World Energy Investment Outlook Prospects and Challenges

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US DOE Award for

Analytical Excellence US DOE Award for

Analytical Excellence

ABN AMRO Award of Excellence ABN AMRO

Award of Excellence

FINDINGS FROM

WORLD ENERGY INVESTMENT OUTLOOK 2003

World Energy Investment Outlook

Prospects and Challenges

Hiroyuki Kato

Energy Analyst, Economic Analysis Division

KEEI-IEA Joint Conference on Northeast Asia Energy Cooperation March 16, 2004

INTERNATIONAL ENERGY AGENCY

US DOE Award for

Analytical Excellence US DOE Award for

Analytical Excellence

ABN AMRO Award of Excellence ABN AMRO

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Contents Contents

z Introduction

z Global Energy Investment Outlook z Oil Investment Outlook

z Natural Gas Investment Outlook z Coal Investment Outlook

z Electricity Investment Outlook

z In Summary

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Introduction

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Increase in World Energy Increase in World Energy Production and Consumption Production and Consumption

More than 70% of energy demand growth and almost all energy production growth over the next three years will come from outside the OECD

0 1,000 2,000 3,000 4,000 5,000 6,000 7,000

Production Consumption Production Consumption

Mtoe

OECD Transition economies Developing countries

1971-2000 2000-2030

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Central Findings Central Findings

z Unless policies change, energy demand, CO

₂

emissions and import dependency will continue to grow steadily z Fossil fuels will remain dominant in the energy mix z Energy markets will shift toward developing countries z China will emerge as a strategic buyer in international

energy markets

z The projections highlight four strategic energy challenges:

Security of energy supplies

Threat of environmental damage caused by energy use

Investment in energy infrastructure

Uneven access of the world’s population to modern energy

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Global Energy Global Energy

Investment Outlook

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World Energy Investment World Energy Investment

2001 2001 - - 2030 2030

Electricity investment will dominates. In each sub-sector, production accounts for the majority of investment – except for electricity

Total investment: 16 trillion dollars

Oil 19%

Electricity 60%

Coal 2%

Gas 19%

Other Refining

E&D 72%

13%

Other 15%

Refining

E&D 72%

13%

15%

E&D LNG Chain

T&D and Storage

55%

37%

8%

E&D LNG Chain

T&D and Storage

55%

37%

8%

Power generation

T&D 54%

46% Power generation

T&D 54%

46%

Mining

Shipping and ports 12%

88% Mining

Shipping and ports 12%

88%

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Energy Investment by Region Energy Investment by Region

2001 2001 - - 2030 2030

Nearly a third of energy investment requirements of $16 trillion will be needed in East Asia

0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000

OECD North America

China OECD Europe

Other Asia Africa Russia Middle East OECD Pacific

Other Latin America

India Other transition economies

Brazil

cumulative investment (billion dollars)

0 5 10 15 20 share in global investment (%)

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Energy Investment Share in GDP Energy Investment Share in GDP

2001 2001 - - 2030 2030

The share of energy investment in the economy is much higher in developing countries and the transition economies than in the OECD

0 1 2 3 4 5 6

OECD Latin America Other Asia India China Middle East Other transition economies Africa Russia

per cent World average

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Fuel Share in Energy Investment Fuel Share in Energy Investment

Requirements Requirements

2001- 2001 - 2030 2030

25 36

50 52

56 62

71 85

87

50 31

30 19

25 14

10

5 4

25 32

18 26

18 23

17 4

6

0 1 2 3

1 2 2 5

3

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Middle East Russia Africa Other transition economies Latin America OECD Other Asia China India

Electricity Oil Gas Coal

Electricity sector dominates investment in most regions, especially in Asian countries

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Oil Investment Outlook

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Oil Investment by Region Oil Investment by Region

Most investment outside the OECD will be needed in the Middle East and the transition economies mainly in the upstream, while refinery

investment will be largest in Asia

0 5 10 15 20 25 30 35

OECD Middle East Transition economies Africa Latin America Asia

billion dollars per year

Exploration & development Non-conventional oil Refineries

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Oil Investment Challenges Oil Investment Challenges

z $3 trillion over the next three decades

z Investment more sensitive to decline rate than rate of

demand growth – most investment needed just to maintain current production level

z Major uncertainties about opportunities and incentives to invest, notably

Access to reserves and production policies – OPEC (and Iraq)

Oil prices and rate of returns

Investment regime and risks

z National oil companies financial resources

Retained earnings – government budget needs

Access to and cost of external financing

z Wild card – short and longer term prospects for Iraqi oil

industry

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Oil Production and Capacity Oil Production and Capacity

Additions Additions

The bulk of additions to crude oil production capacity will be needed simply to maintain both existing and future capacity

0 50 100 150 200 250

2000 2030 2001-2030

mb/d

Production Expansion to meet demand growth Replacement to maintain capacity

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Access to Oil Reserves Access to Oil Reserves

Access to much of the world’s remaining oil reserves is restricted

National companies only

(Saudi Arabia, Kuwait, Mexico)

35%

Limited access - National companies

22%

Production sharing

12%

Concession 21%

Iraq 10%

1,032 billion barrels

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Natural Gas Natural Gas

Investment Outlook

(17)

Net Inter

Net Inter - - regional Trade regional Trade

& Production

A growing share of gas will be traded between regions, much of it in the form of LNG

0 600 1,200 1,800 2,400 3,000 3,600 4,200 4,800 5,400

2001 2010 2020 2030

bcm

Production LNG trade Pipeline trade

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Global Gas Investment Global Gas Investment

Annual Average in Each Decade Annual Average in Each Decade

E&D will continue to account for 55% of gas investment, but the share of LNG jumps in the current decade

0 20 40 60 80 100 120 140

1991-2000 2001-2010 2011-2020 2021-2030

billion dollars per year

Exploration & development Transmission Distribution LNG Storage

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LNG Shipping Fleet LNG Shipping Fleet

A 6-fold increase in LNG trade between 2002 and 2030 will call for massive investment in new carriers

0 50 100 150 200 250 300 350 400

in operation (2001) additions 2002-2030

number of ships

Liquefaction project developers LNG buyers

Oil & gas companies Ship owners

Projected

On order in 2001

}

^{On order}^{in 2001}

}

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Future Gas Supply Infrastructure Future Gas Supply Infrastructure

in China

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Gas Investment Challenges Gas Investment Challenges

z $3 trillion needed up to 2030 - increasing share of E&D and distribution network investment

z Balance of risk and return – price is key

z Access to reserves and fiscal regime – most new investment will be private

z Complexity of financing very large-scale projects – especially in developing countries

z Impact of market reforms on investment risk

Non-OECD countries need to ensure basic principles of good governance are applied and respected

Cost-reflective pricing and adequate returns in regulated businesses are critical to attracting capital

These factors could lead to shortfall in investment, supply bottlenecks and higher prices in some cases

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Coal Investment Coal Investment

Outlook

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Coal Industry Investment Coal Industry Investment

2001 2001 - - 2030 2030

Almost all coal investment will be for mining – a third of it in China alone

Other Developing

countries

$70.3 Transition economies

$32.0 China

$120.6 OECD

$128.1

Ports

$12.9 Shipping

$33.9

Mining

$351.0

Mining by region

Total investment: $ 397.8 billion

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Global Coal Investment &

Production Production

Reference and Alternative Policy Scenarios Reference and Alternative Policy Scenarios

Lower coal production worldwide and lower OECD imports yield a 6% reduction in global coal investment

-20 0 20 40 60 80 100 120 140 160

billion dollars

4,000 4,500 5,000 5,500 6,000 6,500 7,000 7,500

million tonnes

Investment -Reference Investment - Alternative

Investment - difference Production - Reference (right axis) Production - Alternative (right axis)

-7.5%

2001-2010 2011-2020 2021-2030

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Electricity Investment Electricity Investment

Outlook

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World Electricity Sector Investment World Electricity Sector Investment

2001 2001 - - 2030 2030

Transmission and distribution networks will account for well over half of electricity-sector investment

0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500

2001-2010 2011-2020 2021-2030

billion dollars

Power generation (new and refurbishment) Transmission Distribution

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Electricity Sector Investment Electricity Sector Investment

by Region by Region

2001 2001 - - 2030 2030

China will need more electricity investment than any other country or region

0 500 1,000 1,500 2,000 2,500

China Other Asia

Latin America

Africa Middle East

US and Canada

European Union

OECD Pacific

Other OECD

Russia Rest of TE

billion dollars

0 500 1,000 1,500 2,000 2,500

China Other Asia

Latin America

Africa Middle East

US and Canada

European Union

OECD Pacific

Other OECD

Russia Rest of TE

billion dollars

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Electricity Investment Electricity Investment

as Share of GDP as Share of GDP

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

OECD China India Indonesia Russia Brazil Africa

1991-2000 2001-2010

Medium-term electricity sector investment needs will increase relative to GDP in almost all non-OECD regions

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Return on Energy Investment Return on Energy Investment

1993 1993 - - 2002 2002

0 2 4 6 8 10 12 14 16

Oil and gas upstream Electricity Gas downstream

per cent

OECD Non-OECD

Higher returns generally in non-OECD countries reflect higher risks – but not the case for electricity

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Energy Company Capital Structure Energy Company Capital Structure

1993- 1993 - 2001 2001

0 10 20 30 40 50 60

Oil and gas upstream

Electricity Gas downstream

Oil and gas upstream

Electricity Gas downstream

per cent

OECD Non-OECD

Debt equity ratio Debt maturity

Lower leverage and shorter debt maturity in non-OECD countries reflects their more limited borrowing capability – especially long-term debt

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Electricity Revenue and Return on Electricity Revenue and Return on

Capital of Indian

Capital of Indian SEBs SEBs

-60 -40 -20 0 20 40 60 80 100

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Return on capital Revenue as % of cost

The desperate financial straits of Indian state electricity boards underlines the urgent need for pricing reform

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Electricity Investment Challenges Electricity Investment Challenges

z In OECD countries, there are increasing uncertainties about impacts of market reforms on investment

$4 trillion needed (2001-2030)

Blackouts have underscored reliability needs

Concerns are growing over whether electricity prices adequately remunerate investment in peak capacity

Distributed generation will help

Competition is changing investment

z In Non-OECD countries, financing will be the greatest challenge

Almost $6 trillion needed (2001-2030) – far more than in past 3 decades

Local financial markets are not deep enough

Access to international capital is more limited due to non- tradable nature of electricity than fossil fuel sectors

Poor sector governance including inefficient pricing and collection undermines viability of investment

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In Summary

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Summary on Energy Investment Summary on Energy Investment

z Energy investment will shift toward developing countries, particularly China and other Asia

z Capital requirements are largest for electricity

z Investment opportunities and decline rates are key uncertainties for oil and gas upstream investment

z Financial resources are sufficient, but financing electricity- sector investment is biggest challenge for developing

Asian countries

z Realising this investment will call for:

Development of domestic financial markets

More rigorous sector reforms – notably more cost-reflective pricing and improved collection

More stable and predictable investment regimes

Better corporate governance

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World Energy Outlook 2004 World Energy Outlook 2004

z Long-term projections of energy market development up to 2030

Global trends

Outlook for each fuel

Regional outlook

z 20 regions including Japan/Korea, China, Indonesia and other East Asia

z World Alternative Policy Scenario to be developed to

evaluate impacts of policies to address energy efficiency, climate change and energy security on energy demand and on CO

₂

emissions

BOTH OECD and non-OECD countries to be analyzed (WEO2002 focused on OECD countries)

z To be released in fall, 2004