WORLD ENERGY PROSPECTS AND CHALLENGES IN THE FUTURE

EM.RIFQI WILDA PRADANA

University of Pembangunan Nasional Veteran Yogyakarta

Global energy needs are likely to continue to grow steadily for at least the
next two-and-ahalf decades. If governments stick with current policies the
underlying premise of the World Energy Outlooks Reference Scenario the
worlds energy needs would be more than 50% higher in 2030 than today, an
average annual growth rate of 1.6%. More than twothirds of the growth in world
energy use will come from the developing countries, where economic and
population growth are highest.

Fossil fuels continue to dominate energy supplies, meeting more than 80%
of the projected increase in primary energy demand in this scenario. Oil remains
the single largest fuel, with two-thirds of the increase in oil use coming from the
transport sector. Demand reaches 92 mb/d in 2010 and 115 mb/d in 2030. Natural
gas demand grows faster, driven mainly by power generation. It overtakes coal as
the worlds second-largest primary energy source before 2015. In this scenario,
the share of coal in world primary demand declines a little, with demand growth
concentrated in China and India. Nuclear powers market share declines
marginally, while that of hydropower remains broadly constant. The share of
nonhydro renewables, including biomass, geothermal, solar, wind, tidal and wave
energy, will remain flat at 11%.

The worlds energy resources are adequate to meet the projected growth in
energy demand in the Reference Scenario. Global oil reserves today exceed the
cumulative projected production between now and 2030, but more reserves will
need to be proved up in order to avoid a peak in production before the end of
the projection period. The exact cost of finding and exploiting energy resources
over the coming decades is uncertain, but will certainly be substantial. Cumulative
energy-sector investment needs are estimated at about $17 trillion (in year-2004
dollars) over 2004-2030, about half in developing countries. Financing the
required investments in non-OECD countries is one of the biggest challenges
facing the energy industry.

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 Rapidly expanding populations, steady economic growth and heavy
subsidies will continue to drive up MENA energy demand. In the Reference
Scenario, demand is projected to grow on average by 2.9% per year over 2003-
2030. As a result, demand more than doubles. The biggest contributors to demand
growth will be Saudi Arabia and Iran. Between them, they will account for about
45% of MENA energy demand in 2030, the same as today. Most MENA countries
will continue to rely almost exclusively on oil and natural gas to meet their energy
needs. Gas will overtake oil by 2020 as the regions main energy source for
domestic use, thanks partly to policies aimed at freeing up oil for export. Despite
rapid growth in MENA energy use, average per capita consumption projected for
2030 will still be barely half the current level in OECD countries, though
consumption will remain very high in the Gulf states. The power and water
sectors will absorb a growing share of the regions total primary energy use as
electricity and desalinated water needs expand rapidly. Heavy subsidies to both
services are accentuating this trend.

Output of oil and natural gas in the MENA region is poised for rapid
expansion. Reserves are large and costs are lower than in most other parts of the
world. In the Reference Scenario, oil production (including natural gas liquids) is
projected to rise from 29 mb/d in 2004 to 33 mb/d in 2010 and to 50 mb/d by
2030. Saudi Arabia, which has the largest proven reserves of oil in the world, will
remain by far the largest supplier. Its output will rise from 10.4 mb/d in 2004 to
11.9 mb/d in 2010 and just over 18 mb/d in 2030. Iraq is expected to see the
fastest rate of production growth, and the biggest increase in volume terms after
Saudi Arabia. In some countries, including Iraq, increased production will hinge
on large-scale foreign investment. These trends will boost MENAs share of
world oil production from 35% in 2004 to 44% in 2030.

MENA oil production will outpace the growth in domestic demand,

allowing the regions net oil exports to rise by three-quarters from 22 mb/d in
2004 to 39 mb/d by 2030. Most exports will still be as crude oil in 2030, but
refined products will account for a growing share. Exports to developing Asian
countries will increase most, but will grow to all the major consuming regions.
MENA production of natural gas is projected to grow even more rapidly than that

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of oil, trebling over the projection period to 1210 billion cubic metres in 2030.
The biggest volume increases in the region occur in Qatar, Iran, Algeria and Saudi
Arabia. The bulk of the increase in MENA output will be exported, mostly as
liquefied natural gas. Demand for the regions gas will be driven by strong global
demand and dwindling output in many other gas-producing regions.

Net gas exports from MENA countries to other regions are projected to
more than quadruple to 440 bcm in 2030, with a marked shift in sales to Europe
and the United States. Europe will remain the primary destination for North
African gas exports. Major oil and gas importers, including most OECD countries
and South Asia, will become ever more dependent on imports from MENA
countries. MENA oil- and gas-export revenues, which have surged in the last few
years, will remain high. Aggregate MENA oil and gas revenues are projected to
rise from about $310 billion in 2004 to $320 billion in 2010 and $635 billion in
2030. Natural gas will make a growing contribution. Cumulative revenues will far
exceed the investment needed to make them possible. Total oil and gas investment
is projected to amount to about $1 trillion over the period 2004-2030 (in year-
2004 dollars), or $39 billion per year.

Securing reliable and affordable energy will hinge on adequate investment.

The rate of investment in developing crude oil production capacity in the Middle
East is particularly important for world energy markets. Current rates of
investment in that region are not high enough to meet the gap that is expected to
open up between global oil demand and oilproduction capacity in other parts the
world. Without urgent and sizable increases in Middle East investment, a shortfall
in production capacity will emerge and prices will rise and become more volatile
to the long-term economic detriment of both producers and consumers. Under-
investment also carries short-term security risks. The relatively low level of spare
oil-production capacity currently available to counteract any unexpected loss of
supply has resulted from many years of under-investment. This increases the
likelihood that the sudden loss of even a modest volume of oil will lead to a very
sharp increase in prices.

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 A major shortfall in MENA investment in upstream oil would radically
alter the global energy balance. Our Reference Scenario projections involve a
doubling of the rate of upstream investment in MENA countries. It is far from
certain that all that investment will be forthcoming: MENA governments could
choose deliberately to develop production capacity more slowly than we project in
our Reference Scenario. Or external factors such as capital shortages could
prevent producers from investing as much in expanding capacity as they would
like. The Deferred Investment Scenario analyses how energy markets might
evolve if upstream investment in each MENA country were to remain constant as
a share of GDP at the average level of the past decade. This would result in a $110
billion, or 23%, drop in cumulative upstream MENA investment over 2004-2030.

Lower investment on this scale would cause MENA oil production to drop
by almost a third by 2030 compared with the Reference Scenario. Production falls
further than investment by the end of the projection period because of the
cumulative effect over the projection period. In 2030, total MENA output reaches
35 mb/d, compared with 50 mb/d in the Reference Scenario. MENAs share of
world oil production drops from 35% in 2004 to 33% in 2030 (it rises to 44% in
the Reference Scenario). As a result, MENA oil exports are almost 40% lower in
2030. By contrast, higher prices stimulate an 8% increase in non-MENA oil
production. The average IEA import price increases gradually over time relative
to the Reference Scenario and is almost one-third higher in 2030. The prices of
gas and coal also increase. Gas production in MENA countries also falls
significantly, due to lower global demand and lower output of associated gas,
causing the regions gas exports to fall by 46%.

As a result of higher prices and lower world GDP, global energy demand
is reduced by about 6% in 2030, compared with the Reference Scenario. On
average, demand growth is 0.21 percentage points lower over the projection
period. World GDP growth, the main driver of energy demand, is on average 0.23
percentage points per year lower. Among the primary fuels, global demand for oil
falls most. At 105 mb/d in 2030, world oil use is 10 mb/d lower. Demand for both
gas and coal also falls, mainly as a result of lower demand for fuel inputs to power
generation.

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 Our analysis suggests that MENA producers would lose out financially
were investment to be reduced in the way assumed in the Deferred Investment
Scenario. Over 2004-2030, the cumulative value of aggregate MENA oil- and
gas-export revenues would be more than a trillion dollars lower (in year-2004
prices) than in the Reference Scenario. The loss of revenues is almost four times
more than the reduction in investment. Revenues also fall in terms of net present
value.

Uncertainty about future supply-side infrastructure investments is by no

means limited to the Middle East or to crude oil production. The prospects for
urgently needed investment in new refining capacity are clouded by
environmental restrictions and local opposition, especially in OECD countries.
Under-investment in gas-production facilities and transmission pipelines in Russia
and Central Asia threatens to create a supply crunch in the next few years. The
lack of competition in the Russian gas sector is an impediment to the efficient and
timely development of Russian and Central Asian gas resources. And current
capital flows to the electricity sector in many countries notably in the poorest
developing regions cannot even maintain system reliability, let alone meet the
increasing demands of economic and population growth.

Over time, consuming countries will grow increasingly reliant on oil and
gas imports from an ever-smaller group of suppliers notably Russia and the big
Middle East producers. Expanding trade is to be welcomed as it binds suppliers
and customers in mutually beneficial relationships. But, at the same time, the risk
of a major supply disruption whether from terrorism, piracy, accidents, severe
weather, political tensions or war will undoubtedly increase. The recent terrorist
attack on the processing facility at Abqaiq in Saudi Arabia provided a graphic
illustration of the terrorist threat to energy infrastructure. Russias decision to cut
off gas supplies to Ukraine in early 2006 called into question its reputation as a
reliable supplier and raised doubts about how Europe would deal with a more
prolonged disruption.

Further cause for concern is the growing reliance on strategic

transportation channels through which almost all the oil and gas exported by

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Middle Eastern countries must flow. Consuming countries vulnerability to a
disruption in supplies from that region will, therefore grow as will the risk that
some producing countries may use their dominant market position to raise prices
or to withhold supplies for political reasons. Diversity of sources, of suppliers and
of routes is crucial.

Consuming countries must identify policies and measures aimed at

reducing the risk of disruptions and higher prices, as well as mitigating their
consequences. They need to strengthen their ability to handle a supply emergency,
including maintaining adequate volumes of strategic stocks. For example, total oil
stocks in the OECD would need to rise, in the Reference Scenario, to 3.7 billion
barrels in 2030 for them to be equal to 90 days of net imports 1.1 billion barrels
more than in 2003. Consuming-country governments also need to consider long-
term policies that promote further diversification of their energy supplies as a
means of both lowering their vulnerability to supply disruptions and of addressing
environmental challenges, including rising greenhouse-gas emissions. Reducing
dependence on oil and gas through diversification of fuels and their geographic
sources and more efficient use of energy must be central to long-term policies
aimed at enhancing energy security.

But consumer country concerns are not limited to energy security. Because
energy consumption accounts for approximately 80% of global GHG emissions,
consumer governments are under increasing pressure to take steps to reduce or
mitigate the effects of domestic energy consumption. The G8 leaders, meeting
with leaders from several key developing countries at Gleneagles in July 2005,
acknowledged as much when they called for stronger action to combat rising
consumption of fossil fuels and related greenhouse-gas emissions.

The World Alternative Policy Scenario takes into account all the new
measures that governments are currently considering to curb energy use and to
reduce emissions for energy-security and environmental reasons. Under these new
assumptions, primary energy demand grows by 1.2% per year to 2030, 0.4
percentage points less than in the Reference Scenario. Demand for oil would be
10% lower in 2030 than in the Reference Scenario, but oil would still account for

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34% of world primary energy demand. Two thirds of the savings would come
from the transport sector. Natural gas demand in 2030 would also be 10% lower
in 2030 than in the Reference Scenario. Most of the savings would come from
power generation.

The results suggest that importing countries aggregate dependence on

MENA could be sharply reduced in the long term. In this scenario, world energy
demand in 2030 falls even more relative to the Reference Scenario than in the
Deferred Investment Scenario. The fall in the share of oil and gas in primary
energy demand in oil-importing regions an indicator of vulnerability to supply
disruptions is also larger in most regions than in the Deferred Investment
Scenario. MENA oil production is lower than in the Reference Scenario, but still
grows by more than 50%, or 16 mb/d, between 2004 and 2030.

In practice, the policies of producing and consuming countries will change

over time in response to each other, to market developments and to shifts in
market power. If MENA upstream investment falters and prices rise, the more
likely it becomes that consuming countries will adopt additional policies to curb
demand growth and reliance on MENA. This would have the effect of tempering
the long-term impact on prices of lower MENA investment. It would also amplify
the depressive effect of higher prices on oil and gas demand. The more successful
the importing countries policies are, the more likely it is that the producing
countries will adopt policies to sustain their production and their global market
share. Lower prices would result.

These interactions illustrate the case for improving market transparency,

for more effective mechanisms for exchanging information between oil producers
and consumers, and for a more profound dialogue between them. The uncertainty
surrounding the outlook for global energy markets has rarely been greater. For as
long as the world economy continues to expand, we can be sure that demand for
oil and other forms of energy will increase commensurately. But the rate of
growth in primary energy needs and the mix of fuels will depend on what action
governments decide to take to curb demand and emissions and on developments
in energy technology. Other factors,,including extreme weather, natural disasters

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and geopolitics, will complicate our ability toanticipate with confidence near-
medium- and long-term energy-market developments. Energy security is more
than ever a matter of managing risk and coping with uncertainty.

Deepening the dialogue between oil and gas producers and consumers
would help all energy players handle uncertainty and help industry mobilise
much-needed investment. The aim should be to improve market transparency, by
developing more effective ways of exchanging information, and co-operating on
policies to enhance the efficiency of the oil and gas sector. Producing countries
are as much concerned about security of demand as consuming countries are
about security of supply. Working together, consumer and producer governments
can improve the mechanisms by which we meet our common challenges and
achieve mutually beneficial outcomes. But they need to identify this objective as a
priority and take the first steps. And they should start now.

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Lawrence Berkeley National Library, Oktober 2003.

International Energy Agency, World Energy Outlook 1999 Insights, IEA, Paris,
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Jalal, M. N., The China-Arab States Cooperation Forum: Achievements,

Challenges and Prospects, Journal of Middle Eastern and Islamic Studies
(in Asia), vol. 8, no. 2, 2014.

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On Date February 17, 2017 At 09:45 pm.