Aside from minor adjustments, BP’s latest Energy Outlook is mostly business-as-usual, writes Fereidoon Sionshansi, president of Menlo Energy Economics and publisher of the newsletter EEnergy Informer. BP seems to have missed out entirely on the agreement reached in Paris in December 2015, as if it did not happen, notes Sionshansi: “The Outlook seems more of a wish list than a forecast.”
BP‘s annual Energy Outlook is always worth a read even if you do not agree with BP’s oil-centric outlook. The 2016 edition, which looks out to 2030, is no exception. To its credit, BP is slowly and grudgingly acknowledging that the future may evolve rather differently than the past – e.g., lower global demand growth rates, changes in the mix of fuels that supply the demand, growth of renewables especially in the power generation sector – yet it seems reluctant or unable to abandon the status quo, the history with which it is familiar and comfortable. Call it organizational inertia, or bias, common among all oil majors.
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In its introduction, Bob Dudley, the CEO, acknowledges the continuing weakness in the oil market, but adds, optimistically, that there are clear signs that the market is adjusting and that it will gradually rebalance.
Few would fundamentally disagree that at $30 a barrel, oil is too cheap – certainly compared to highs of 100+ in 2014. But given the supply glut and fierce competition among many producers it is less clear how soon the rebalancing will take place, to what extent prices will rebound and for how long. US shale producers, for example, are likely to be back in business once prices rise above $50, dampening the price recovery.
As noted by Mr. Dudley, BP’s energy outlook is predicated on 3 key assumptions. First, energy demand will continue to grow – more or less along familiar historical patterns. Second,the fuel mix will continue to shift – with fossil fuels remaining as dominant sources of energy as always. Third, the rate of growth of carbon emissions will fall due to gains in energy efficiency and gradual migration towards lower carbon fuels.
Sensible? Up to a point.
Take energy demand growth. BP’s own analysis suggests flat energy consumption within OECD, and rapidly declining growth rates everywhere else (graph above).
The latest forecast for oil consumption shows an increase over the past year, because – what else – oil prices are lower now.
Regarding the energy mix, many expect a faster decline in coal and oil, a flat or marginally declining demand for natural gas, and a much more robust growth in hydro as well as non-hydro renewables than projected (graph on bottom of page 5).
BP‘s base case scenario should in fact be labeled failure to combat climate change scenario
How would this be possible? As economies mature, they will increasingly rely on electricity – an increasing share of which can be generated from non-fossil sources (graphs below).
On the carbon issue, BP’s Outlook seems to have missed out entirely on the agreement reached in Paris in December 2015 – as if it did not happen. BP’s 2016 Outlook says global greenhouse gas emissions will rise by 23% between 2015 and 2035, rather than the 25% projected in 2015.
While much uncertainty surrounds the eventual implementation of the Paris accord as described in this month‘s lead article, BP appears to assume that it will be business as usual. Carbon emissions need to be reduced over time for all the obvious reasons, but failing that, life will go on as it always has.
In a section buried at the end of the report, BP examines 3 alternative future scenarios including one titled faster transition to a lower carbon world (graph below).
As far as this newsletter‘s editor is concerned, this is a more probable base-case scenario with oil demand flattening, coal demand falling precipitously and renewables soaring to displace fossil fuels.
Why? First, because of the falling costs of renewables. Second, because governments around the world are beginning to move towards low carbon sources of energy for a variety of reasons, including increasing pressure from the agreement reached in Paris to combat climate change.
BP‘s base case scenario should in fact be labeled failure to combat climate change scenario. It portrays a future where governments abysmally fail to carry out what was pledged at COP21 in Paris – thereby allowing greenhouse gas emissions to continue to rise unabated. BP‘s answer to the problem is to say, we tried a little but failed, so get over it.
BP says: Renewables are expected to account for more than a third of EU power generation by 2035. How odd. Last time we checked, many were already getting a third of the power from renewables, a figure that continues to rapidly grow.
In forecasting the growth of renewables, BP, like the International Energy Agency (IEA), the Energy Information Administration (EIA) and countless others, seems unable or unwilling to believe its own numbers. Every year, it acknowledges that it underestimated renewables’ growth, yet every year it modifies its forecast only incrementally (graph below).
How much longer will this pattern persist? Some renewable resources may be intermittent but they are no longer expensive, exotic or unreliable. Their costs will continue to fall while their performance will continue to improve (graphs below).
This is not true of most fossil fuels, especially if one adds a carbon penalty to the cost – as implied by the climate agreement reached in Paris. Moreover, renewables are abundant and essentially free – once the investment in the infrastructure has been made.
Likewise, BP may be off on its assumptions about the future demise of coal – obviously not its main forte. The decline of coal is likely to be far more pronounced than is projected by BP, as I explain in the March issue of my newsletter EEnergy Informer.
In mid-February 2016, Anglo-American, among the world‘s biggest mining companies, announced that it was abandoning coal mining – once amongst its main sources of business – altogether. If Anglo-American does not see a future in coal, who does?
One can make other arguments about BP’s projections. For example, minor downward adjustments in growth rate of GDP, and how much energy is required to feed it – energy intensity – are likely to result in much lower energy demand projections over a 20 year period.
In an editorial on 12 Feb 2016, The Financial Times said, “Of course, BP is hardly an impartial observer: it has its own plans for growth in its US business. Moreover, its forecasts are subject to huge uncertainties. Slower growth in China over the 20-year period would cut the overall rise in energy demand by a third; while the extent to which China succeeds in rebalancing its economy away from manufacturing will have a huge impact on the relative share of different fuels.”
No one, of course, has a crystal ball. But one can find plenty to nitpick in BP‘s Outlook. By some measures, BP‘s latest Outlook is more of a wish list than a forecast.
As illustrated in the accompanying graph from the website Carbon Brief, BP appears to be saying that long-established trends are now reversed. If anything, the reverse is likely to be true, including lower global GDP growth rates, lower demand for energy, more pressure towards low-carbon fuels, and a flood of renewable energy getting cheaper by the day.
Energy expert and author Fereidoon Sioshansi (firstname.lastname@example.org) is president of Menlo Energy Economics, a consultancy based in San Francisco. He edits and publishes EEnergy Informer, a recommended monthly newsletter with international circulation. This article was first published in the March edition of EEnergy Informer and is republished here with permission.