By- Ali Aissaoui*

As part of its WEO series, the International Energy Agency (IEA) last week released a special report titled “World Energy Investment Outlook” (WEIO).1 This 190-page study constitutes the first comprehensive update since a similar outlook was originally published in 2003. With reference data on past trends and future projections at regional and global level, the study develops new insights into investment, investment risks, and financing for the various links in energy-supply chains. It further quantifies investment requirements for energy efficiency and extends its findings to explore funding for the transition to a low-carbon energy system consistent with reaching climate stabilization goals. In this commentary we review the IEA study, focusing on broad trends and Middle East relevance, before offering some critical observations.


Prior to getting into the long-term energy investment and financing picture, it is worth recapitulating briefly the prospects for energy demand that underpins the investment outlook. The reference is another report published last November – the IEA’s World Energy Outlook (WEO 2013) – around which most of the modeling and analysis are based. The focus is on the ‘New Policies Scenario’.

Under this central scenario, global primary energy demand increases by one third between 2011 and 2035. This overall trend, however, masks marked differences between fuels: oil grows at 13% during the period; coal at 17%; natural gas at 48%; nuclear at 66%; and renewables (hydro, bioenergy and others) at 77%. Still, oil, which is the focus of a ‘Delayed [Investment] Case’ in the Middle East to be discussed in later sections, continues to be the largest single fuel in the global energy mix, even though its share declines from 31% to 27% over the projections period.

Moreover, driven by population and economic expansion, global demand growth entails a major shift in the geographical pattern. As a result, non-OECD countries are responsible for more than 90% of the growth, with China and India alone accounting for 55% of the total increase.

However, while Asian energy demand growth is led by China this decade, it shifts towards India and, to a lesser extent Southeast Asia after 2025. The Middle East (short of North Africa) emerges as a major energy market as well. During the same projections period the region’s domestic oil demand increases from 7 to 10mn b/d, while that of natural gas from 400 to 700 bcm/year.

To meet the above demands, the study under review estimates that a cumulative global investment of $48.2 trillion (2012 dollars) is needed between 2014 and 2035, $40.2 trillion of which in energy supply and $8.0 trillion in energy efficiency.

As detailed in the below chart, the energy-supply investment of $40.2 trillion includes $13.7 trillion for oil, representing 34% of total; $8.8 trillion for gas representing 22% of total; $1.0 trillion for coal representing less than 2% of total; $0.3 trillion for biofuels representing less than 1% of total; and $16.4 trillion for the power sector (generation, transmission and distribution), representing 41% of total. The high volume of investment in the oil and gas supply chains is explained by the study’s finding that more than 80% of upstream investment is needed to merely offset production declines.

About 60% of total energy investment takes place in non-OECD countries. However, while the focus in the OECD is on energy efficiency, that in the non-OECD is on energy supply.

Furthermore, consistent with the shift in the geographical demand pattern, the latter focus moves beyond China to other emerging countries, most notably to the Middle East and India.

Investment funding comes from a variety of sources, either internal, such as companies’ retained earnings and state budget allocations, or external via the loan market and the capital markets. Before getting into the specifics and details of each sector – oil, gas, power, renewables and energy efficiency – the study expresses fair confidence regarding funding prospects, notwithstanding a number of underlying investment risks that may be on the rise worldwide. This confidence comes from the observation that the resulting capital requirements not only constitute a reasonable share of GDP across regions, but are also consistent with global economic growth trends.

While meeting these investment needs requires funding from both governments and private investors, the IEA raises some general concerns about the supply of funds from the former. This is particularly the case of non-OECD governments whose capacity to sustain funding for large-scale investment projects is found to very much depend on their available fiscal space and the pressure of multiple, competing social demands for public funds.


Meeting anticipated global oil and gas demand requires a major commitment to upstream investment in the Middle East. After a relative lull explained by the rise in oil production from light-tight oil (LTO) in the US, oil sands in Canada, deepwater pre-salt oil in Brazil, and other non-Middle East conventional oil (all expediently equated with non-OPEC supplies), investment in the Middle East upstream should pick up again by the end of the current decade. Yet, the Middle East’s share in global upstream investment – some $2 trillion over 2014-35 – only represents 12% of total. This is rather low when considering the region’s resource endowment. Since this latter fact is missing from the IEA’s selected indicators for the region, it is worth noting that the Middle East currently holds 48% of the world’s proven reserves of crude oil and condensate, but only contributes 33% of global oil output. Similarly, while holding 43% of proven natural gas reserves, it only accounts for 16% of world gas output. One explanation for the Middle East’s modest upstream investment share is the lower costs of finding and developing reserves in the region.

The IEA’s study confirms that cost inflation remains a key driver of investment growth. Increases in worldwide costs of developing oil and gas infrastructure reflect the rising cost of input factors, skilled personnel and oilfield services. In the upstream sector, costs have additionally been found to closely correlate with the complexity of the projects being undertaken. However, the impact of all such factors, which varies by region and type of resources, is arguably minimal for the largest producers in the Middle East.

In any case, considerable requirements are placed on Middle East oil beyond 2020 when non-OPEC supply starts to run out of steam. Understandably, the IEA is concerned that a shortfall in upstream investment could limit the region’s production during that period with serious disruptive effect on global oil markets.

Accordingly, the IEA has tentatively built a “Delayed Case” in which a shortfall in upstream investment may occur for lack of sufficient funds, in addition to the uncertainties over Iran and Iraq, the two major sources of capacity growth. The potential considerations for the scarcity of funds include the prospect of declining or stagnating oil export revenues; prioritization of social spending; and continued domestic fuel subsidy regimes.

Whatever the reason, the central concern is that a shortfall in investment leads to a flat Middle East production that falls short of the New Policies Scenario’s expectations, particularly from 2020 onwards. The resulting supply deficit could reach a little more than 2mn b/d by the mid-2020s. In this eventuality, the IEA has determined that the oil price (the average IEA crude oil import price is taken as a proxy for international oil prices) needed to bring global supply and demand into balance is $130/B in real terms in the mid-2020s. This is much higher than the price of $116/B underpinning the New Policies Scenario by that time. Obviously, and as is typical in circumstances where supply becomes tight, this could also result in significant price volatility.


The IEA should be commended for its research efforts to gain further insight into a complex and hardly comprehensively-covered topic. At the same time it surely expects public critical reviews to further its progress by pointing out methodological and argumentative issues. In the case of the Middle East such issues can be, from our perspective, formulated in four areas.

The first is about costs. The fact that the Middle East is a low-cost production region does not imply, as the IEA seems to assume, that “although the complexity of development increases, the [region’s] largest producers do not experience major increases in cost.” The reason given is that these producers still have a choice of resources to exploit. Such an inference is not consistent with our own research-based findings and interpretation. The increase in the cost of large-scale energy projects across the region stems from the concurrent inflation of the main cost components of engineering, procurement and construction (EPC). Therefore, to the IEA’s input factors, one should add contractors’ margins, project risk premiums and what we have dubbed ‘the cost of excessive largeness’ which, contrary to the IEA’s ‘complexity cost’, implies a diseconomy of scale.

The second issue is the premise of scarcity of investment funds should producers’ export revenues stagnate or decline. While the premise is pertinent it is not sufficiently specific. Our argument is that that key producing countries may not be able to extend internal financing to the upstream sector if oil market prices remain below these countries’ fiscal break-even levels – currently $105/B (2013 dollars) for OPEC as a whole – for an extended period. In the Middle East and North Africa (MENA) we should not be particularly worried about low fiscal-cost countries such as Qatar, Kuwait, and to some extent the UAE. But we should definitely be concerned about higher fiscal-cost countries such as Saudi Arabia, whose fiscal break-even price is nearest to OPEC’s average. This is not to mention, in ascending order along the fiscal cost curve, the cases of Libya, Iraq, Algeria and Iran.2

The third issue is the IEA’s geographical groupings whereby the Middle East and the whole of Africa are treated separately. This de facto excludes North African producers, key of which Algeria and Libya, from the ‘Delayed [Investment] Case’. A corollary of unintended effects is the difficulty of deriving MENA share of energy investment for comparative purposes. Using APICORP’s benchmark investment data we have managed to put MENA cumulative energy investment over the period 2014-35 at $4.3 trillion, three quarters for the Middle East and one quarter for North Africa.

The last issue also lies in the way the ‘Delayed Case’ has been built. While the focus on funding has merit because it constitutes, to a large extent, a major investment constraint in the region, the approach may be perceived as ad hoc and lacking perception. Yet the IEA has been much more discerning in the past. Suffice to mention that, in a similar exercise conducted for the WEO 2011, the likely causes for ‘deferred investment’ (as it was then labeled) included, in addition to constraints on financing, the following: conservative depletion policies; renegotiation of upstream agreements; international sanctions; heightened risks of political instability; and, in case of armed conflict, long-term loss of production. These factors, which weigh negatively on MENA energy investment climate, are still current and, if history is any guide, are likely to be quasi-constant.


The IEA study has provided us with a holistic picture of global investment and financing that will wield considerable influence on the energy policy debate. Our main take is that notwithstanding the hugeness of the cumulative investment up to 2035, mobilizing the required funding capital will be a challenging task but not an intractable one. At the same time though, this should not be taken for granted as there will be cases of suboptimal investment, particularly within MENA, which, on second IEA thoughts, is found to remain critical.

1 2Ali Aissaoui (2014), “Oil investment outlook: What we should really worry about in the context of MENA”, Presentation to the IEA’s High-level Workshop on the Outlook for Energy Investment - Paris, 28 February.

*Mr Ali Aissaoui is Senior Consultant at the Arab petroleum Investments Corporation (APICORP). This article is published concurrently in APICORP’s Economic Commentary dated June 2014. The views are the author’s own. Comments and feedback may be sent to: [email protected]