The International Energy Agency has posted its recent report on the impact of the financial crisis on global energy investment on its website. The analysis was first submitted to the G8 Energy Ministerial meeting in Rome last weekend, but the charts and detailed commentary are worth a closer look.
The agency’s conclusions are most neatly summed up in the following table:
Furthermore, the IEA points out those reductions could actually end up being even larger as some companies have not yet announced their revised plans for 2009. There are also some other caveats:
…oil companies may not spend as much as they are budgeting, for example if government owners decide to divert cash from the national company for other purposes or if costs fall back. As in the power sector, almost all projects already under construction are expected to be completed, though work is being slowed in many cases to limit the need to raise fresh capital and to profit from an expected fall in costs (see below).
One of the areas the IEA sees suffering the most due to the budgetary pullbacks, meanwhile, is Canadian oil sands. As the agency explains:
Canada’s once booming oil sands industry has been hit extremely hard by the oil price slump and the fallout of the global credit crisis, mainly because such projects are very capital intensive and much of their output is destined for the United States where demand is waning. Canada ranks second only to Saudi Arabia in terms of proven oil reserves with 179 billion barrels that can be recovered using current technology. The vast bulk is in the form of oil sands — a thick, viscous mixture of sand, water, clay and bitumen concentrated in three major deposits in northern Alberta.
Oil sands projects require much greater capital expenditure than conventional oil to extract the oil-rich bitumen and then refine it into oil. Nonetheless, thanks to high oil prices and a lack of opportunities in other parts of the world to grow production that are open to foreign investment, oil companies flocked to Alberta over the past decade and output from the oil sands rose from 600 kb/d in 2000 to 1.3 mb/d in 2008. This rapid growth led to shortages in skilled labour and rapid cost inflation, prompting concerns that the pace of development was not sustainable.
The outlook has changed dramatically since mid-2008. Projects involving around 1.7 mb/d of peak capacity and worth around $150 billion of investment have been suspended or cancelled.These announcements led the Canadian Association of Petroleum Producers to revise downwards their oil sands production forecast for 2020 by 200 kb/d to 3.3 mb/d, though this is still double current capacity (CAPP, 2009).
With the IEA still expecting demand to grow over the long-term, the lack of investment now, they say, will inevitably lead to supply shortfalls and connected price spikes. As they put it (our emphasis):
Cutbacks in investment in energy infrastructure will only affect capacity with a lag, often amounting to several years. So, in the near term at least, weaker demand is likely to result in an increase in spare or reserve production capacity. But there is a real danger that sustained lower investment in supply in the coming months and years, could lead to a shortage of capacity and another spike in energy prices in several years time, when the economy is on the road to recovery. The faster the recovery, the more likely that such a scenario will happen.
In the meantime though the agency sees continued risks of further contractions to global energy demand growth due to the financial crisis. The degree of the contractions is perhaps best illustrated by global electricity consumption, which the IEA sees dropping by as much as 3.5 per cent in 2009. As the chart below shows (click to enlarge), this would be the first annual fall since the end of the Second World War.
Clouseau-esque market-moving commentary, IEA edition – FT Alphaville
Electricity use faces first fall since 1945 – FT