Last week, OPEC's subsidiary APICORP held a seminar in Manama on Oil and Gas Markets, and the impact of political developments in the Middle East on petroleum-related policies, as well as future investment by Middle Eastern countries in the sector. Apicorp's senior policy consultant Ali Aissaoui presented a paper and said that these investments must take into account global changes in energy supply and demand, and the repercussions of political shifts in the Middle East. The paper also analyzed the future of oil investments in the Middle East and competition with new oil types. Investments in the oil sector aim at meeting the increasing demand for energy. Here, Aissaoui said that studies indicate that global demand for energy may increase by about 40 percent by 2035, which will take place in tandem with geopolitical shifts. Indeed, developing nations (China, India, etc.) will account for about 90 percent of this growth in demand, while the transportation sector, which relies primarily on oil, will continue to do so for the foreseeable future. At the same time, gas consumption will grow, and will be in direct completion with coal in power generation. Aissaoui also said that the Middle East is expected to provide the majority of the oil supplies required to meet this increase, as well as enormous supplies of natural gas. According to Apicorp's policy consultant, the world will require about 38 trillion dollars (at the 2010 dollar value) in investments to balance energy supplies and demand by 2035, broken down as follows: 10 trillion dollars in investments for oil production, 9.5 trillion dollars in natural gas production, and 1.2 trillion dollars in coal production, as well as 400 million dollars in biofuels production. The largest slice of investments will go to power generation (about 16.9 trillion dollars). In other words, according to these figures obtained from the IEA, power generation will account for 45 percent of future energy investments, followed by oil production investments at 26 %, gas at 25%, coal production at 3 percent, and biofuels at about 1 percent. According to the data of the IEA, the main reason behind the dramatic increase in production costs in the present decade is inflation. In this vein, Apicorp's policy consultant states that costs have increased dramatically as a result of contract costs, increased risk margin, and increased costs of large-scale projects. It is expected that Middle Eastern countries will spend around 2.7 trillion dollars on energy production projects by 2035. However, Aissaoui believes that it is possible that some of these projects will be delayed over the medium term, for many reasons, most notably the deterioration of the investment climate in the region because of political unrest, as well as the renegotiation of contracts that are already in place, and the adoption of more conservative policies regarding oil reserves (in the sense of reducing declared production targets). In addition, there is the issue of damaged infrastructure as a result of armed conflict, which leads to project priorities being reconsidered. Aissaoui particularly highlighted the issue of funding, and said that the rate of investments in producing new energy supplies will greatly rely on the price levels of crude oil, and the ability of the national budgets of producing countries to provide adequate financial support. It is expected that the majority of investments will rely on local or regional funding, while funding from international markets and banks will remain very limited, especially amid the global economic crisis. Aissaoui also raised important questions, such as: Will it be possible to attract sufficient local or regional funding, if oil prices drop below their target values included in national budgets? In truth, the majority of oil-producing countries adopt in their annual budgets at present a price level within the range of 90 to 100 dollars per barrel. Aissaoui also raised the following question: Is it possible to attract sufficient foreign investment if the global economic crisis persists and worsens, in light of the chronic financial deficits seen in a number of countries in the region – and also bearing in mind that regional financial deficits may grow bigger if funding from official sources is reduced? Since oil prices play a key role in this regard, Aissaoui believes that it is necessary to study price trends from two different angles: A short-term one, which sees many fluctuations and changes and is affected greatly by immediate news and speculation. And a second long-term one that involves the study of price evolution through market fundamentals such as supply and demand, and this angle must take into account the cost of oil production in costlier projects. Aissaoui also underscored the expected increase of oil prices over the long-run, should production in Middle Eastern countries with low production costs decline. Subsequently, this expected increase of oil prices over the medium and long terms will motivate production of a broader scope in countries where production costs have been lower. The talk here involves increasing deep-sea oil production, shale oil or tar sands, which are all important new sources of crude oil - albeit they entail higher production costs than extracting crude from oil fields in the Middle East. Here, Apircorp's senior policy consultant expects, in light of the important developments in supply and demand for oil, that the Middle East would continue to provide the world with the largest volume of oil and gas supplies. However, this, in order to be sustained, requires around 100 billion dollars in annually investments up until 2035. But is it possible to secure these huge funds annually? The question is particularly valid given the factors mentioned above, in addition to changes pertaining to prices, oil policies and oil-related planning, which all require an increase in prices to secure investments in order to produce more oil. However, at the same time, the growing role of technology and politics (the enthusiasm of consuming countries to secure oil locally) and increased production costs, are not inevitable matters. Therefore, this requires officials responsible for oil policies in the Middle East to take note of the risks resulting from political uncertainty, while major oil-producing countries in the Middle East must also pay attention to not deplete their hydrocarbon reserves. * Mr. Khadduri is a consultant for MEES Oil & Gas (MeesEnergy)
