Casing Point

Energy Outlook 2035 - BP

March 2, 2014
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To borrow the words of Christof Ruehl, Group Chief Economist and Vice President of BP, this time around the multinational oil supermajor aimed to “shake-up the crystal ball” by recalibrating some of its old formulas in the bid to provide a fresh outlook on the way global energy markets will evolve. In this post Casing Point explores to what results this recalibration leads and what is in store for us in the world of energy; at the end should we anticipate major shifts or expect much of the same as in the last several years?



 



 







 





 



Personal Note:



 



As customary I would like to first thank IMEMO RAN for providing me the chance to attend BP’s presentation. In addition, the publication of this 19th post signifies a small anniversary as I have now been blogging on RIAC for over a year. I am really glad to have received so much positive feedback on social networks and email; with many great questions, enquiries and kind words of support. I want to thank all my readers, especially a group of my regular followers, I am really glad you kept reading my posts from the start! I am unsure if full-time work will allow me to post regularly, but I hope up to this point I succeeded at least somewhat in making the niche energy discussions more interesting and accessible for a wider audience. Again, Thank You All!



 



If anyone wants to go beyond this summary to explore the outlook in more detail, or browse through IMEMO RAN’s other events and online resources, please follow the links below:



            - BP Energy Outlook 2035 Material



            - BP Energy Outlook 2035 Factsheet



            - BP Energy Outlook 2035 Russia



            - Oil and Gas Dialogue (RUS)



 





 



BP’s Pure & Fresh Approach:



 



The most evident sign of BP carrying out a recalibration of its outlook lays on the fact that timeframes have been altered with now the base year of 2012 going up to 2035, rather than as in before to only 2030. BP sees this change as essential due to the fact that it anticipates major trends will emerge or even materialise in exactly these last 5 years. As the post will show it is an important addition, if the timescales prove right.



 



For the sake of BP analysts’ timeframes need to prove right (if they ever look back in several decades!) as the report is highly linear, which is either a good or a bad thing, depending on the stance one takes. Ruehl argued that the choice to avoid “scenarios”, as common with industry standard reports like IEA World Outlook, is based on the fact that the supermajor wanted to offer a pure, clean and direct forecast. If any reader hopes to avoid analytical jargon of various highly divergent scenarios then this is an ideal report offering a guide into the future granting that one believes the BP analysts, but others may cast it as too limited with BP’s reasoning of pragmatism failing the mark of a satisfactory excuse – as if they could not have been bothered to research a tad more. For me, after seven years of studying Social Sciences, which rarely offered anything direct or concrete, with the cliché phrase of ‘more research needs to be done’ usually coming in one form or another at the end of everything, to a degree its nice to just get an actual clear cut pathway. At the same time, the energy industry is vigorous and swings do occur so an analysis with more options perhaps ought to be favoured as it reflects the nature of the trade. I shall leave this thought for my readers to decide, as at the end its personal preference.



 





 



Changing the Engines of Growth – Asian Momentum & OECD’s Stagnation:



 



Asia will manifest into the leading cradle of energy growth with more than a half of it coming from India and China. A key factor behind growth in these nations and similar countries, will be the most predictable – growth in population, with a respective need for energy. More specifically, the international energy markets will record a “hump-effect” from 2015-2025 as BP sees China hitting a giant surge in this timeframe. By 2030 China will even overtake the EU as the world’s top importing region. However, after this period Chinese growth will steadily slow and be replaced in turn by a rise of other Asian powers. In all, almost the entire growth (95%) will come from non-OECD countries, which will lead to an increase of energy consumption globally by 41% from current levels. To break down this growth furthermore, nearly 60% of it will come in the form of power generation as Asian nations urbanize.



 



OECD’s traditional markets will experience stable, but negligible growth for most of 2012 to 2035 period. However in 2035, which is one of the reasons why BP extended its forecast timeframe, the OECD may even experience a slide in demand as energy efficiency finally takes hold. In effect, the OECD’s peak growth in demand, recorded around 2006, will never be beaten. In all, we should expect a continuation of the trend originally began in the 1980s, whereby rapid improvements in energy efficiency have set precedent for a much more sluggish demand. 



 





 



Resurgence of the USA – No Longer a One Way Ticket:



 



USA is anticipated to produce 101% of its energy needs by 2035, up from a low 69% in 2005, which means as a result it will be energy self-sufficient. Also, as a result the North American region, including Canada, Mexico and USA, is set to become a net-exporter in BP’s timeframe, consequentially meaning that imports will be even more concentrated in the Eurasian region. A lot will of course rest on market openness and security, as USA has traditionally played a key role in the world to make sure its own and consequentially others imports were secure. With the game now changed, certain issues remain uncertain – as for instance, who will take over the mantel of protecting global trade routes if they are no longer a key concern for the US?



 



2012 and 2013 have been really notable years for USA. In 2012 it set a record for the quickest growth in energy production, while in 2013 is set an all time record for not only domestic, but global energy production. USA increased energy output faster than anyone ever before, beating the last 5 records set by Saudi Arabia. This achievement was even more impressive as it did so by increasing real or innate output, not as was the case of the Middle East giant through a fluctuation of its existing spare capacity. As BP predicts, USA will be able to become an energy exporter by 2016 and net gas exporter by 2018. Moreover, by 2035 it will be the 2nd biggest energy exporter. As a downside for other exporters, USA’s rise will inevitably hinder production for other players by taking their market share, be it regionally for players like Mexico or globally for the likes of Russia.



 



A major question will remain open for much of the 2012 to 2035 period – should the USA sell directly to China? It will be a question haunted by security issues and likely geopolitics concerns, as quite clearly likely conflicts will exacerbate trade relations. At the moment Europe will probably be the more favourable location for US exports, as Asia will need to command premium prices to attract flows of energy away from it. On a positive note for the US, which ever direction flows go it will impact its balance sheet. If it goes to China, it will be even better as some of the US debts can be shifted back in the form of shale gas. Christof Ruehl does caution that we must not see this shale sale as the US Holy Grail, as at the end the American consumers may just spend more on Chinese goods. That said it will at least act as a cap on the US huge trade deficit with China.  



 





 



Trouble Brewing – Do Not Boil



 



The energy renaissance of USA from one perspective will benefit its inhabitants and wider North American security, but such gains could also become inadvertently and indirectly undermined if the knock-on effects are too severe. For instance, the Middle East relies heavily on exporting oil to manage its volatile populace, but if oil demand looses pace from this area or if prices per barrel fall below thin-lined budgeted levels it could spell crisis. It is already difficult for the Middle East to keep a multiethnic and multi-religious population calm, particularly as people have a tendency over time to expect more from the government. If more severe crises occur like the Arab Spring, even a rising US production will not be able to keep prices steady. Thus, a false sense of security is perhaps being created now as the West will not be able to support itself autonomously.



 



In history we have recorded several events, which have rocked the oil industry and changed its dynamics. If we recall these are Iran’s Revolution (1979), Libya (1970), Iraq (1990) and Russia (1991). The disintegration of USSR and Russian instability for instance was really substantial as it wiped of 4 million barrels of oil production from the global market place. In the last 20 years we have not witnessed such catastrophes, as the closest anticipated crisis was in Libya during the 2011 Arab Spring, but a repeat of 1991 could spell disaster if it does occur in the future as we are coming into an era of increasing demand. It is interesting to add here, as Christof Ruehl highlights, most nations that experience major oil disruptions only come back to pre-crisis levels after a decade, but as we know some never make it back. Hence, it will be crucial to think about what will happen if we lose a major player and will players like Iraq ever make it back? 



 





 



The Old King Is Dead (Oil), Hail the New Kings (Oil, Coal and Gas):



 



BP as expected forecasts a continued central role for fossil fuels, which will primarily go towards the budding market of electricity generation; as any fuel can be converted to electricity. That said a new development does occur as the energy mix will alter as oil will no longer be the outright king of fuels. It will still keep its first position with 28% of the market mix by 2035, but it will be just ahead of coal at 27% and gas at a close 26%. Also, quite remarkably renewables will account for 7% of the total mix as they will grow at the fastest rate around (6.4% p.a.). A new makeup of the energy mix will be largely down to slow growth in oil demand (0.8% p.a.) and record setting rates by gas (1.9% p.a.). A huge share held by coal will stay steady even as China begins to finalise its industrialization and shift to cleaner more energy inputs (e.g. gas), as other Asian nations will enter their own respective industrializations and boost demand for coal (at 1.1% p.a). As BP forecasts coal will resurge strongly in lesser economies like Indonesia, India, etc. As Ruehl points out industrialization has always been about the “cyclical effect of energy usage”, as first countries use cheap dirty coal when they are not developed, then they shift to oil that stimulates demand and then finally to cleaner gas and green energy as they are no longer worried about expensive energy prices nor do their economies use that much energy to produce final goods due to efficiency.



 



To gage the gravity of this development, for the fist time ever in history of mankind, there will not be a dominant fuel in the world, as oil will lose its absolute position as the king of all fuels by almost equalling with two other main sources. The peak period of 1980s will not be restored for oil and it will spiral down in growth rates. To recall, we had wood for millenniums as the crucial energy source, then we had crude oil, but now we are seeing an unprecedented convergence among the top three. I want to add here personally, that it is fascinating that the evolution from this global energy input was much quicker now than it was at the beginning. We are seeing that technological innovation has really picked up pace with evolution, as wood dominated for a much longer period than oil. To reflect on history, it is a trend that has been quite prevalent since the OPEC oil shocks in the 1980s, which have led states to diversify away from the Middle East and oil in general. In all, oil as the slowest growing fossil fuel will expand to just 109 Mb/d by 2035, in contrast to natural gas supply which will reach nearly 500 Bcf/d, with USA accounting for nearly 20% of this rise.



 





 



Shale et al – Winners and the EU:



 



Ruehl underlined that until a few years back shale or tight oil were not considered as serious energy sources with production rarely exceeding nil, but by 2035 BP estimates that around 7% of the global oil output will be from tight oil. In 2004 even the CEO of BP thought that peak oil was looming (oil was coming to a point when more was used than found), but as it turned out it was an overreaction as alternative ways to produce oil were found even though at a higher cost. It was not far from a wonder due to the anticipated catastrophe. Still, as Ruehl argued it was a limited wonder with little surprise that it occurred just in the US. As he argued USA’s openness and competitive spirit allowed such boom to occur and thrive, as we saw small businesses flog shale rich areas and take great risks to produce, with some failing, until a right formula was found, which then attracted bigger players. In essence, the US has a unique business climate unmatched by others, meaning that the shale revolution will not be replicated elsewhere on such scale, with at best pockets of production in other nations.



 



Ruehl stressed that diplomats in Brussels ought to abandon the idea that the US shale miracle can be replicated in the EU with a new industrial age, or at least a boom with really cheap gas/oil prices. At best it is a fairytale spun by vested interests, as energy accounts for a small portion of actual final goods, so the EU will not stimulate poorly performing economies substantially enough, nor can such miracle be copy and pasted in a completely contradictory business climate. A major pocket that is likely to occur is in China, as it will become the 2nd biggest producer of shale gas in the world, driven particularly by its own growing gas demand, which is expected to rise to 12% of the overall Chinese energy mix. However, shale gas production is not expected to kick in before 2020, as unlike USA, it will take China more time to develop the needed skills, infrastructure and technology. 



 





 



Nuka-Break – New Shining Opportunities: 



 



BP estimates that even with well known disasters like Fukushima, nuclear power will continue to gain grounds with 1.9% p.a. growth in output, which will actually exceed the demand for nuclear power. Still, BP sees that the overall market share by nuclear power will decline as peaks of the 1980s are unlikely to be regained again. This rise in output will be driven by major players like China and Russia (part of official strategy to move away from fossil fuels at home, with anticipated growth of nuclear power by 72% from 2012-2035), as well as, secondary powers like India. Moreover, China’s growth will offset USA as the principal nuclear producer with its share of global total rising from just 4% today to a massive 29% in 2035. As it stands, growth will be limited to a select few states due to several issues: it is very costly to make nuclear reactors, no private insurance firms cover accidents and governments must appease populism whilst providing much of the funding. 



 






 



Climate Change – Changing Minds?



 



Over the last few years, as Ruehl argued, climate change has moved down the list of concerns in most nations. It is not a biased view of an oil company as he stresses, but a fair reflection of reality as austerity, economic instability and social unrest are quite simply taking precedent. A major problem with environmentalists, with which I have to agree with Ruehl, is that they fail to seek a middle ground – as we cannot just go back to the Stone Age. If we listen to environmentalist they mostly simply demand everyone to move away from fossil fuels, but completely avoid the topic of fair fuel substitution. To put it bluntly, even if the harshest renewable policies are implemented they will not achieve the CO2 targets set, nor will they offer enough energy output for the global economy. The only way we can realistically shift from heavy CO2 inducing coal/oil is to go via the relatively better natural gas route. To put this in perspective, as Ruehl sees, a single digit CO2 reduction via the renewable route could be achieved through a double digit reduction via a gas route with lower costs. Hence, why choose the impossible route?



 



To add, it will be interesting to see how states react to China on a geopolitical level in respect to environment and if they will use it as an argument to limit the economic expansion of this shadowing giant. As by 2035 China’s per capita CO2 emissions will overtake the entire OECD (by 2030 it will overtake entire EU), thus making it hardly acceptable for China to argue that its economy is still developing – which granted it effectively a free pass in the protocols like Kyoto with zero limits of CO2 emissions. Interestingly, ‘naughty’ China is the only nation that sets targets in its 5 year plans for energy intensity, so quite clearly China does consider this an issue, but it is unlikely that it will trade blunt economic growth for sceptical environment. The path it takes will nevertheless be vital as 87% of all coal demand growth will come from China or India and even by 2035 64% of total demand will still reside there. Due to such coal use and general rise of energy demand, 72% of emissions by 2035 will come from non-OECD states, albeit per capita emissions will still be less than half of the OECD levels. As it stands, environmental protocols will fail as CO2 emissions will increase by 29%, even though renewables (inc. biofuels) will account for 7% of the demand in 2035, from just 2% today. 



 





 



Russia – Hold It Steady!



 



Ruehl only made a few passing remarks about Russia during the whole presentation, which was surprising as IMEMO’s event occurred in Russia and due to BP relatively recent engagement with Rosneft via a share-swap and latter’s acquisition of TNK-BP. Moreover, the remarks made were not optimistic as he said that Russia is unlikely to challenge for top spots as one of the biggest energy producers due to uncompetitive nature of its energy giants; adding that even drastic changes/reforms are unlikely to reverse this drift. Still, on a more upbeat note citing from the actual BP report, Russia will keep its world heavyweight title as the primary energy exporter (i.e. combination of fossil fuels, mineral fuels and renewables) with net exports of 736 Mtoe (million tons of oil equivalent) by 2035. As even though others will produce a lot of oil and gas, they will not be able to export as much due to domestic needs, etc. As a result, Russia’s net exports will meet 4.2% of world’s energy demand in 2035, which will be sent to Europe (still world’s largest importer of natural gas) and China (world’s largest oil importer).



 



Oil production will be dominated by USA, Saudi Arabia and Russia, with well over a third of global liquids coming from these three powers. At a rate of 11 Mb/d by 2035 Russia will only trail Saudi Arabia and the US. BP anticipates that post-2020 Russia will commence its tight-oil production, which will prop up its falling production and account for 7% of the country’s total output. Gas production will be dominated by USA and Russia, with the latter just trailing the former in total volumes produced, but dominate export wise. At 79 Bcf/d of gas output by 2035 Russia will a major player, but its production will predominantly be conventional as only 5% of it will come from shale.



 



In overall terms fossil fuels will account for 84% of Russian primary energy usage in 2035, down from 89% in 2012. From these 84% oil and gas will dominate, as despite sizeable coal reserves, Russia’s production of coal will remain relatively modest with only 6th largest production in the world. BP predicts quite a stable trend for Russia, as energy production and consumption will grow by 21% and 20%, between 2012 and 2035. The country’s share of global energy production and consumption will slightly decline, but it will be modest from 10% to 9% and from 6% to 5%, respectively. Lastly, renewables will remain underdeveloped as their share of demand will reach just 1% in 2035 versus an 11% average in the OECD.



 





 



To Conclude – Time Will Guide Us:



 



My regular readers will recall that this is my 2nd post focusing on a report by a leading oil giant – with the last one being on “Oil and Gas Markets to 2025 by LUKoil”. If we recall this last report or any other notable reports in the field, we would conclude that there has not been anything particularly monumental happening in the last year. Still, BP does offer at least the first timeframe I’ve seen, when OECD countries will for the first time experience negative growth in energy demand and a strong emphasis that we have entered a new era of energy production without a dominant fuel for the first time in human history. Hence, this report is unlikely to offer anything astonishing for seasoned energy experts, but it will provide interesting food for thought. As usual, I would warn people that many of the predictions after one to two years, are likely to be inaccurate and predictions for the next several decades as wild guesses, but we all do enjoy making them and reading about them!



 



Fun Fact: Ruehl said that during hot periods Saudi Arabia has to increase its production by an extra 1 million barrels per day to allow for air conditioning and alike to function globally.



 



Technical Fact: Ruehl said that shale gas and tight oil rigs are interchangeable so they can be used to produce both types of fossil fuel. Hence, price differential will decide where the global rig fleet will go, whether it will focus on shale gas or tight oil. 



 



Thank You for Reading & I hope You've Enjoyed this Post!



 



Igor Ossipov



M.A. University of Kent & Higher School of Economics, Oil/Diesel Broker and RIAC Blogger.



 

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