Oil output to fall short of demand: IEA

LESS FROM OILSANDS

JESSE SNYDER CALGARY • The world’s thirst for oil barrels will continue during the next few decades, but Canadian production will not keep up enough to take advantage of that insatiable demand, according to a new report by the International Energy Agency.

The energy watchdog’s latest World Energy Outlook, released Wednesday, expects Canadian output to grow to 6.1 million barrels per day by 2040 if governments stick to their Paris climate pledges — but that’s 1.5 million bpd lower than the IEA’s Current Policies Scenario, which assumes no new international policy measures to combat greenhouse gases.

During the past few years, the IEA has been steadily cutting its Canadian oil output forecast. Last year, the Paris-based agency estimated production primarily from the oilsands to expand to 6.8 million bpd — 600,000 bpd lower than its 2014 forecast.

Despite the challenges, the Canadian oil and natural gas sector will remain an investment magnet, attracting US$1.1 trillion over the next 24 years, with upstream oil and gas attracting around US$40 billion annually to 2040.

Meanwhile, the IEA’s predictions suggest there will be opportunities for Canadian natural gas producers in particular. It expects natural gas producers in the U.S. and Canada will need to eventually produce as much as one trillion cubic feet of natural gas per day to meet demand.

Prices for U.S. natural gas benchmark Henry Hub are expected to gradually rise to about US$7 per Mbtu by 2040, up from just below US$3 today.

LNG markets are also expected to enter back into balance, though not until the mid-2020s. There is currently 130 billion cubic feet of LNG capacity currently under construction, 85 per cent of which is in either the U.S. or Australia. The extensive buildout of new supply has weighed down prices for gas, making prices for export projects appear uneconomic and pushing the LNG market into oversupply.

Despite a global growth rate of 1.5 per cent, the outlook for natural gas is significantly lower than the IEA’s previous report, which pegged growth at 2.3 per cent. That is largely due to rapidly decreasing costs for renewable energy sources, which are expected to make up 60 per cent of total power capacity by 2040.

The IEA report also suggests global oil demand is unlikely to peak in the next 25 years, even as governments implement increasingly rigid climate policies.

Oil demand will grow at an average of just under one million barrels per day until 2040, leading consumption to surpass the 100-millionbpd mark around 2030, despite recent climate commitments made in Paris, aimed at hastening the world’s shift away from fossil fuels in favour of renewables.

The report also accounted for a substantial rise in the adoption of electric vehicles, which it estimates will reach a worldwide total of 150 million by 2040, up from 1.3 million in 2015. That growth, the report said, could displace 1.3 million bpd in the next 25 years, but would only make a small dent in curbing oil consumption more broadly.

“The difficulty of finding alternatives to oil in road freight, aviation and petrochemicals means that, up to 2040, the growth in these three sectors alone is greater than the growth in global oil demand,” the report said.

The findings of the report appear to run counter to recent comments that claim oil demand is rapidly nearing its peak. The chief financial officer of Royal Dutch Shell PLC, Simon Henry, said on a conference call with analysts recently that demand could peak “somewhere between five and 15 years.”

How quickly oil demand reaches its eventual summit depends upon climate policy. Under a scenario in which policies are put in place to keep global temperatures below the 2 C threshold, oil demand peaks as early as 2020, falling below 80 million bpd by 2040.

Under that scenario, electric vehicles would reach 710 million globally, displacing about six million bpd.

The report is the most comprehensive energy outlook published by the IEA, analyzing long-term markets for oil, natural gas, coal and clean energy.