More oil industry spending cuts to hit production outlook: IEA

[March 04, 2016]  By Krisztina Than

BUDAPEST (Reuters) - The oil industry cut investment spending by more than $100 billion last year and another round of major cuts this year is expected to hit the production outlook, the International Energy Agency's chief economist said on Friday.

Laszlo Varro told Reuters in Budapest that in the next five years, oil demand was expected to rise by 1.2 million barrels per day on average and even though Chinese oil demand growth was slowing it was "still a sizeable oil demand growth".

"This year (there) could be a similar order of magnitude (of) investment decline that took place in 2015, unless there is a significant recovery in oil prices," Varro said in an interview.

"The investment cuts are so serious that there is no doubt that they have a meaningful impact on the production outlook."

Varro said with the lifting of the sanctions against Iran, a meaningful increase was expected in Iranian oil production but output would still remain under the geological potential of the country.

He said this was because the bulk of Iranian oil production was coming from old fields which required sophisticated technologies.

"The oil industry is cutting investment spending everywhere so Iran would need to offer exceptionally attractive terms for major oil companies ... to come in and bring in sophisticated technologies and new capital," he said.

"So we do foresee a growth of Iranian oil production but not to the level which the geological potential would in theory allow."

He also said Central Eastern Europe, once entirely dependent on Russian gas, was becoming well integrated into European gas markets thanks to the pipeline interconnectors built between the region's countries and the possibility of reverse gas flows in some pipelines from western Europe.

This also allows eastern parts of the EU to have access to LNG arriving into European terminals.

"Building the Polish LNG terminal was the right decision to do and I think it would be desirable to have an LNG terminal in Croatia," Varro added.

"We should no longer think about CEE as if it was an island in the middle of the ocean -- CEE is increasingly well integrated in the western European market."

Varro said LNG coming from the United States was intensifying competition in Europe, and Russian gas exporter Gazprom was also adjusting its strategy and engaging in competition.

"Lithuania built the LNG terminal, next week the price of Russian gas for Lithuania was cut by 20 percent," he said.

(Reporting by Krisztina Than; editing by David Clarke and David Evans)

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