Crude to remain tight: McKinsey

Asian oil producers and consumers need to create a deep, liquid and transparent Asian energy market for ensuring stable price for buyers and revenue growth for sellers, international consulting firm McKinsey said today.

In a presentation at the oil meet here, McKinsey said, "A strong Asian market will require putting in place a "marker crude" that is relevant for the region and available in sufficient volume.

It will also require support from buyers and sellers to ensure adequate trading volumes and flexibility framework, and robust financial markets to support hedging and trading.

For building energy security, McKinsey said, information on demand, supply and inventory positions need to be shared transparently and buyers and sellers need to co-invest in building emergency response mechanisms by increasing physical supply security in Asia through strategic reserves and cross-border inventories.

"A more intense form of cooperation to build security will be for buyers and sellers to increase the scale and pace of joint investments in oil and gas in the region. This would entail consumers making upstream investment in oil producing countries and suppliers making downstream investments in refining and gas," it said.

Much of Asia's oil and gas is already consumed within the region "" 55 per cent of crude in 2003. Supplying gas from West Asia to China or India could result in higher netback for producers relative to the US due to lower transport costs," the McKinsey presentation said.

McKinsey said oil supply is projected to remain tight and large; risky investments are needed to increase supply. West Asia and Africa alone need to increase capital investment from $8 billion per annum in the last decade to $45 billion per annum for the next three decades.

"Suppliers countries are likely require external funding to sustain such large capital investment," it said, adding significant downstream investments are needed in consuming nations to meet Kyoto commitments.

"First, there is no Asian market with the active backing of key demand and supply centres and sophisticated financial markets. Second, the markets are not backed by adequate storage that can control excessive speculations," the presentation said, adding such an underdeveloped market results in buyers not being able to hedge risks and heightens supply security concerns.