June 2, 2014 9:09 pm

Energy watchdog in investment warning

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The west’s energy watchdog has said the costs of meeting the world’s energy needs will rise to $2tn a year by 2035, warning that current energy investment is too focused on sustaining existing production.

In a new report that seeks to shake up traditional attitudes towards energy investment, the International Energy Agency predicts that a cumulative total of $40tn will be invested in energy supply by 2035 – with over half of this money going on replacing resources such as ageing power plants and drying oilfields.

Fatih Birol, chief economist at the IEA, said the market has underestimated the large proportion of energy investment that goes on stemming the decline of existing infrastructure.

“When we look at investment and production growth, we mainly look at how much demand will grow but compared to [investment for] decline, this is much less relevant,” said Mr Birol.

The report – the first to look in detail at global energy investment – points out that investment in oil and gas is particularly weighted towards maintenance of existing assets.

More than 80 per cent of upstream oil and gas investment is forecast to compensate for declines in output.

The IEA also predicts that, when it comes to oil, the focus will increasingly shift towards the Middle East over the next 20 years as supplies in non-Opec countries begin to thin out.

However, prospects for a timely increase in oil investment in the region remain uncertain, especially when it comes to exploring new oilfields.

“There are competing government priorities for spending, as well as political, security and logistical hurdles that could constrain production,“ the report says.

It added that, if investment failed to pick up, the resulting shortfall in supply would create tighter and more volatile oil markets – with prices $15 per barrel higher on average in 2025 compared with current levels.

As well as risks of insufficient investment in the Middle East, Mr Birol warned that the “lights could go off in Europe” unless the continent’s power markets are overhauled and problems with efficiency are addressed.

The IEA estimates that 100 gigawatts of new thermal capacity needs to be added over the next decade but wholesale electricity prices are too low at the moment – by more than 20 per cent – to incentivise investment.

“If this situation persists, the reliability of European electricity supply will be put at risk,” the report says.

Mr Birol said part of the solution would involve higher payment to power producers, even if this meant higher prices for end users, underscoring the difficult balancing act facing policy makers.

The IEA has previously said Europe will lose a third of its global market share of energy-intensive industrial exports of the next two decades because power prices will stay stubbornly higher than those in US, where the shale revolution has fuelled a manufacturing renaissance.

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