World oil demand is forecast to rise into the 2040s, but the multi-billion-dollar opportunity to supply production will increasingly be served by OPEC nations and jurisdictions outside of free markets, according to two new major international oil forecasts.

The reports, by the Paris-based International Energy Agency (IEA) and OPEC itself, put numbers around the future for a situation that is already playing out, where some free-market oil companies move away from oil production to focus on emissions reduction.

“As society, we’re not only ultra-focused right now on green initiatives but also actively chasing away investment in oil development, particularly in those regions that have the best ESG [environmental, social and governance] track record,” says Jared Dziuba, analyst with BMO Capital Markets.

“It sets a dangerous precedent because ultimately these barrels of ESG-friendly oil will end up in the hands of oil jurisdictions that have much lower environmental and social standards, simply because they’re not put under the microscope.”

Even without demand growth, substantial investment will be required to sustain oil production and manage natural declines in the future, Dziuba says. The IEA’s base case forecasts this at approximately US$350 billion annually between 2030 and 2040.

“A lot of people don’t really understand this narrative. The view right now is that oil is simply going to zero; it’s not going to be used anymore, and therefore we don’t actually have to worry about the ESG implications of development. [But] regardless of the demand outlook, there’s a material ongoing need for investment in new supply for the foreseeable future,” Dziuba says.

“If we’re really interested in sustainable development, then we don’t want these barrels going in the hands of regions that have lower standards.”

If free-market producers or international oil companies (IOCs) move away from fossil fuels it could create an issue for energy security, according to IEA executive director Fatih Birol.

“I am all for the IOC s being responsible, taking clean energy seriously, pushing clean energy technologies and increasing their clean energy investment in their strategies, but I don’t think it is effective only and solely focusing on those companies,” Birol said on the ARC Energy Ideas podcast in September.

“In the world there are reliable suppliers and there are suppliers who have been proven that they were not desirable. If you punish the reliable suppliers, their share diminishes… it is important to see not only [the] climate aspect but also energy security.”

Unrest, sanctions lead increased oil outages in 2020

So far this year, unplanned oil supply disruptions have reached the highest level since the U.S. Energy Information Administration (EIA) started keeping records in 2011, the EIA said last week.

Unplanned supply outages have averaged 4.6 million barrels per day so far in 2020, the EIA said. While the US and Canada’s contribution to this reached nearly 800,000 barrels per day in August as a result of the unprecedented COVID-19 crisis, the main contributors to the disruptions have been OPEC nations Libya, Venezuela and Iran.

“Domestic political instability in Libya has removed about 1.2 million barrels per day from oil production since February 2020,” the EIA said. “The Libyan National Army, the warring faction in eastern Libya, blockaded five of the country’s oil export terminals and shut in oil production from major fields in the southwestern region in January 2020, causing Libya’s production to fall to less than 100,000 barrels per day by April.”

Meanwhile, the EIA said that US sanctions have led to production outages in Venezuela and Iran. Venezuela’s production—which was as high as two million barrels per day as recently as 2017—is now approaching zero, according to IHS Markit.

Rising OPEC market share

In their base case forecasts, both OPEC and the IEA predict that after recovering to pre-COVID demand levels starting in 2021, global oil demand will continue rising over the next two decades. This is primarily driven by economic growth in India and China, and increased demand for petrochemical products.

The IEA’s base case sees global oil demand increasing from 97.9 million barrels per day in 2019 to 104.1 million barrels per day in 2040, while OPEC’s forecast projects that demand will increase to 109.1 million barrels per day in 2045.

Meanwhile, the IEA forecasts that the market share of non-OPEC countries will decrease from 63 per cent to 61 per cent between 2019 and 2040, while OPEC’s share increases from 37 to 39 per cent. The Middle East is the only jurisdiction in the IEA’s forecast that sees continued production growth over the next 20 years.

There is a significant degree of uncertainty in the forecast, the IEA said.

“Inventories are high and markets are well supplied in the near term, but the prospects for continued ample supply in the [base case forecast] over the period to 2030 should not be taken for granted,” the agency said.

“There is no shortage of resources, but there is a distinct possibility that the supply side may be losing appetite for oil faster than the world’s consumers.”

This is particularly true in Canada, where despite massive oil resources, producers are challenged to expand production because of “increasing challenges related to pipeline export infrastructure,” the IEA said.