Every year, towards the end of February, BP releases its Energy Outlook. This sets out the firm’s idea of how the world’s energy demand and supply will evolve over the next 20 or so years. It isn’t the only such report that a major firm puts out, but it is one of the most well regarded, particularly because it is one of the first to be released, and that past Outlooks have proven prescient.
In the 2018 edition, the general direction of the story has not changed. Global energy demand is still growing, up by some 1.3% per year through 2040. The world will continue to diversify its energy sources, with BP calling it ‘the most diversified energy mix ever seen.’ What has changed, however, is speed. Specifically in electricity, which will account for almost 70% of primary energy demand growth through 2040. With buoyant economic growth projected, demand for power will rise, not just from developing nations building new infrastructure, but from the accelerating electric transportation sector – BP increased the number of electric cars it expects in 2035 to 180 million, up from 100 million in last year’s report. By 2040, almost 20% of the world’s 2 billion cars will be electric.
This has implications for oil. While natural gas and LNG will see strong growth, propelled by power usage in Asia, oil faces a more challenging future. With oil-based transport likely to see a decline beginning 2030, global oil demand will peak in 2035. BP does not see a sharp falloff after, but rather a plateauing, as industries will continue to find avenues to absorb crude, which will grow strongly thanks to American production. By 2040, the US will be the world’s largest producer of oil and gas. However, BP does warn that oil demand could start sliding rapidly if proposed bans on internal combustion engine bans play out faster than expected. Or if bans on single-used plastic items take off, denting oil demand for petrochemicals.
All these aren’t new headlines. It is fair to say that the industry has anticipated most of this (driven by developments in China and Europe), and has been preparing for such a future already. Hence, BP and Shell’s recent major investments into renewable energy and electric vehicles. However, the speed at which these changes happen may still keep the best forecaster guessing. With the economics of renewable energy investments still unclear (or unconvincing) in some areas, combined with the concern of potential raw material shortage for battery manufacturing, costs could escalate with the growing popularity of renewable energy. Shell continues to project higher demand for LNG as the transitionary fuel towards cleaner energy, and that seems to be the immediate high growth story for now. What is certain is that the clock is ticking. How fast or slow, would probably be the highlight in next year's report. As they say, it is not “if” but “when”.
Key points of the BP Energy Outlook 2018:
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Headline crude prices for the week beginning 11 November 2019 – Brent: US$62/b; WTI: US$56/b
Headlines of the week
The year’s final upstream auctions were touted as a potential bonanza for Brazil, with pre-auction estimates suggesting that up to US$50 billion could be raised for some deliciously-promising blocks. The Financial Times expected it to be the ‘largest oil bidding round in history’. The previous auction – held in October – was a success, attracting attention from supermajors and new entrants, including Malaysia’s Petronas. Instead, the final two auctions in November were a complete flop, with only three of the nine major blocks awarded.
What happened? What happened to the appetite displayed by international players such as ExxonMobil, Shell, Chevron, Total and BP in October? The fields on offer are certainly tempting, located in the prolific pre-salt basin and including prized assets such as the Buzios, Itapu, Sepia and Atapu fields. Collectively, the fields could contain as much as 15 billion barrels of crude oil. Time-to-market is also shorter; much of the heavy work has already been done by Petrobras during the period where it was the only firm allowed to develop Brazil’s domestic pre-salt fields. But a series of corruption scandals and a new government has necessitated a widening of that ambition, by bringing in foreign expertise and, more crucially, foreign money. But the fields won’t come cheap. In addition to signing bonuses to be paid to the Brazilian state ranging from US$331 million to US$17 billion by field, compensation will need to be paid to Petrobras. The auction isn’t a traditional one, but a Transfer of Rights sale covering existing in-development and producing fields.
And therein lies the problem. The massive upfront cost of entry comes at a time when crude oil prices are moderating and the future outlook of the market is uncertain, with risks of trade wars, economic downturns and a move towards clean energy. The fact that the compensation to be paid to Petrobras would be negotiated post-auction was another blow, as was the fact that the auction revolved around competing on the level of profit oil offered to the Brazilian government. Prior to the auction itself, this arrangement was criticised as overtly complicated and ‘awful’, with Petrobras still retaining the right of first refusal to operate any pre-salt fields A simple concession model was suggested as a better alternative, and the stunning rebuke by international oil firms at the auction is testament to that. The message is clear. If Brazil wants to open up for business, it needs to leave behind its legacy of nationalisation and protectionism centring around Petrobras. In an ironic twist, the only fields that were awarded went to Petrobras-led consortiums – essentially keeping it in the family.
There were signs that it was going to end up this way. ExxonMobil – so enthusiastic in the October auction – pulled out of partnering with Petrobras for Buzios, balking at the high price tag despite the field currently producing at 400,000 b/d. But the full-scale of the reticence revealed flaws in Brazil’s plans, with state officials admitting to being ‘stunned’ by the lack of participation. Comments seem to suggest that Brazil will now re-assess how it will offer the fields when they go up for sale again next year, promising to take into account the reasons that scared international majors off in the first place. Some US$17 billion was raised through the two days of auction – not an insignificant amount but a far cry from the US$50 billion expected. The oil is there. Enough oil to vault Brazil’s production from 3 mmb/d to 7 mmb/d by 2030. All Brazil needs to do now is create a better offer to tempt the interested parties.
Results of Brazil’s November upstream auctions:
Global liquid fuels
Electricity, coal, renewables, and emissions