BP has warned that while rebalancing of oil production and demand led to a strong recovery of oil prices in 2017 this is a short-term effect that is unlikely to persist.
In its annual Statistical Review of World Energy presented in London earlier this month, Bob Dudley, BP’s group chief executive, said in the same period natural gas demand increased considerably, driven by China.
Improving accessibility to gas should help increase future demand further. In addition renewables exhibited strong growth and have a great future. The setback was that carbon emissions, after flat-lining during the past three years, increased by 1.6 per cent in 2017. Dudley stressed that BP is a strong advocate of carbon pricing as a means of driving carbon demand and carbon emissions down.
Spencer Dale, BP chief economist, summed up 2017 as a year of two steps forward, one step back in terms of world energy. The key findings of this review were that in 2017:
- With global GDP picking up, global primary energy consumption increased by 2.2 per cent, the fastest since 2013
- This growth was led natural gas and renewables. Coal consumption also increased by one per cent. Two steps forward, one step back
- A consequence of these was that energy related carbon emissions grew by 1.6 per cent, after plateauing for three years
- Global oil consumption growth continued to be high, at 1.7 million barrels/d, as a result of low prices
- Natural gas consumption of three per cent was the fastest since 2010. This was led by China
- Natural gas production grew by four per cent, double the last 10-year average, led by Russia
- Growth in LNG trading outpaced growth in pipeline gas
- Coal consumption growth was led by India and China, with OECD demand falling for the fourth year
- Renewables grew by 17 per cent, the largest increment on record, led by wind, now account for 8.4 per cent of global power generation
These results may be seen as alarming in terms of energy transition, with both coal consumption and carbon emissions going up. BP, though, considers these to be short-term adjustments, and unlikely to persist, rather than long-term trends.
However, perhaps the most startling and striking graph BP presented is one that shows the share of coal, oil and gas and non-fossil fuels in global power generation over the last 20 years. Despite the exponential growth in renewables over this period, and huge government policy effort to encourage this, the global power generation mix does not appear to have changed significantly during the past 20 years. Coal provided 38 per cent of this mix in 1998 and 20 years later it is still providing 38 per cent.
But the shares of global primary energy consumption by fuel demonstrate the continued ascendancy of gas and renewables, wind and solar. This is a good sign for the future.
Nevertheless, the share of fossil fuels declined only slightly, to 85 per cent, in comparison to 85.3 per cent in 2016.
Oil demand and supply
Oil remains the world’s dominant fuel, making up just over a third of all energy consumed.
As a result of the action taken by Opec and non-Opec, oil demand and supply are back in balance and inventories are getting close to normal levels. As a result, the Brent oil price averaged $54.2 per barrel in 2017, up from $43.7 per barrel in 2016. During the first half of 2018 it increased to around $75 per barrel, but this is unlikely to persist.
In terms of supply, output by Opec and non-Opec fell 0.9 million barrels/d, while oil production by other countries grew by 1.5 million barrels/d, led by US shale oil production responding to higher oil prices. A central part of the success of US shale oil has been the strong and continuous gains in productivity, as technology and know-how have improved over the past few years.
Clearly, though, Opec still has the ability to smooth temporary disturbances to the oil market. But as BP says, if ‘Opec tries to resist more permanent or structural changes in the market, there is an increasing risk that these actions will quickly be cancelled out by the responsiveness of US shale oil.’
Natural gas and LNG
For natural gas 2017 was a year of strong growth, with both consumption and production increasing at their fastest rates since 2008, by 96 billion cubic metres (bcm), or three per cent, and by 131 bcm, or four per cent, respectively. Gas now accounts a record 23.4 per cent of global primary energy.
The growth in consumption was led by China, followed by the Middle East and the rest of Asia. Growth in production was led by Russia, followed by Iran, Australia and China.
The single biggest factor driving global gas consumption last year was the surge in Chinese gas demand, where consumption increased by over 15 per cent, accounting for around a third of the global increase in gas consumption. This was driven by new measures to improve air quality in cities.
These measures encouraged Chinese industrial and residential users to switch away from coal, favouring gas. BP says that this increased gas demand looks set to continue to increase strongly this year, but it seems unlikely that it will be repeated in 2019 and beyond. This is bound to have a knock-on impact on prices. Currently experienced high prices may not persist.
A key factor in the resurgence of gas was the rapid growth in LNG trade, which increased by 10 per cent in 2017, led by the start-up of new liquefaction trains in Australia and the US. Provided gas and LNG prices remain competitive, they have further to run.
Even though coal’s market share fell to 27.6 per cent, the lowest level since 2004, it is still demonstrating strong resilience. Its share of global primary energy has remained reasonably steady, fluctuating within a narrow band, over the past 40 years. Clearly coal is not going away.
Both global coal production and consumption actually increased in 2017, led by demand increases in India and China. This also meant that even though domestic consumption fell in the US, production increased to feed exports to Asia.
Power sector and renewables
Renewables continued to exhibit rapid and strong growth, increasing by 17 per cent, higher than the 10-year average and the largest increment on record. But despite this, they accounted for only 3.6 per cent of global primary energy in 2017.
The power sector grew by 2.8 per cent and absorbed more than 40 per cent of global primary energy in 2017. It is the single biggest market for energy. Almost all growth came from the developing world.
Renewables accounted for almost half, 49 per cent, of the growth in global power generation, with their share increasing to 8.4 per cent, from 7.4 per cent in 2016. This was led by growth in wind up 17 per cent and a stunning growth in solar by 35 per cent. This was underpinned by government policy support, but also by continuing falls in costs.
The power sector matters more than any other energy sector. It accounts for over a third of carbon emissions from energy consumption. In order to have any chance of getting on a path consistent with meeting the Paris climate goals there is need for significant improvements.
Spencer Dale summed this up in his presentation when he said “Personally, I am more worried by the lack of progress in the power sector over the past 20 years, than by the pickup in carbon emissions last year.”
Implications for energy transition
BP’s latest statistical review of world energy poses question marks on global energy transition – it appears to be progressing less rapidly than hoped for.
But BP is advising caution at being too alarmed by this data. The review shows that the structural forces shaping energy transition continued in 2017, with particularly robust growth in renewables and natural gas. Longer-term trends are more important than short-term fluctuations.
Going forward, China will be critical to future global energy demand growth and to how energy transition progresses.
Cyprus can achieve new carbon emission reduction targets beyond 2020 efficiently by switching to solar power, which will also result in a significant reduction in electricity prices.
The upshot from this year’s energy statistical review by BP is that the road to meeting the Paris climate goals is likely to be long and challenging.
Dr Charles Ellinas is a nonresident senior fellow at the Global Energy Center of the Atlantic Council @CharlesEllinas