BP Announces Tectonic Shift In World Energy Production

Starting slowly but gathering force and quickly accelerating between 2007 and the winter of 2015, the global energy market was completely upended, retooled, and reconstituted. This process reached a climax when OPEC purged oil prices last November by refusing to pump reduced quotas of conventional oil to dry up the shale oil flooding the US and severely displacing imports. So no one was surprised when CEO Bob Dudley opened his press conference for BP's 2015 Statistical Review of World Energy by saying:

The eerie calm that had characterized energy markets in the years prior to 2014 came to an abrupt end last year... and may come to be viewed as a broader shifting in the tectonic plates that make up the energy landscape...

He reminded his audience that the crash was the denouement of the relentless US shale revolution, which had accounted for the largest increase in oil production in the world and created the first time any country had increased production by 1 million barrels a day for three consecutive years. This mind-boggling wave of oil had lubricated the US economy, revving up Rick Perry's Texas job miracle, and allowed the country to overtake Saudi Arabia as the world’s largest oil producer — an unimaginable outcome for even the most wildly optimistic Texas oilmen eight years ago. (The report)

Connecting the dots

Following Dudley's introduction, Spencer Dale, the report's chief economist, stepped to the podium armed with stacks of fresh data and connected the dots to his Boss's thesis of ongoing energy upheaval, which, at its height last year, had more than 1800 rigs were drilling 40,000 new wells in major US oil and gas plays. Furthermore, easy money from Wall Street had flooded places like Bakken and Eagle Ford, fueling fracking's unique quick-depletion economics. This gush of capital more than doubled in 5 years, reaching $120 billion in 2014, resulting in an inevitable rise in productivity that was even more striking.

Rapidly innovating real-time seismic data, perfecting directional drilling, adding more wells per pad, and  doubling the amount of proppants per frack, and other production tweaks, increased drilling efficiency 700 percent during the historical go-go spasm between 2007 and 2014. This has become an achievement that gives Silicon Valley and its Moore's Law-inspired techno-religion a run for its money. (Read the full report here.)

A similar recipe of easy-to-find reserves, a tsunami of investment and steady innovation had also supercharged the growth of the Barnett and Marcellus shales, causing the US to leapfrog over Russia, another hydrocarbon top-dog, as the world’s largest producer of oil and gas. Finally Mr Dale took a breath and intoned:

We are truly witnessing a changing of the guard of global energy suppliers.

This was one of the only times that a sober economist would hit such pitch-perfect TedTalk high notes, after which he continued: US imports of oil in 2014 were now less than half their 2005 "peak-oil" fretting levels, meaning that the US had finally retired as the world’s longest serving and largest oil importer, turning that dubious honor over to China.

It takes two to contango

OK, now over on the flip side of the shale miracle, when sudden fluctuations in global energy demand amplified shale oil's effects on the world economy. Just last year as global growth slowed sharply, energy consumption was throttled back and increased only 0.9% in 2014, its slowest rate since the late 1990s. With energy demand pretty much plateaued in Europe and the US, much of the actual slowing occurred when China started moving away from energy intensive industries. This disproportionately impacted that 20th century heavy lifter, coal.

To a large extent, China is synonymous with coal. For many years, the price of coal had been wedded to the economic rise of China. It was certainly true as the former developing economy started industrializing rapidly, which made the coal the fastest growing fossil fuel during the first decade of this century. And it was also true in 2014 as Chinese demand cooled and coal became the the "dead man walking" among fossil fuels.

It should also be mentioned that the Chinese government has restricted coal use in heavily polluted cities in the north.

Although coal was heavily exposed to the industrial sectors severely affected by the economic rebalancing, like cement, steel and construction, it also lost ground against competing fuels and technologies in China. Very strong growth in hydropower, and to a much lesser extent, wind and solar, have all had a strong impact on coal's shrinking market share.

Battles for market share

While these shifts in supply and demand had major up-and-down effects on energy production, particularly oil prices, this accelerated as non-OPEC production grew, led by the US and closely followed by Canada and Brazil. Finally prices tanked after OPEC refused to cut production — like it had done in the past — and opted to protect its market share instead. Countries outside of OPEC had increased supply by 2.1 million barrels a day in 2014, the largest increase ever seen in non-OPEC output and more than double the ten year average.

Also last year, renewables were the fastest growing form of energy, and they accounted for one-third of the increase in total energy use, providing around 3% of the world’s energy needs. Suddenly renewables were providing a bigger contribution to global energy growth than fossil fuels for the first time.

The slowing of China's and global energy demand and the shift to a diferent fuel mix had a big impact on carbon emissions. BP's calculations suggest that global CO2 emissions from energy use grew by just 0.5% in 2014, the weakest since 1998, excluding the messy aftermath of the financial crisis.

In 2014, emissions growth of 0.5% was far slower than the annual 2% growth rate over the previous ten years. While about a quarter of the slower rate can be attributed to weaker GDP growth - 3.3% vs 3.7%, the most important driver was improved in energy intensity, largely reflecting the changing Chinese economy - i.e., kicking coal to the curb. 

Living in a $60 oil world

To a large degree, Dale Spencer's presentation was the foundation that supported Bob Dudley's policy recommendations, which took the long view, saying that larger oil inventories meant "we have to be prepared for life in a lower-oil-price world. The $100 plus years now felt "like ancient history...the exception not the rule."

Then Dudley tossed in some common sense to survive the downturn by explaining the need to maintain fiscal discipline on capital and costs. He also validated the industry's postponed exploration projects.

Finally, reflecting the Oil Majors' decade-long move into natural gas exploration and LNG: he offered that "if carbon emissions are to be brought to a tolerable level, BP had joined with a number of fellow oil and gas companies last week to call for a global price on carbon."

Dudley would certainly prefer market mechanisms over government intervention to encourage "efficiency, renewables and gas instead of coal….or other solutions we can’t even imagine yet."

So BP is positioning itself for a "low carbon" future, with a gas portfolio making up half of its production, as well as a biofuels operation and a wind business.  And he encouraged policy-makers to move forward when they meet in December.

Will BP's and the other Oil Majors' carbon-pricing strategy work?

Images: BP