Global Oil & Gas: “Oil prices at $100 or at $20? That’s a normal range” – BP Head of Energy Economics says
Offshore Energy Today has recently interviewed Mr. Paul Appleby, Head of Energy Economics at BP. Mr. Appleby, who is responsible for the renowned BP Energy Outlook, will be a keynote speaker at Offshore Energy event in Amsterdam, on October 25. Offshore Energy touched upon a plethora of subjects from oil prices, the future fuel mix, primary energy demand drivers, to the current situation in the oil and gas market.
OET: You are the Head of Energy Economics in BP, leading the production of BP’s Energy Outlook. Also, looking at your resume and history with BP spanning over three decades, and the titles that you’ve held, is it safe to assume you know everything about anything related to oil & gas?
That would be a very dangerous assumption, and I would be wary of anyone who claims to know everything about oil and gas. It’s obviously a vast, complicated subject, and it’s constantly changing. I think it’s probably why I’m still doing this after more than thirty years. There’s something to learn every day.
Hopefully, all those years of experience allow me to provide some useful insights about oil and gas markets. (Laughingly) So I don’t know everything, but a lot.
OET: Mr. Appleby, BP expects gas and renewables to grow strongly in the next 20 years. Can you break this down for us? What are the primary drivers behind this expected growth?
In our outlook gas is the fastest growing fossil fuel, and renewables – excluding large-scale hydro-power – are the fastest growing source of energy overall.
Over the next twenty years, gas is providing the largest absolute increase in energy, followed closely by renewables. Together they’re accounting for well over half in total increase of global energy consumption.
What’s driving that growth? For gas, the primary driver is its increasing availability as an affordable and relatively clean source of energy. In power generation for example, electricity can be produced from gas with about half the carbon emissions compared to using coal.
Gas resources are relatively abundant. That’s been boosted recently of course by the shale revolution in America, and the rapid expansion of liquefied natural gas, LNG, making it easier to connect gas resources to markets.
So that’s gas. For renewables, they’re growing rapidly from a small base. Currently, they supply about three percent of the global energy, and the main driver here is policy support, and also the decline in the cost of renewables.
Renewables costs are falling down rapidly, especially the solar, but most renewables still need some sort of policy support whether as in subsidy or some form of regulation. That will change over the course of the outlook so we’ll gradually see more and more areas in which renewables can compete without subsidies. So we do see renewables meeting around 9% of global energy needs by 2035.
Climate change – big challenge
OET: One of the reasons behind the shift to renewables and gas is the climate change. Is a 2°C future realistic, considering the Earth’s population is growing rapidly, consequently leading to growth in energy demand?
The global response to climate change is certainly one of the key drivers in the energy outlook, and we do see a shift to low carbon energy resources such as gas and renewables. I’m not a climate scientist so I’m not really qualified to assess the probability of meeting any particular climate goal. What I can say, if you just look at the carbon emission from energy consumption – of course, that’s only part of the overall climate change picture – in our outlook the central case projection has a significant slowdown in the growth of emissions. That’s the good news. But emissions are still growing by about 20 percent over the next 20 years.
And that means the world appears to be on a path that’s well above the trajectory that is described for example in the IEA’s 450 scenario, designed to be consistent with the 2°C goal. So there’s still a very big challenge there. Clearly one of the risks to our central projections is that the world will, at some point, take much tougher action to deal with climate change.
OET: Also there is a scenario where poorer nations don’t have the time nor the will for attempting to meet climate goals, as they’re in pursuit of social prosperity first, and will not shy away from using coal to meet their energy needs. What is your take on this?
That’s certainly a scenario for some countries. We do see coal consumption growing in some places. Globally, the main driver for coal is what’s happening in China, so we see the growth there slackened off, and coming to an end. There will still be some countries where coal is the most readily available, the most affordable form of energy and will still likely be used.
Oil price – $100, $50, $20?
OET: On the matter of supply, and demand of energy, can you comment on the current oil prices? I know the matter is far from simple, with too many factors involved, U.S. shale, Russia, Saudi Arabia, Iran, China, even the recent fires in Alberta, Canada. But, can you tell us what is going on? Are these prices of around $50 a barrel a new, long-term reality?
It’s certainly far from simple; that’s a good description. The one thing we know for sure about the price of oil is that we can’t predict the price of oil. So where are we now? Well, last year the price averaged $52, currently it’s sitting just below $50.
How do we get here? If you go back a few years, we had a run of almost four years from 2011 through to the middle of 2014 with oil relatively stable above $100.
That was a highly unusual period in historical context. We never expected that to persist. What was going on then was a fairly precarious, fragile balance between two opposing forces. We had strong growth of tight oil in the U.S., that’s part of the shale revolution, but that was masked or hidden if you like, by unusually high levels of supply disruptions elsewhere – for example, Libya, Iran.
The one thing we know for sure about the price of oil is that we can’t predict the price of oil.
It was only around mid-2014 that that balance kicked decisively in favor of strong growth that was coming out of U.S. It was compounded by some weakness in demand growth, and on top of that, of course, OPEC decided no to cut the production to try and balance the market. So we’ve had an oversupply of the market, rapid growth in stocks, and a sharp decline in the price of oil.
The market is adjusting as US production has now fallen, demand is growing strongly, but we still have a very large overhang of stocks, and that’s what’s reflected in the current prices.
So over time we expect the market to work its way through that excess inventory. It’ll take time, but eventually, there should be some relief with spot prices, however, I wouldn’t put a number or date on that.
OET: There have been talks of Russia and Saudi Arabia discussing a production freeze to “stabilize” oil prices. What could this stabilization mean for the global oil trade?
Both Saudi Arabia and Russia have been producing at record levels recently, so I’m not sure how much you can read into any agreement to stabilize production. How much more could their production grow anyway in the absence of that agreement?
I think it’s a very reasonable assumption to expect that the U.S. tight oil production will recover if and when the prices rise, but it’s very hard to put precise numbers on that because the shale revolution is still a very recent phenomenon.
We really don’t know yet how this new source of supply will react as we move through an oil cycle. So our expectation might be that U.S. tight oil will moderate the upswing of the oil price, but we’ll have to wait and see if that’s right.
Steady, but modest growth for oil
OET: While global oil demand is expected to grow by 2035, does it necessarily mean a substantial growth in oil prices?
We do project steady but modest growth for oil. Demand is averaging about 0.9% per annum over the next 20 years, slightly slower than we’ve seen historically. We don’t think that means a substantial growth in oil prices, certainly nothing beyond the historical range of prices that we’ve seen, because we think there’s still plenty resources for oil and other liquids to meet the world’s growing need, and they’re available at prices well below $100 that we saw.
OET: Now a science fiction question. What scenarios do you see for the future of oil price? Do you / we deal with scenarios where oil is reaching a $100 a barrel mark at any point by 2035? Or maybe going below $20, and why?
Lots of scenarios are possible of course, and oil prices remain highly uncertain. I wouldn’t be surprised to see oil at $100 or $20 at any particular point. Because when you look over the past 20 years, we’ve had years with oil below $20, and years with the oil above $100. So those prices are within the normal range. We can construct a scenario to $100, and we can construct a scenario to $20 through a combination of supply and demand factors there are many different ways to get to each of those. I wouldn’t regard either of those as a central scenario.
The energy outlook
OET: Can you tell us what exactly the BP Energy Outlook is?
It’s our view of the future and energy trends for the next twenty years. The reason we publish it is, obviously the world’s got a tough challenge ahead. You want to meet the growing need for energy that’s affordable, sustainable, and secure. There’s a big debate taking place. We are all facing choices, whether we’re producers, consumers or policy makers. By sharing the Energy Outlook we hope we are contributing to that discussion.
The reason we think we’ve got something to say is that we’ve been publishing the statistical review of energy for 65 years now. That’s the backward looking at historical data and trends. The energy outlook is, if you like, the forward-looking counterpart.
So, we’ve taken what we’ve understood about history, and what can we then share in terms of the view about the future; which we hope will help people make better choices when it comes to energy.
OET: How does one even begin working on an energy outlook? Where do you start, considering a huge mass of information out there? How many people take part, and how long does it take to wrap it up?
The team itself, the core team, is about eleven economists, and we only work on this for a couple of months a year. That’s not a lot of man-hours. But apart from the core, we rely on a much larger resource throughout BP and external experts as well. I don’t know how exactly many people get involved with the energy outlook, but it’s a lot more than the eleven people on the team.
One starting point is the historical data we have on energy. Another starting point is a view on the world economy. That’s obviously a big driver behind energy demand, so we take a view on what’s happened to the world’s GDP and population; we then take views on energy policy around the world, and energy technology. We then put that group of assumptions together as a starting point to think about the future of energy.
OET: You have been announced as a keynote speaker at the Offshore Energy Conference to be held in Amsterdam in October. So, what about the offshore oil and gas industry? Oil companies are canceling rig deals, exploration budgets have been cut leading to drillers barely keeping their heads above the water. When do you see the activity picking up in that sector?
The offshore sector is basically facing the challenges of the rest of the oil and gas industry. We may get some relief some time from high prices when the market gets back in the balance, but there is also a lot the industry can do itself to improve efficiency and reduce costs.
During the time of high oil prices, we saw costs running up. There is a kind of a relationship here – when oil prices go up, then costs prices go up throughout the system.
The bottom line is, this remains a very competitive industry, so the prospects for the offshore industry depend very much on how well the offshore operators can respond to those competitive challenges.
OET: What is your view about jobs? Some say that the oil and gas industry is shooting itself in the proverbial foot by cutting so many jobs these days. The oil industry may again face a workforce shortage once the prices go up. What is your take on this?
That’s certainly a risk. If you look back in history, with hindsight, we can probably see now that some of the cost-cutting that was achieved in the 80s and 90s, in response to low prices in those times, led to shortages in skills and actually right through the supply chain capacity. That contributed to the run-up in oil prices in the 2000s. So it is a risk, and the focus should be on achieving sustainable gains in efficiency and productivity, not just on reducing headcounts and cutting jobs.
OET: What will be the focus of your keynote speech at Offshore Energy?
I’ll give a brief overview of the energy outlook, both the central case and key uncertainties around it. I’m focusing on what it means for oil and gas, so hopefully can provide useful context for a more detailed discussion of the offshore sector.
Want to learn more about the Offshore Energy session Mr. Appleby will speak at? Click here for more: http://offshore-energy.biz/conference/conference-program-2016/keynote-industry-panel
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