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COVID-19 spells volatility for long-term oil supply, risk of shortfalls: IEA

Highlights

Shale no longer guaranteed 'shock absorber' for markets

Collapse in upstream investment poses supply risk

OPEC+ faces 'very delicate balancing act'

London — The coronavirus pandemic has set the stage for greater volatility in world oil supply, with US shale less able to act as a "shock absorber," and a heightened risk that global production will fall short, the International Energy Agency said in its World Energy Outlook Oct. 13.

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The document, presenting scenarios for the period to 2040, said low-cost producers within the OPEC+ group were relatively well positioned, contrasting with producers in sub-Saharan Africa, where output is unlikely to reach 2019 levels any time in the period.

While upstream oil and gas investment has fallen by a third this year, it has dropped by half in the US shale sector, the report said, estimating investment in US tight oil this year at around $45 billion, down from $100 billion in 2018-19.

Rising investor skepticism toward shale, alongside growing criticism of the oil and gas sector for environmental reasons, mean shale can no longer be relied upon to the same extent, with serious global implications, the report said.

The report acknowledged an increase in the pace at which conventional producers can bring new production to the market, with new projects now taking three years on average to reach first production. But it said uncertainty over the world's demand for oil means "there is a distinct possibility that the supply side may be losing appetite for oil faster than the world's consumers."

"Any slack in markets in recent years has largely been picked up by rising US shale output, but it is not clear whether [and if so when] shale will be in a position to continue this role amid a collapse in investor confidence in the sector," the IEA said. "These uncertainties create real potential for future market imbalances and volatility."

"If demand recovers and tight oil for whatever reason does not, conventional producers may struggle to bridge the gap. Tight oil remains a force to be reckoned with in global oil supply, but the shale industry post-COVID will not be the same as the one that we have seen so far," it added.

North American oil output reaches 27.7 million b/d in 2025 under the IEA's latest central scenario, known as the Stated Policies Scenario, a 700,000 b/d reduction from the equivalent projection for 2025 in last year's report. The scenario foresees US tight oil production returning to 2019 levels in 2022, but with a "high degree of uncertainty."

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OPEC+ struggles

The report said it would also be tough for advantaged countries such as Russia and Saudi Arabia to manage the market through international efforts at coordinating production, given the budgetary needs of partners like Iraq, and political uncertainties surrounding the likes of Iran and Libya.

Africa's oil production drops by 1.5 million b/d between 2019 and 2025 to 6.9 million b/d in the Stated Policies Scenario, putting it 1 million b/d lower than in last year's report under the same scenario.

With oil prices set to recover to $71/b in 2025 under the IEA's central scenario for oil demand, this "assumes that attempts at market management led by OPEC are maintained and that individual producers avoid the temptation to 'open the taps,'" the report said.

"In practice, this is a very delicate balancing act. Uncertainty over the shape of the economic recovery from COVID-19 makes it very difficult for oil producers to know what investment and policy approach to follow."

"The possibility of a mismatch between supply and demand is ever present," the report said.

For the global upstream industry as a whole, "Bouncing back will be tougher than in the past, not least because of continued reductions in the cost of some key renewable technologies," the IEA said, going on to highlight the need to replenish production even in a period of muted demand.

In the central 'New Policies Scenario,' while there is only limited growth in oil demand after 2030, "around $390 billion in annual investment is still needed in upstream oil projects," the IEA said.

"Less than 10% of this is required to meet the 900,000 b/d increase in oil demand in the 2030-40 period: the rest is necessary to sustain production in existing fields and develop new fields to offset declines in existing sources of production."

(Corrects year in penultimate paragraph to 2030)