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Technology change and demand transition Coal usage plunges as shale development drives down natural gas prices and China transitions away from energy-hungry industries ALAN BAILEY Petroleum News
Part one of this two-part series on findings from the BP Statistical Review of World Energy 2016 focused on global oil and natural gas markets. This second part of the series covers coal and non-fossil fuel markets, and the insights that data presented in the review may provide for assessing future energy trends.
Spencer Dale, BP group chief economist, overviewed the statistical review during a June 8 webcast.
Dale characterized world energy markets as being in a state of flux, as the industrialization of China slows down while rapid advances in energy technologies impact the supply side of the energy market equation. Low oil prices have buoyed the demand for consumer-related oil products such as gasoline, while low natural gas prices have boosted the use of gas for power generation.
Coal lost out The biggest energy supply loser in 2015 was coal, as industrial coal demand in China fell sharply and as cheap natural gas displaced coal for power generation in the United States.
“2015 was undoubtedly an annus horribilis for coal,” Dale said. “Global production and consumption both recorded the largest falls records, and coal prices fell by around 20 percent.”
In China, 2015 proved to be the second year in a row in which coal consumption dropped, as industrial production braked sharply and coal lost out to competition from other energy sources in the power sector. The shifting pattern of the Chinese economy towards slower, more service oriented growth, coupled with a determination to move to cleaner, lower carbon fuels, are creating a strong structural force, pushing in the direction of lower coal usage, Dale said.
Chinese output of iron, steel and cement all fell in absolute terms in 2015 for the first time in nearly 35 years, he said. However, future trends of Chinese coal consumption remain unclear.
In the United States, technical innovation in the form of the shale gas revolution pushed down gas prices, enabling gas to displace coal for power generation. Tightening environmental policies also drove down coal demand, with coal consumption falling by more than 12 percent. And, while a similar drop in U.S consumption in 2012 was counterbalanced by increased U.S. coal exports, in 2015 the coal could not easily be sold overseas: The consequence was a drop of more than 10 percent in U.S. coal production, Dale said.
Non-fossil fuel Global non-fossil fuel energy usage, on the other hand, grew by 3.6 percent in 2015, a rate of growth slightly higher than the average over the last 10 years. In particular, renewable energy sources, re-enforced by a reputation for being “the next big thing” for energy supplies and by falling costs coupled with improving technology, grew by more than 15 percent in 2015, a growth level that accounted for more than one-third of the total global growth in energy consumption, Dale said. Wind power led the charge towards the adoption of renewable energies, but with solar power catching up fast in the renewable energy mix - Solar energy usage expanded by almost one third in 2015, with China overtaking Germany and the United States as the largest generator of this form of energy, Dale said.
But the trend in carbon emissions in 2015 provided perhaps the most striking data in the statistical review, Dale said. Essentially, carbon emissions were flat, thanks to a slowing growth in energy demand and a shift away from coal towards lower carbon fuels. That flat emissions growth represented the slowest growth in nearly a quarter century, apart from the slow growth following the 2008 financial crisis.
Although some of the carbon emissions growth hiatus in 2015 can be attributed to relatively weak economic growth, the majority of the effect resulted from improved energy intensity and changes in the fuel mix. Energy intensity refers to the quantity of energy used per unit of economic activity. China was responsible for the vast majority of the emissions growth slowdown, with that country’s carbon emissions actually estimated to have fallen slightly in 2015, the first time this has happened in almost 20 years, Dale said.
Future trends So what might all of this say about future energy trends?
Dale suggested three key issues likely to have major impacts on global energy over the next 20 to 30 years: the future decline rate of China’s energy intensity; the speed at which renewable energies gain share in the global energy mix; and the global drive to reduce carbon emissions.
In terms of energy demand, the future trend of China’s energy intensity matters as much, if not more, than the country’s economic growth, Dale said. And, although it is possible to gain insights about what is happening in China from what has happened to energy intensity in countries such as Japan and South Korea, the energy intensity level in these countries fell rather slower than in China when at similar stages of economic development. Ultimately, much will depend on the twin Chinese objectives of improved energy efficiency and a shift towards a more serviced-based, less energy intensive pattern of economic growth.
When it comes to the growing role of renewable energies, Dale cautioned against assuming unrealistic growth rates, especially given the inertia associated with the highly capital intensive nature of the energy ecosystem, with many long-life assets.
“The simple lesson from history is that it takes a long time, numbering several decades, for new energies to gain a substantial foothold within global energy,” Dale said.
It took oil usage, for example, more than 40 years to expand to just 10 percent of the world’s primary energy portfolio. And thus far the market penetration trajectory for renewable energies has followed a similar relatively fast track to that of nuclear energy. Even assuming that renewable energy usage grows somewhat faster than any other energy source in history, renewable energy use will barely reach 8 percent of total primary energy in 20 years time, Dale said.
Carbon emissions From a carbon emissions perspective, Dale sees 2015 as a landmark year, marking the first occasion when carbon intensity - the amount of carbon emissions per unit of economic activity - dropped at a time when oil prices have not been rising.
“So, real progress last year,” Dale commented.
But, with the average annual carbon intensity decline still needing to drop over each of the next 20 years by double the rate of decline in 2015, much remains to be done to achieve carbon emissions goals set in Conference of Paris meetings in 2015.
From an economist’s perspective, by far the most efficient means of achieving the Paris objectives would be through government policies that set a price for carbon rather than set carbon-limiting regulations, Dale suggested. While regulation unrealistically depends on governments picking winning and losing technologies for an unpredictable future, carbon pricing allows the business community and the market to allocate capital in the most efficient manner, he said.
Importance of efficiency Dale also commented that improved energy efficiency deserves much more attention in the effort to reduce carbon emissions.
“What I find deeply frustrating is that much of the popular discussion when thinking about climate is all of the discussion seems to focus on the fuel mix,” Dale said.
And, while issues with the fuel mix have a habit of being “someone else’s problem,” energy efficiency, with its focus on how people use energy, becomes everyone’s problem, he said.
Bob Dudley, BP group chief executive, said during the June 8 webcast that he views natural gas as a transition fuel that will lead to the low carbon future.
“So you’re seeing more and more of our capital investment go into natural gas projects,” Dudley said.
Commenting that BP constantly adjusts its decision making to reflect the changing world energy scene, Dudley said that, despite a massive selloff in assets to cover the costs of the Deepwater Horizon disaster, BP retained a major wind farm business in the United States and a large biofuel business in Brazil. In the interests of learning about new technologies, to enable BP to position its portfolio for the future, the company invests in a wide spectrum of companies, Dudley said.
The oil market In terms of oil, Dale commented that, being driven by an oversupply rather than low demand, the current low oil price situation is likely to be somewhat more prolonged than demand-driven price drops of the late 1990s or late 2000s. Although the oil market should return to balance later this year, with the market already responding to price signals, the current overhang in oil stocks will still need resolution before the market can truly return to normal.
If oil prices go above $50 per barrel and appear set to remain there, people will start wanting to bring drilling rigs back into operation, Dale said. But, the speed with which oil development can resume will depend on the availability of personnel, many of whom have already left the oil producing regions, and on the availability of financing from perhaps reluctant banks and private equity funds, he said.
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