Upstream oil investment 'crucial' during transition says IEA
It is crucial that the oil industry continues to invest in the upstream (exploration and production) sector as it will take years to shift global transport fleets away from internal combustion engines to EVs and other low-carbon alternatives, according to the IEA's Oil 21 report.
Key energy sectors such as aviation, shipping and petrochemicals will continue to rely on oil for some time, it states, yet only a marginal rise in global upstream investment is expected this year after operators spent one-third less in 2020 than they planned at the start of the year.
To meet the growth in oil demand to 2026 in the IEA report’s base case, supply needs to rise by 10m bpd by 2026 - but it is projected to increase by 5m bpd, although a production capacity cushion of a record 9m bpd could keep global markets comfortable in the near term.
The Middle East, led by Saudi Arabia, is expected to provide half that increase, largely from existing shut-in capacity. Asia will continue to dominate growth in global oil demand, accounting for 90% of the increase between 2019-2026.
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The need for ongoing upstream investment illustrates the challenges facing the industry as it is increasingly preoccupied with decarbonization and meeting clean energy and net zero targets. Minimising emissions from core operations, notably methane, remains an urgent priority.
Moreover the Covid-19 demand shock, large scale expansions and expectations of a long‑term structural decline in demand are creating an overhang that can only be eradicated through massive closures.
"The Covid-19 crisis caused a historic decline in global oil demand – but not necessarily a lasting one. Achieving an orderly transition away from oil is essential to meet climate goals, but it will require major policy changes from governments as well as accelerated behavioural changes. Without that, global oil demand is set to increase every year between now and 2026," said Dr Fatih Birol, the IEA’s Executive Director.
"For the world’s oil demand to peak anytime soon, significant action is needed immediately to improve fuel efficiency standards, boost electric vehicle sales and curb oil use in the power sector."
A third wave of worldwide refinery rationalisation is currently underway. Global shutdowns of 3.6 mb/d have already been announced, but a total of at least 6 mb/d will be required to allow utilisation rates to return to above 80%.
China, the Middle East and India continue to drive new capacity growth. As a result, Asian crude oil imports are forecast to surge to 27m bpd by 2026, requiring record levels of Middle Eastern crude and Atlantic Basin production to fill the gap.
The petrochemical industry will continue to lead demand growth, with ethane, LPG and naphtha together accounting for 70% of the forecast increase in oil product demand to 2026. Gasoline demand may have peaked, though, as efficiency gains and the shift to electric vehicles offset mobility growth in emerging and developing economies.
Demand for aviation fuels, the area that was hardest hit by the pandemic, is forecast to gradually return to pre-crisis levels. But a shift to online meetings and conferences – along with persistent corporate efforts to cut costs and hesitation by some citizens to resume leisure travel – could permanently alter travel trends.
McKinsey has highlighted three decarbonization levers, focusing on optimising operations, sustainable design and balanced portfolios.
"Over the years, upstream operators have responded to market and technological disruptions with innovation and resilience," it states. "With an accelerated energy transition, they must do so again."