Opec’s conclusion of a landmark deal on oil output cuts may be a huge boost for producers in the short term but in the long run the group’s prominence in commodities markets looks set to diminish as energy majors place more emphasis on natural gas, experts say.
The 12-member oil group met in Vienna on Wednesday taking the decision to cut oil production by 1.2 million barrels per day (bpd) as it looked to support crude prices amid a global supply glut. However, this may not be enough to kick start billions of dollars in investment that had been shelved or cancelled after oil prices halved from their 2014 summer peaks of above US$110 per barrel.
“Many oil producers are looking at the market and they’re now concerned about long-term future demand, and that matters because it affects the decisions of future investments,” said Richard Mallinson, a geopolitical analyst for the UK consultancy Energy Aspects.
The International Energy Agency (IEA) said in its World Energy Outlook, released last month, that even without new policies focused on lowering emissions oil demand would grow at an annual average of 1 million bpd.
Yet policies are changing from tighter emissions regulations to a shift away from oil-based economies, as seen throughout the Arabian Gulf.
The IEA’s new policies scenario shows global oil demand growing at an annual average of less than 400,000 bpd. Royal Dutch Shell believes that peak demand for oil could happen in as early as five years – the point at which the need for the resource will begin to decline.
“It splits the market, whether gas is that much more attractive than oil, and it depends on how you view demand, supply and politics,” said Mr Mallinson.
Vienna-based JBC Energy said that a major oil consumer, Saudi Arabia, has significantly cut consumption with a 30,000 bpd drop expected this year. Eugene Lindell, an energy analyst, said the country has been working to substitute more gas in its power sector, but the collapse in revenue as a result of the 30-month oil price low had an impact on overall demand. “Before, Saudi Arabia’s oil demand was growing by 150,000 to 200,000 bpd annually,” he said.
Meanwhile, gas is a growth business. Michael Stoppard, the global gas chief strategist at IHS Markit, said gas will be the fastest growing fossil fuel in the world with a 1.9 per cent compound annual growth rate to 2025. And it has an increasing importance for international oil companies, but that isn’t always out of choice.
“Last year was the fifth straight year in which gas volume discoveries exceeded that of oil – this is not a strategic choice but rather by geology,” he said.
Gas also faces more competition than oil in its end markets. Natural gas is used in the power sector but other sources such as coal, renewables and nuclear compete in the same space.
“Gas is a growth story, but not necessarily a value story,” said Mr Stoppard.
lgraves@thenational.ae
Follow The National's Business section on Twitter