BP's Energy Outlook: Renewables & Gas Surge, Coal Slows

Despite the dramatic fall in oil markets that began four months ago, this year's BP Energy Outlook 2035 tries to look long term - beyond the current turmoil - to explain the confluence of several mega-trends. The most dramatic is the rerouting of global growth to Asia – particularly China and India – accompanied by an insatible demand for energy, and rising 37% over the next twenty years. Spencer Dale, BP’s new group chief economist, lays this and other powerful trends out over 90 pages of text and graphs (watch his interview). 

Next important megatrend: the oil glut caused by strong growth in U.S. tight oil production, slowing growth in China, and a refusal by Saudi Arabia to act as the market's swing producer, will take several years to work through. After the shakeout, the global energy landscape will have significantly shifted. Most think that U.S. shale drillers are changing places with OPEC to become the world's new swing producers, quickly ramping production up and down to set the market's new and lower profit floor. Since most of OPEC and other petro states like Russia had become addicted to $100 oil, a new era of lower prices will cause political turmoil. And national budgets are already being slashed.

The biggest culprit in the oil glut: long before the U.S. rig count started dropping, tight oil production in the U.S. had broken records several years in a row. In 2014 output surged by 1.5 million barrels a day – the largest single-year rise in U.S. history. Although no one can predict how long productivity will continue to rise, this rapid growth won't last very long, and about a decade from now, as growth slows, Middle East production will regain its dominance. None the less, by the 2030s the U.S. should be self-sufficient in oil, after having imported 60% of its total demand as recently as 2005.

Heading toward 2035, as the world's demand for oil tilts East, it increases by around 0.8% each year - entirely from the non-OECD countries. By 2035 China is likely to overtake the U.S. as the largest single consumer of oil. Reflecting incresing energy efficiency, OECD oil consumption peaked in 2005 and should finally fall to levels not seen since 1986.

As gas rises, coal falls

There are also winners and losers as the rise of natural gas plays out across the globe. Increasing 1.9% a year, demand for natural gas in Asia will outstrip other fossil fuels. Half of the new demand will come from growing conventional gas production, primarily from Russia and the Middle East, and about half from shale gas. By 2035, North America, which currently produces almost all of the world's shale gas, will still account for three quarters of output.

On the flip side, coal was once the fastest growing fossil fuel, driven by a growing China, but over the next 20 years, the fuel will move into the slow lane. This turnaround is driven by less energy-intensive (industrial) growth in China; coal-fired power regulation in the US and China; and cheaper gas elbowing coal out of the power sector. Even in the U.S., many former coal-fired powered plants are being repowered by more effiecient combined-cycle gas turbines. At this point in time, the world fears that India will use China's coal-intensive develoment strategy, but that could change. Although China has gotten a bad rap for dangerous air pollution, Indias' major cities are actually worse. So ultimately solar and wind could start to edge out coal in India's future.  

Global growth of LNG

While the growth of shale gas in North America means that the U.S. will switch from being a net importer to net exporter of gas, Russia will likely lose control over prices in Europe. That's because most of the increase in traded gas will be met through increasing LNG supplies, showing dramatic, 8% growth over the rest of this decade. This means that by 2035 LNG will have overtaken pipelines as the dominant form of traded gas. Over time, more globally connected gas markets will mean more stable prices. 

Unsustainble CO2 emissions

Even though renewables (including biofuels) will make up 8% of total energy consumption in 2035 (which might be overly pessimistic), compared to just 3% today,tucked into the very end of the Outlook, BP sees global CO2 emissions rising by 1% a year to 2035 - 25% in total - and significantly above the 2 degree limit set by scientists following the 450ppm threshold.

BP feels that to realistically keep carbon emissions within safe limits will require more government intervention. While the company stresses that the world will use many different options, it now sees the need for a "realistic" global carbon price to provide incentives in meeting the world’s energy needs in a sustainable way. If this were to happen, suddenly CCS wouldn't be dependent on enhanced oil recovery to make a profit. More facilities would be built - hopfully hitting the IEA target of 200 world-wide sequestration facilities. 

How realistic are BP's current predictions?