1. WORLD ENERGY INVESTMENT OUTLOOK
Dr. Fatih Birol
Chief Economist
Head, Economic Analysis Division
International Energy Agency / OECD

2. Global Strategic Challenges
Security of energy supplies
Threat of environmental damage caused by energy use
Uneven access of the world’s population to modern energy
Investment in energy-supply infrastructure

3. Global Energy Investment Outlook

4. More than $16 trillion, or $550 billion a year, needs to be invested in energy-supply infrastructure worldwide over the three decades to 2030, an amount equal to 1% of projected gross domestic product.
The average annual rate of investment is projected to rise from $455 billion in the decade to $632 billion in This compares with estimated energy investment of $413 billion in 2000.
For the energy sector as a whole, 51% of investment in production will be simply to replace existing and future capacity. The rest will be needed to meet the increase in demand.
Almost half of total energy investment will take place in developing countries, where production and demand are expected to increase most.
The electricity sector alone will need to spend almost $10 trillion to meet a projected doubling of world electricity demand, accounting for 60% of total energy investment. If the investments in the oil, gas and coal industries that are needed to supply fuel to power stations are included, this share reaches more than 70%.
Total investments in the oil and gas sectors will each amount to more than $3 trillion, or around 19% of global energy investment.
Coal investment will be almost $400 billion, or 2%.

5. More than $16 trillion, or $550 billion a year, needs to be invested in energy-supply infrastructure worldwide over the three decades to 2030, an amount equal to 1% of projected gross domestic product.
More than half of investment in energy production will be needed simply to replace or maintain existing and future capacity.
The average annual rate of investment is projected to rise from $455 billion in the decade to $632 billion in This compares with estimated energy investment of $413 billion in 2000.
Almost half of total energy investment will take place in developing countries, where production and demand are expected to increase most.
Russia and other transition economies will account for 10% and OECD countries for 41%.
Over 40% of non-OECD investments in the oil, gas and coal supply chains will be devoted to projects to export those fuels to OECD countries.
OECD Europe will account for around 15% of global energy investment needs

6. Projected global energy investment of $16
Projected global energy investment of $16.5 trillion equates to 1% of global GDP on average over the next thirty years.
The proportion is expected to fall slightly over the projection period, from 1.1% in the current decade to 0.9% in the decade
The share of energy investment in GDP varies significantly across regions. It will remain much higher in developing countries and the transition economies than in the OECD countries. The share is highest in Russia, averaging more than 5% between 2001 and 2030, followed by Africa (4.1%), other transition economies (3.6%), and the Middle East (3%).
Energy investment will amount to only 0.5% of GDP in the OECD.

7. Global Oil Investment

8. In the Reference Scenario of the World Energy Outlook 2002 (WEO-2002), oil demand is projected to grow from 77 mb/d in 2002 to 120 mb/d in To meet this increase in demand, production in OPEC countries will have to grow continuously from 29 mb/d in 2002 to 65 mb/d by Their output will grow most rapidly in the second and third decades, when they will account for most of the increase in world crude oil production.
Supported by recent high oil prices, non-OPEC supply will remain around the current level until Then it will decline slowly as production in non-OPEC regions, notably the transition economies, Africa and Latin America, will no longer compensate for output declines in mature areas, such as North America and the North Sea. Non-OPEC production will fall to 42 mb/d in 2030.
Non-conventional oil production and processing gains provide the balance with world oil demand.

9. A little over $3 trillion of investment will be needed in the oil sector through to Investment needs will average $103 billion per year, but will increase steadily through the period as demand increases. Annual capital spending will rise from $92 billion in the current decade to $114 billion in the last decade of the projection period.
Capital spending on exploration and development will dominate oil-sector investment, accounting for 72% of the total over the period The bulk of this investment will be needed to maintain production levels at existing fields and in new fields that will produce in the future. The rest will be needed to meet projected growth in demand of 1.6% per year.
Investment in non-conventional oil projects, mainly in Canada and Venezuela, will represent an important and growing share of total exploration and development spending.
Investment in crude oil tankers and oil pipelines will amount to $257 billion. This will be driven by rapid growth in inter-regional trade. Most of this investment will go towards expanding the capacity of the oil-tanker fleet. Global investment in pipeline capacity will be relatively small, but will be important in some locations where large deposits are situated far from the coast.
Cumulative investment in crude oil refining will total $412 billion, or $14 billion per year. This will go to increasing refining capacity to 121 mb/d and to upgrading refineries to match output to the changing product-demand slate.

10. Global oil investment will amount to $ 3 trillion through 2030.
Capital spending will slightly rise over the period from $92 billion in the current decade to $114 billion in the last decade.
If we look at the regional break-down you can see that:
Investment needs will be larger in OECD than in other regions. OECD region investment requirements are high compared to their expected production level, this is the result of higher units particularly in the upstream segment
Other major investment needs will come from major producing regions, such as the Middle East, Transition Economies and Africa.
This chart also reflects that in all regions capital spending on exploration and development will dominate oil sector investment.

11. This slide deals with upstream oil production and capacity additions.
Investment in the oil sector through to 2030 will be dominated by spending on upstream elements of the supply chain, namely exploration and development. These will account for over 70% of total spending within the sector – or around $74 billion per year.
There are two elements to this upstream investment. Firstly investment to meet demand growth and secondly investment to replace progressive declines in production. These two elements are illustrated on this first slide.
The two blue bars represent oil production in 2000 and projected oil production for 2030 (excluding non-conventional oil and GTL and processing gains).
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This next bar, in yellow, represents the amount of new production capacity required to meet this increase in demand.
This second bar, in red, which is about 4 times larger in comparison, represents the amount of capacity required to counter the decline in production from wells already in production and those that will start producing in the future. In order to assess this component of required capacity expansion, it was necessary to make assumptions of oil field decline rates.
As you can see the overall level of investment in the upstream sector, which is derived from the sum of the yellow and red bars, will be far more sensitive to changes in decline rates than to the rate of growth of oil demand.

12. Investment Uncertainties & Challenges

13. Uncertainties & Challenges
Opportunities and incentives to invest
Oil prices and rates of return
Investment regime and risk
Access to reserves
Role of NOCs
Restrictions on foreign investment
Licensing, fiscal and commercial terms
Environmental regulations and ethical concerns
Demand-side impact
Impact on access to reserves and drilling costs
Remaining resources and technology
Iraqi production prospects
Middle East production and investment policies

15. The openness of those countries with large oil resources to foreign direct investment to develop their resources for export will be an important factor in determining how much upstream investment occurs and where.
By the mid-1990s, most countries had at least partially opened their oil sector to foreign investment. However, in some of these countries, particularly Russia, China and Iran, foreign investment has proved difficult because of regulatory and administrative barriers and delays.
Today, three major oil-producing countries – Kuwait, Mexico and Saudi Arabia – remain totally closed. However, plans are afoot in Kuwait to allow direct investment.
Mexico has opened some areas to foreign oilfield services companies and may loosen its ban on direct investment in the future. Readiness to open up the Saudi upstream has so far been restricted to natural gas, but economic pressures could ultimately lead to some opening of the oil sector too. Internal political and socio-economic factors will determine the extent and pace of any such change in these countries.
Overall 60% of the world’s proven reserves are difficult to access.

16. Production prospects in Iraq are highly uncertain
Production prospects in Iraq are highly uncertain. The pace of production growth is linked to the pace of political recovery.
It is estimated that raising capacity to around 3.7 mb/d by 2010 will cost about $5 billion. Further increases are possible but will depend on the future Iraqi government’s production strategy.
To illustrate the uncertainties shrouding future Iraqi oil developments and their implications for investments, we have devised two alternative production profiles corresponding to faster and slower development. In a rapid growth case in which production reaches 9 mb/d in 2030, investment needs would be around $54 billion, about $12 billion more than in the Reference Scenario, where production reaches 8 mb/d. The rapid growth case assumes that capacity of 3.5 mb/d is reached within two years and that production rises in a linear fashion through to This trend implies that Iraq’s share of total OPEC production would rise significantly. In the slow production growth case, investment is about $12 billion less than in the Reference Scenario, with production reaching 3.5 b/d only in 2007 and 6 mb/d in In this case, once production of 3.5 mb/d has been achieved, the subsequent production increases keep Iraq’s share of total OPEC production more or less constant.

17. Restricted Middle East Oil Investment Scenario

18. The WEIO includes a Restricted Investment Scenario which assesses the consequences for global oil supply and demand, oil revenue and upstream investment of investment in Middle East OPEC countries occurring at a lower level than projected in the WEO-2002 Reference Scenario.
In order to simulate the effect of restricted oil investment in OPEC Middle East countries, their share of global oil production is assumed to remain flat at 28%. This is close to the level observed in recent years.
Under this assumption, production in the region keeps growing, but at a much slower pace than in the Reference Scenario. This is considered to be at the outer limit of what might be plausible. A scenario involving a falling share of Middle East OPEC in global supply is improbable, given the region’s large reserves and low development costs. Producers in the region would be unlikely to accept a loss of collective market share.

19. OPEC Oil Revenues, 2001 - 2030 Restricted Investment vs
Reference Scenario
6,000
8,000
10,000
12,000
OPEC
OPEC Middle East
billion dollars
Restricted Investment Scenario
Oil revenues in OPEC Middle East producers are substantially
lower in the Restricted Investment Scenario
The results of the Restricted Investment Scenario indicate that:
Oil revenues in OPEC countries outside the Middle East grow continuously over the projection period thanks to higher oil prices and higher production.
The situation is different in OPEC Middle East countries, where cumulative revenues are lower than in the Reference Scenario
For OPEC as a whole, higher oil prices do not compensate for lower production. Cumulative revenues over the projection period are more than $400 billion lower than in the Reference Scenario. Even on a discounted cash-flow basis, cumulative OPEC revenues over the projection period are lower.
These findings imply that it will be in the interests of both consumer and producer countries to facilitate capital flows to the Middle East upstream oil sector. This is a key issue that will need to be addressed in the context of the consumer-producer dialogue.

20. Oil Concluding Remarks
Global investment of $3 trillion needed in
Investment more sensitive to decline rate than rate of demand growth – most investment needed just to maintain current production level
Major uncertainties about opportunities and incentives to invest, notably
Access to reserves and production policies – OPEC (and Iraq)
Oil prices
Production costs and investment risks
Lower investment in Middle East oil would raise global investment needs, lower OPEC revenues & harm global economy
Enhanced consumer-producer dialogue to help facilitate capital flows

21. Natural Gas Investment Outlook

26. Falling LNG costs are good news for those countries facing a shortfall in domestic gas supply – especially US and Europe. These 2 regions are expected to absorb most of the LNG that will become available from new projects to be commissioned in next 3 decades.
In fact, LNG into US is already economic – when one compares cost of currently proposed projects in Trinidad, Venezuela and Nigeria with average prices over last 5 years of just under $3/Mbtu or current prices of [almost $6).
LNG is also becoming more competitive with alternative domestic supply options in US – as drilling costs rise and decline rates accelerate in lower 48 states and Western Canada.

27. Gas Investment Uncertainties
Balance of risk and return – price is key
Complexity of financing very large-scale projects – especially in developing countries
Access to reserves and fiscal regime – most new investment will be private
Impact of market reforms on investment risk – long-term contracts will remain necessary
These factors could lead to shortfall in investment, supply bottlenecks and higher prices in some cases

28. Electricity Investment Outlook

29. Developing countries will need more than half of the global investment.
China is the region with the highest investment requirements – 2 trillion (they should spend about 2% of their GDP every year just in power infrastructure).
OECD countries will need 4 trillion in their power sector and North America will need the highest investment. Substantial portion of this will be needed to replace old power plants or lines, transformers etc,,
This is only 0.3% of their GDP and in general, there is no problem financing these projects but there are some concerns about the timeliness of investment in the new market conditions.

30. Average Age of Power Plants in the OECD
200
400
600
800
1,000
<20 years
>20 years GW
Fossil
Nuclear

31. Profit margins have fallen sharply in recent years
U.S. Privately Owned Utilities
Profit Margin 0% 2% 4% 6% 8%
10%
12%
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
Profit margins have fallen sharply in recent years
Confidence in the new competitive market model is at a low ebb. The California energy crisis caused the pace of deregulation to slow in many states and increased regulatory uncertainty. The trading scandal and ensuing financial collapse of Enron has prompted close financial scrutiny of the industry. These events, combined with a slowing economy (and resulting lower demand growth for electricity) and volatile fuel and wholesale electricity prices, have resulted in poor financial performance, high debt and downgrades by credit rating agencies, most significantly for merchant companies. While regulated utilities can expect to recover their costs, they too have seen their profit margins shrink, as they seek to improve their competitive position.
Main lesson:It is not easy to attract private capital with low and decreasing profit margins.
Transmission: U.S.investment in transmission did not keep pace with investment in generation in the 1990s due to:
Siting and approval difficulties
Utility focus on unregulated activities
Regulatory uncertainty arising from transition to competitive markets
Transmission bottlenecks have emerged with increase in final demand and new wholesale market generation
There have also been reliability problems, illustrated quite clearly by the August blackout.
U.s. private investment in transmission systems has increased from $2.6 billion in 1991 to $3.7 billion in 2001… but will need to more than double to provide adequate transmission capacity in the long run. By comparison, Japanese investment in transmission lines was between $4 billion and $7 billion per annum in the late 1990s despite Japan’s electricity generation capacity being only a quarter that of the United States.
Deregulation has also prompted an increase in mergers and acquisitions, resulting in substantial industry consolidation. By the end of 2000, the ten largest companies held more than half of the country’s privately-owned capacity, compared to 36% in 1992.

32. Electricity Investment Uncertainties in US
Investment needs will increase over next 3 decades
Demand growth of 1.6%
Many old plants – including most nuclear reactors – will be retired
Shift to higher unit cost renewables
Tightening reserve margins
Gas prices and capital costs of coal stations & renewables are key drivers of future investment in generation
Wind power will be primary renewable source – calling for investment in voltage regulation & network reinforcement
New capacity investment may be delayed as investors wait to see what environmental policies – including possible climate action – are enacted
Higher investment costs for new capacity may delay decommissioning of old plants and raise emissions
I would also like to speak briefly about an issue that is the focus of considerable debate currently: the impact of gas and electricity market liberalisation on investment.
Well-functioning competitive markets should stimulate investment where needed through price signals
Investment in regulated natural monopoly activities will depend on risk-adjusted returns set by regulators.
Concerns are growing over whether electricity prices adequately remunerate investment in peak capacity.
Under-investment in power transmission
Declining reserve margins may be sign of more efficient investment but may impair security of supply
More emphasis on demand-side measures to meet unexpected shortfall in peak capacity
Governments need to monitor and adjust regulatory policies to ensure security of supply is not compromised… but their role will be different from the past – not return to state control.

33. Power Generation Capacity Additions in Developing Countries
200
400
600
800
1,000
1,200 GW
Power Generation Capacity
Additions in Developing Countries
1971 -
2000
Developing countries will need to add increasing amounts of new
generating capacity over the next three decades
Capacity additions are assumed to accelerate in the future. Total capacity additions during the period will need to be three times higher than in the past thirty years. Mobilising the capital needed to build those plants and to add sufficient transmission and distribution capacity may prove an insurmountable challenge for developing economies.

34. Electricity Investment as Share of GDP
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
OECD
China
India
Indonesia
Russia
Brazil
Africa
Medium -
term electricity sector investment needs will increase
relative to GDP in almost all non
OECD regions
Dev. countries will need over 5 trillion dollars but there is no guarantee that this investment will be forthcoming. There are some enormous challenges in developing countries and many obstacles that must be overcome. Already, the 1990s was a very difficult decade for the power sector in many countries. We looked at investment relative to GDP: it’s about 0.5% in OECD countries, but higher in the developing countries (2%-3%). In many regions this ratio was quite low but it should have been higher and should go up in the medium term in most regions.
Major problems are the poor financial health of utilities which means that they cannot finance projects by themselves, poorly developed domestic financial markets and access to international capital markets. Overcoming these obstacles will require significant efforts of restructuring and reform in the electricity sector and elsewhere. A major challenge will be to make tariff structures more cost -reflective.
Of all the regions and countries we analysed in this study, we are particularly concerned about Africa and India.

35. Total private sector investment in electricity between 1990 and 2002 in developing countries amounted to $193 billion. Brazil and other Latin American countries attracted half of it. However, much of it was spent on existing assets that were privatised rather than on new projects.
Reasons for the decline in private investment include badly designed economic reforms, economic collapse or bad business judgements. Many private companies are now selling their assets in developing countries. The reasons for this are diverse and include poor returns on investment, loss of position in their home markets (notably in the case of US investors) and mergers and take-overs under corporate retrenchment policies (in the case of European investors). The result is a drastic reduction in the number of active international investors in developing countries. There are great uncertainties about when and to what extent private investment will revive and where the new investors might come from. One possible answer is local conglomerates, especially in Asia. But development of this source will take time and appropriate policies. These uncertainties create large doubts in attempting to estimate future private investment.

36. Energy Investment Challenge
Total investment requirements are modest relative to world GDP, but challenge differs by region
Energy and financial resources are sufficient, but increasing competition for capital and higher risk
Capital needs are largest for electricity
Half total energy investment is needed in developing countries – where financing will be hardest
Production accounts for the bulk of investment – more than half just to replace old capacity

37. Broader Policy Implications: “Wake-Up Call” for Governments
Increasing emphasis on creating right enabling conditions – and lowering barriers to investment
Less direct intervention as lender or owner
Governments should monitor and assess the need to adjust regulatory reforms in network industries
Policymakers need to ensure basic principles of good governance are applied and respected – including cost-reflective pricing
Fiscal and regulatory incentives to develop advanced technologies – carbon sequestration, hydrogen, fuel cells, advanced nuclear reactors, etc. – could speed their deployment and dramatically alter energy investment patterns and requirements to 2030