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Crash in oil exploration puts world ‘on bad path’

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By Carola Hoyos, Javier Blas and Ed Crooks in London

Published: November 13 2008 02:00 | Last updated: November 13 2008 02:00

A lack of investment in new sources of oil risks a supply crunch worse than the problems that pushed prices to $147 a barrel this summer, the developed world’s energy watchdog said yesterday.

The International Energy Agency warned that cuts and delays in investment that were prompted by the fall in oil prices and the credit crunch had put the world “on a bad path”.

Fatih Birol, chief economist at the IEA, said: “We hear almost every day about a project being postponed. This is a major problem.”

Last year, $390bn (€311bn, £259bn) was invested in oil and gas exploration and production, one of the highest amounts in recent years. Yet it still fell short of the $450bn the IEA said would be needed in both sectors.

There was no respite for the IEA in oil prices yesterday. West Texas Intermediate on the New York Mercantile Exchange dropped to a 20-month low of $56.35 a barrel, down almost $3, after the US Department of Energy said demand would remain flat for 2008-09.

Oil prices have fallen as economies have struggled in the credit crisis and demand has dropped, especially in the developed world.

The IEA predicted that shrinking demand would be a long-term phenomenon among members of the Organisation for Economic Co-operation and Development. “We think OECD oil demand has peaked. The OECD countries’ role in the energy world is becoming less and less important,” said Mr Birol.

Developing countries are expected to be the only source of growth in oil demand until 2030, with China contributing 43 per cent and India and the Middle East each about 20 per cent. The remainder will come from other emerging economies in Asia.

But meeting the demand growth is secondary to the big challenge of compen-sating for the fast-declining production from the world’s older fields, the IEA said. It suggested the oil price was too low to guarantee the necessary investment and noted that high-cost ventures, such as Canada’s tar sands, were producing oil at a cost of about $80 a barrel – more than $20 higher than the prevailing oil price.

The warning represents a change of tone from an organisation that has often criticised the Opec cartel of oil-producing nations for reducing production to prop up prices.

The main spur for the IEA’s focus on investment – and the oil price that it regards as necessary to stimulate investors – has been its exhaustive study on the rates of decline in production from 800 of the world’s biggest oil fields.

The watchdog found that even after recent investment, production from the fields was declining at an annual 6.7 per cent and that this rate was accelerating. This means 45m barrels a day would have to be found and tapped in the next 22 years simply to meet an unchanged world demand. As it stands, however, the IEA expects demand to rise from 85m b/d last year to 106m b/d in 2030, making the challenge that much greater.

Many of the fields experiencing the sharpest decline in production lie in developed countries, including in areas such as the North Sea and Alaska. This meant the west would become less and less of an influence in terms of production, while Gulf countries would become more important.

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