INTERNATIONAL ENERGY AGENCY WORLD ENERGY INVESTMENT OUTLOOK 2003 INSIGHTS

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1 INTERNATIONAL ENERGY AGENCY WORLD ENERGY INVESTMENT OUTLOOK 2003 INSIGHTS

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 World Energy Investment Total investment: 16 trillion dollars E&D 72% 46% Power generation Refining Other 13% 15% Oil 19% Electricity 60% 54% T&D E&D LNG Chain T&D and Storage 55% 8% 37% Gas 19% Coal 2% 88% Mining 12% Production accounts for the majority of investment in the supply chain except for electricity Shipping and ports

5 Energy Investment by Region ,000 cumulative investment (billion dollars) 3,500 3,000 2,500 2,000 1,500 1, share in global investment (%) 0 0 OECD China OECD Other Asia Africa Russia Middle East OECD Other Latin India Other Brazil North Europe Pacific America transition America economies OECD Europe will account for around 15% of global energy investment needs of $16 trillion

6 Energy Investment Share in GDP Russia Africa Other transition economies Middle East China India Other Asia Latin America OECD World average per cent The share of energy investment in the economy is much higher in developing countries and the transition economies than in the OECD

7 Global Oil Investment

8 World Oil Production mb/d OPEC - Middle East Non-OPEC OPEC - Other Non-conventional oil OPEC countries mainly in Middle East will account for almost all the increase in world oil production to 2030

9 World Oil Investment 1,200 1,000 billion dollars Exploration & development Non-conventional oil GTL Refineries Tankers Pipelines Upstream will continue to dominate oil investment, but the shares of tankers and GTL increase over projection period

10 Oil Investment by Region Asia Latin America Africa Transition economies Middle East OECD billion dollars per year Exploration & development Non-conventional oil Refineries Most investment outside the OECD will be needed in the Middle East and the transition economies mainly in the upstream

11 250 Oil Production and Capacity Additions mb/d Production Expansion to meet demand growth Replacement to maintain capacity The bulk of additions to crude oil production capacity will be needed simply to maintain capacity

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

14 Global Upstream Oil and Gas Investment & Crude Oil Price $/barrel Investment WTI price (right axis) Upstream investment is sensitive with a lag of a year or so to movements in oil prices billion dollars

15 Access to Oil Reserves Concession 21% Iraq 10% National companies only (Saudi Arabia, Kuwait, Mexico) 35% Production sharing 12% Limited access - National companies 22% 1,032 billion barrels Access to much of the world s remaining oil reserves is restricted

16 Iraq Oil Investment Scenarios cumulative investment (billion dollars production (mb/d) Restoration of production capacity Reference Scenario Slow production expansion Rapid production expansion Iraq will need to invest around $5 billion to raise oil production capacity to almost 4mb/d by 2010 in the Reference Scenario

17 Restricted Middle East Oil Investment Scenario

18 Restricted Middle East Oil Investment Scenario OPEC Middle East Share in Global Oil Supply per cent Restricted Investment Scenario Reference Scenario OPEC Middle East s share of global oil production is assumed to remain flat at under 30% in Restricted Investment Scenario

19 OPEC Oil Revenues, Restricted Investment vs Reference Scenario 12,000 billion dollars 10,000 8,000 6,000 OPEC Reference Scenario OPEC Middle East Restricted Investment Scenario Oil revenues in OPEC Middle East producers are substantially lower in the Restricted Investment Scenario

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

22 Gas E&D Investment & Incremental Production Othe 20% Africa 9% E&D Investment OECD 48% Incremental Production OECD 10% Other Transition 32% economies 18% Middle East 8% Transition economies 15% Africa 17% $ 1.7 trillion 2,767 bcm Middle East 23% OECD countries will account for almost half total upstream gas investment, but only 10% of additional production

23 Net Inter-regional Trade & Production bcm 5,400 4,800 4,200 3,600 3,000 2,400 1,800 1, Production LNG trade Pipeline trade A growing share of gas will be traded between regions, much of it in the form of LNG

24 LNG Shipping Fleet number of ships On order } in 2001 in operation (2001) additions Liquefaction project developers LNG buyers Oil & gas companies Ship owners Projected A 6-fold increase in LNG trade between 2002 and 2030 will call for massive investment in new carriers

25 Indicative LNG Unit Capital Cost dollars per tonne of capacity Mid-1990s Liquefaction Shipping Regasification The recent dramatic fall in LNG costs is expected to continue

26 Levelised Cost of LNG Imports into US Gulf Coast Henry-Hub average price, $/MBtu Trinidad Nigeria Venezuela Egypt Qatar Upstream Liquefaction Shipping Regasification Lower capital costs are making LNG imports more economic and more competitive with domestic supply projects

27 Gas Investment Uncertainties Balanceofriskandreturn priceiskey 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 Electricity Sector Investment by Region ,500 2,000 billion dollars 1,500 1, China Other Latin Africa Middle US and European OECD Other Russia Rest of Asia America East Canada Union Pacific OECD TE China will need more electricity investment than any other country or region

30 Average Age of Power Plants in the OECD 1, GW <20 years >20 years Fossil Nuclear

31 U.S. Privately Owned Utilities Profit Margin 12% 10% 8% 6% 4% 2% 0% Profit margins have fallen sharply in recent years

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 Shifttohigherunitcostrenewables 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

33 Power Generation Capacity Additions in Developing Countries ,200 1, GW Developing countries will need to add increasing amounts of new generating capacity over the next three decades

34 Electricity Investment as Share of GDP 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% OECD China India Indonesia Russia Brazil Africa Medium-term electricity sector investment needs will increase relative to GDP in almost all non-oecd regions

35 Power Sector Private Investment in Developing Countries billion dollars Developing countries will need to reverse the slump in private capital flows if projected investment is to be forthcoming

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 costreflective 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

Global Strategic Energy Challenges

WORLD ENERGY INVESTMENT OUTLOOK Global Strategic Energy Challenges Dr. Fatih Birol Chief Economist Head, Economic Analysis Division International Energy Agency INTERNATIONAL ENERGY AGENCY US DOE US DOE