Providing coverage of Alaska and northern Canada's oil and gas industry
July 2021

Vol. 26, No.29 Week of July 18, 2021

An extraordinary year

BP Statistical Review reports huge drop in energy use, carbon emissions in 2020

Alan Bailey

for Petroleum News

The COVID-19 pandemic caused a massive drop in energy consumption during 2020, mainly as a consequence of a fall in oil usage, according to BP’s annual Statistical Review of World Energy. The drop in oil consumption came primarily as a result of the pandemic related shutdown and the crash in transportation oil demand. The slump in the use of fossil fuels resulted in turn in a major fall in global carbon emissions.

With the production of renewable energy actually increasing somewhat, despite the overall energy usage slump, the year provided important lessons in terms of managing carbon emissions and tackling global climate change.

Spencer Dale, BP chief economist, characterized the impact of the pandemic on global energy in 2020 as “unmatched in modern peacetime,” with the largest falls in energy demand and carbon emissions since World War II. And, with energy systems under extreme pressure, “the global pandemic was the mother of all stress tests,” Dale commented.

Drop in global demand

World energy demand is estimated to have fallen by 4.5% and carbon emissions from energy usage to have dropped by 6.3%. The carbon intensity of energy, a measure of how much carbon is emitted per unit of energy, fell by 1.8%, the Statistical Review says.

That rate of fall in carbon emissions is around the rate of fall needed over the next 30 years, if the world is to meet the carbon reduction targets set in conjunction with the 2015 Paris agreement on climate targets. But the drop in carbon emissions in 2020 resulted from a major fall in economic activity, a situation that makes continuing emission drops for the same reasons unlikely. On the other hand, the decline in world economic output in 2020 implies a carbon cost of nearly $1,400 per metric ton, a figure that does not seem unduly high - the challenge is to reduce carbon emissions without causing major damage to people’s way of life, Dale commented.

Oil demand in 2020 fell by a massive 9.3%, or 9.1 million barrels per day. Thanks in particular to the crash in transportation related demand, this fall was much larger than had been predicted from modeling.

Initial oversupply

The onset of the pandemic, between December 2020 and April 2021, saw oil supplies continuing as normal while demand completely collapsed. The oil price dropped dramatically, with the West Texas Intermediate index briefly dropping into negative territory in April, as storage facilities filled, Dale commented.

Then, between April and August, the oil supply rate dropped significantly, with production cuts in particular in the OPEC plus countries and the United States. In the United States, in addition to allowing natural production declines, oil wells were shut in, both in shale oil plays and in conventional oil fields. At the same time, a partial easing of pandemic lockdowns in various parts of the world resulted in a convergence of oil production and consumption rates.

Between August and the end of 2020, with oil demand edging up while oil production constraints were partially reduced, around half of the excess oil stocks from earlier in the year were eliminated while the oil price recovered to around $50 per barrel.

Dale suggested that a lesson from this sequence of events is that OPEC plus is willing and able to stabilize oil markets during short term market shocks of the type experienced in 2020. However, questions remain over OPEC’s potential response to a more sustained fall in oil demand, such as would result from a global transition to net zero carbon emissions, he cautioned.

Natural gas demand

In contrast with oil, the global demand for natural gas fell by only around 2%, a demand drop that was in line with model predictions and that was much smaller than that of oil. The drop was similar to that observed in 2009, in the aftermath of the global financial crisis. The fall in demand in 2020 was softened by a drop in gas prices and consequent buoyancy in the use of gas for power generation.

Characterizing the gas supply situation in Europe as a contest between Russian pipeline gas and US liquified natural gas, Dale commented that, while Russian gas exporters appeared willing to lose some market share in 2020, European LNG imports increased. However, the likelihood that the Russian suppliers were simply responding to a short-term market phenomenon, rather than a possible long-term decline in gas demand, needs to be considered, Dale cautioned, citing similarities with OPEC’s response to the short-term drop in oil demand.

And, during the summer, when European LNG pricing fell below LNG facility operating costs, there was a significant shutdown of US LNG exports.

Electricity consumption

Interestingly, while global electricity consumption only dropped 0.9% in 2020, with reduced industrial demand being partially offset by increased domestic use, total renewable energy production, including wind, solar and geothermal production, but excluding hydro, was impressively resilient to the pandemic and saw its highest ever annual increase. Moreover, the past five years have seen a growth of around 60% in global renewable power production, with the production of wind and solar power more than doubling.

The increase in renewable energy production in 2020 came largely as a counterbalance to a loss of coal-fired power generation, which experienced one of its highest annual declines on record. However, given the increases in coal-fired generation in recent years, the reduction in 2020 only took this form of generation back to 2015 levels. And the reduction of coal-fired generation in emerging market economies will require the increased use of natural gas.

Carbon reduction goals

Reflecting on the global response to the Paris accord on climate change, Dale commented that there are now 10 countries, plus the European Union, that have passed laws with net zero carbon emissions targets. Another 34 countries have proposed similar legislation or carbon reduction policies. And more than 3,000 companies have now stated objectives around net zero emissions. There has also been a major upsurge in investments related to environmental, social and governance objectives.

However, the various national pledges still do not go far enough to meet the Paris agreement goals, and the world has yet to see a marked improvement in carbon dioxide emissions, Dale cautioned. The emissions reductions observed in 2020 will likely, for the most part, prove transitory. And, worldwide, more energy is needed - although there have been significant improvements in global energy access in recent years, about 10% of the world’s population still does not have access to electricity. Moreover, access to energy is vital for productive uses as well as for household consumption.

On the other hand, in 2020 the capacity of wind and solar power generation increased by 230 gigawatts, an increase 50% larger than the largest previous annual increase. China accounted for about half of the 2020 increase. The renewable energy capacity increased by an average of 18% per year between 2015 and 2020, particularly driven by falling costs: a 40% cost reduction for wind and a 55% cost reduction for solar. In China, in particular, manufacturing costs have dropped as manufacturing capacity has scaled up.

However, Dale cautioned that the expanded use of renewable energy sources will not be sufficient in itself to achieve net zero carbon emissions. Improved energy efficiency and other energy technologies such as hydrogen, together with carbon, capture use and storage, will also be needed.

Editor’s note: Part 2 will appear in the July 25 issue and will cover a panel discussion on the findings of the Statistical Review.

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