic metres by 2030. Coal use will increase by 1.4 per cent per year between now and 2030. By 2030, the coal demand will reach nearly 7300 million tonnes with China and India accounting for about two-thirds of this increase.

While the share of nuclear power is seen to decline marginally, that of hydropower would remain broadly constant. The share of biomass would also decline slightly, as modern commercial fuels in developing countries substitute it. Other renewables, including geothermal, solar and wind energy, are expected to grow faster than other energy sources at 6.2 per cent per year, but still account for only 2 per cent of the primary energy demand in 2030.

World energy resources are adequate to meet this demand, but an investment ofthe order of $17 trillion would have to be marshalled to tap these resources and reach energy to consumers. Oil and gas imports from the Middle East and North Africa would mount, with the rising dependence of IEA countries (mainly rich nations countries) and large importers such as China and India.

Along side, climate-destabilising carbon-dioxide emissions would continue to rise, calling into question the long-term sustainability of the global energy system. Energy-related CO₂ emissions would be 52 per cent higher than today, Mr Ramsay said, adding that "we must change these outcomes and get the planet onto a sustainable energy path". This also assumes importance in the light of the fact that the sharply increased reliance of consuming regions on imports from a small number of MENA countries would aggravate concerns about the security of energy supplies. Turning the spotlight on the energy prospects in the Middle East and North Africa up to 2030 and covering in detail the developments in Algeria, Egypt, Iran, Iraq, Kuwait, Libya, Qatar, Saudi Arabia and the United Arab Emirates, the WEO report scans internal demand, resources, policies, investment, production, exports, even energy use for water desalination in these countries. It says that in the MENA region, surging populations, economic growth and heavy energy subsidies drive domestic energy demand.

The primary energy demand would more than double by 2030. Alongside, the MENA oil production will increase by 75 per cent by 2030 and the natural gas output would treble, leading to more exports of the latter. The region's share in the global oil production would rise from 35 per cent today to 44 per cent in 2030. But this is contingent on the countries investing, on average, $56 billion per year in energy infrastructure. The level of upstream oil investment required would be more than twice that of the last decade.

Considering the massive investments needed in the MENA region, the IEA has developed two scenarios, one, what if adequate investment is not made by the MENA countries, and, two, what if the consuming countries change their policies, a possibility acknowledged by the leaders of G8 and several large developing countries including China and India at Gleneagles in July. They called for stronger action to slow the rising consumption of fossil fuels and related greenhouse gas emissions. A World Alternative Policy scenario, the IEA said, demonstrates that if governments around the world were to implement the new policies aimed at addressing environmental and energy-security concerns, the fossil-fuel demand and carbon-dioxide emissions would be markedly lower. But even then the global energy demand in 2030 would be 37 per cent higher than today and the volume of MENA hydrocarbon exports would still grow significantly.

In the deferred investment scenario, envisaged by the IEA, energy prices rise sharply. The global energy demand growth falls, cutting the MENA region's oil and gas export revenues by more than $1 trillion from 2004 to 2030. World GDP growth slows. Investments can be deferred due to a variety of factors, but whatever the cause, the results could be higher prices, greater uncertainty and market inefficiencies.

Notwithstanding these two scenarios, the WEO's assumptions about global energy prices have also been revised upwards significantly, as a result of changed market expectations after years of under-investment in oil production and the refinery sector. The average IEA crude oil import price, a proxy for international prices, was $36.33 a barrel in 2004 and peaked at around $65 (in 2004 dollars) in September 2005. In the reference scenario, the price is assumed to ease to around $35 in 2010 (in 2004 dollars) as new crude oil production and refining capacities come on stream. It is then assumed to rise slowly to around $39 a barrel in 2030. But in the deferred investment scenario the oil price reaches $52 in 2030.

In sum, as the IEA energy economy profile shows, the world is perched on a high-tension wire and the balancing act by producing countries, in terms of finding and making enough investments both in downstream and upstream operations, and by the consuming countries in terms of efficiency of energy use and devising alternative strategies to reduce dependence on fossil fuels, would determine how far the world economy manages to sustain its energy consumption to maintain higher economic growth levels.

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