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 February 2019 – Brent: US$61/b; WTI: US$52/b
Headlines of the week
Midstream & Downstream
Global liquid fuels
Electricity, coal, renewables, and emissions
2018 was a year that started with crude prices at US$62/b and ended at US$46/b. In between those two points, prices had gently risen up to peak of US$80/b as the oil world worried about the impact of new American sanctions on Iran in September before crashing down in the last two months on a rising tide of American production. What did that mean for the financial health of the industry over the last quarter and last year?
Nothing negative, it appears. With the last of the financial results from supermajors released, the world’s largest oil firms reported strong profits for Q418 and blockbuster profits for the full year 2018. Despite the blip in prices, the efforts of the supermajors – along with the rest of the industry – to keep costs in check after being burnt by the 2015 crash has paid off.
ExxonMobil, for example, may have missed analyst expectations for 4Q18 revenue at US$71.9 billion, but reported a better-than-expected net profit of US$6 billion. The latter was down 28% y-o-y, but the Q417 figure included a one-off benefit related to then-implemented US tax reform. Full year net profit was even better – up 5.7% to US$20.8 billion as upstream production rose to 4.01 mmboe/d – allowing ExxonMobil to come close to reclaiming its title of the world’s most profitable oil company.
But for now, that title is still held by Shell, which managed to eclipse ExxonMobil with full year net profits of US$21.4 billion. That’s the best annual results for the Anglo-Dutch firm since 2014; product of the deep and painful cost-cutting measures implemented after. Shell’s gamble in purchasing the BG Group for US$53 billion – which sparked a spat of asset sales to pare down debt – has paid off, with contributions from LNG trading named as a strong contributor to financial performance. Shell’s upstream output for 2018 came in at 3.78 mmb/d and the company is also looking to follow in the footsteps of ExxonMobil, Chevron and BP in the Permian, where it admits its footprint is currently ‘a bit small’.
Shell’s fellow British firm BP also reported its highest profits since 2014, doubling its net profits for the full year 2018 on a 65% jump in 4Q18 profits. It completes a long recovery for the firm, which has struggled since the Deepwater Horizon disaster in 2010, allowing it to focus on the future – specifically US shale through the recent US$10.5 billion purchase of BHP’s Permian assets. Chevron, too, is focusing on onshore shale, as surging Permian output drove full year net profit up by 60.8% and 4Q18 net profit up by 19.9%. Chevron is also increasingly focusing on vertical integration again – to capture the full value of surging Texas crude by expanding its refining facilities in Texas, just as ExxonMobil is doing in Beaumont. French major Total’s figures may have been less impressive in percentage terms – but that it is coming from a higher 2017 base, when it outperformed its bigger supermajor cousins.
So, despite the year ending with crude prices in the doldrums, 2018 seems to be proof of Big Oil’s ability to better weather price downturns after years of discipline. Some of the control is loosening – major upstream investments have either been sanctioned or planned since 2018 – but there is still enough restraint left over to keep the oil industry in the black when trends turn sour.
Supermajor Net Profits for 4Q18 and 2018
- 4Q18 – Net profit US$6 billion (-28%);
- 2018 – Net profit US$20.8 (+5.7%)
- 4Q18 – Net profit US$5.69 billion (+32.3%);
- 2018 – Net profit US$21.4 billion (+36%)
- 4Q18 – Net profit US$3.73 billion (+19.9%);
- 2018 – Net profit US$14.8 billion (+60.8%)
- 4Q18 – Net profit US$3.48 billion (+65%);
- 2018 - Net profit US$12.7 billion (+105%)
- 4Q18 – Net profit US$3.88 billion (+16%);
- 2018 - Net profit US$13.6 billion (+28%)