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BP: Abundance of oil resources more than matching growing demand
The 2017 edition of BP’s annual Energy Outlook report, issued on Jan. 25, anticipates world oil demand continuing to grow, but at a slowing rate. At the same time, with volumes of technically recoverable oil reserves far in excess of anticipated demand out to 2035, the market conditions will likely favor low-cost producers. Natural gas demand is likely to grow steadily, with LNG supplies growing faster than supplies of pipeline gas, and with long-term LNG contract pricing likely to be increasingly indexed to spot LNG prices, the Energy Outlook predicts.
The primary forecast in the Energy Outlook relies on a base case, the future scenario that the analysts preparing the outlook see as most likely to happen. However, given the huge uncertainty involved in any forecast of this type, the report also considers alternative scenarios, to test the sensitivities of different aspects of the energy forecast to different potential situations.
World economic growth In its base case scenario, the Energy Outlook anticipates the world economy nearly doubling in the next 20 years, with an average annual growth rate of 3.4 percent in the world gross domestic product. A population growth of 1.5 billion people to nearly 8.8 billion will cause part of that growth.
Although the economic growth will cause a corresponding growth in the demand for energy, the rate of increase in energy demand is likely to slow from the average rate of 2.2 percent per year seen in the past 10 years to an average rate of 1.3 percent. That slowdown will result from a rapid fall in energy intensity, the amount of energy used per unit of GDP, as energy usage becomes more efficient.
Almost all of the growth in global energy demand will come from fast-growing emerging economies, in particular China and India, the BP analysts think. Little demand growth is expected in the developed world of the countries in the Organization for Economic Cooperation and Development. And, in parallel with the growth in energy demand, there will be a continuing gradual decarbonization of the fuel mix, as renewable energies become more competitive, the Energy Outlook says.
Growing oil demand Demand for oil, an energy source primarily used in transportation, will continue to grow, but at a slowing rate. The Energy Outlook expects the number of cars in use to double between now and 2035. But while this increase in vehicle usage will cause an increase in demand for oil, that increase will be significantly offset by major improvements in vehicle fuel efficiency. The BP analysts also anticipate a major increase in the use of electric cars, from 1.2 million in 2015 to perhaps 100 million in 2035. An increase of this scale in electric car usage would knock a further dent in oil demand, although, with 100 million electric vehicles only representing 6 percent of the total worldwide car fleet, the impact of electric car use on oil consumption would be relatively modest. The resulting global demand for liquid fuels for car use in 2035 might then be some 23 million barrels per day.
Also of potential but unknown impact on oil demand from car use is an emerging trend toward the use of autonomous vehicles, car sharing and car ride pooling. The Energy Outlook, in addition to its base case, considers a scenario in which the move toward car sharing using efficient autonomous cars is particularly strong. In a Jan. 25 presentation on the Energy Outlook, BP Group Chief Economist Spenser Dale said that this particular scenario appeared to decrease future oil demand from car use by 2 million to 3 million barrels per day. However, this estimate does not take into account the possible impact of the lower cost and higher accessibility of car travel, Dale commented.
In another scenario, the BP analysts considered the possibility of an “electric revolution,” which assumes a much heightened penetration of electric car use to, say, 300 million cars in 2035, with these cars being used for car sharing and car ride sharing. That would trigger a further significant fall in oil demand.
But, overall, the potential drop in oil demand from electric car use over the next 20 years does not appear big enough to have “huge implications” for the growth of oil demand, Dale suggested.
The BP analysts also think that by the early 2030s the dominant use of oil will transition from transportation to non-combustible uses, especially in petrochemicals.
Glut of oil reserves Set against this future oil demand is a situation in which the quantity of proven oil reserves around the world is substantially greater than the amount of oil that the world is expected to need out to 2050 and beyond, the Energy Outlook says. Oil reserves have more than doubled over the last 35 years, with every barrel of oil consumed being replaced by two new barrels of oil discovered, the report says. Technically recoverable oil is currently estimated at some 2.6 trillion barrels, 1.7 trillion barrels of which are located in the Middle East, the Commonwealth of Independent States and North America.
This glut of oil reserves in conjunction with slowing oil demand will allow low-cost oil producers to increase their market share of oil production, the Energy Outlook suggests. In particular, the share of production coming from low cost resources in the Middle East, Russia and the best U.S. tight oil plays is likely to grow disproportionately.
Growing natural gas consumption Meanwhile the consumption of natural gas is expected to grow steadily at a rate of about 1.6 percent per year, with shale gas production accounting for about two-thirds of the increase in gas supplies. China is expected to become the second largest shale gas producer, after the United States, by the end of the forecast period. Liquefied natural gas supplies are expected to grow rapidly, led by LNG supplies from the United States and Australia. Countries in Asia will continue to provide the largest market for LNG, but LNG demand from Europe will also increase in response to declining domestic gas production, the Energy Outlook suggests.
And, with a deep and competitive LNG market, LNG pricing in long-term supply contracts will likely be linked to spot LNG prices, anchored by U.S. gas prices, the report says.
Coal continues as a major component of the world’s fuel mix. As China, in particular, switches to the greater use of natural gas, hydropower and renewable energies, global demand for coal is expected to flatten, with coal occupying a declining share of total energy production.
The use of renewable energy sources, on the other hand, will continue to climb rapidly - the Energy Outlook anticipates use of renewable energy growing from 3 percent of the energy mix in 2015 to 10 percent by 2035, with worldwide renewable energy growth being highest in China over the next 20 years. This phenomenon is likely to be linked to an expectation that electrical power is expected to account for an increasingly large proportion of the energy consumption mix.
Carbon emissions The Energy Outlook in its base case anticipates carbon emissions from energy production and usage continuing to grow at a rate far above what is needed to achieve carbon emission goals set in the 2016 Paris agreement on climate change. However, the rate of growth is expected to be substantially lower than rates seen in the recent past, thanks to the declining energy intensity and the changing fuel mix.
The Energy Outlook assesses two scenarios in which carbon emission rates are reduced, either quickly or very quickly, through policies such as carbon pricing, and through factors such as the especially rapid adoption of electric car use. The faster of these scenarios would meet the Paris goals, Dale explained.
Under the faster of these carbon reduction scenarios, much of the carbon abatement would come from power generation. Non-fossil fuels would provide all of the growth in primary energy. Oil demand would peak and then drop slightly by 2035, the Energy Outlook indicates. But, under either of the carbon reduction scenarios, the world would need about the same quantity of oil and gas combined as it does today, meeting about half of the world’s energy needs in 2035, Dale said.
However, there are many different ways of achieving carbon reductions, and the outcomes depend on policy judgments and assumptions used, Dale cautioned. Given the multitude of ways of tackling carbon emissions, the establishment of carbon pricing to encourage creativity in finding solutions, rather than the imposition of solutions through carbon-related regulation, is likely the best means of achieving carbon emissions targets, Dale suggested.
But government carbon emission policies, or lack thereof, could have a significant impact on the future fuel mix, a factor that emphasizes the uncertainty over demand for, for example, LNG or coal, Dale cautioned.
- ALAN BAILEY
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