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Abu Dhabi, UAESunday 16 December 2018

BP urges greater investment by energy producers to meet future demand 

Energy mix will reach new levels of diversity by 2040, firm's Energy Outlook predicts

Mark Finley, BP's general manager for Global Energy Markets & US Economics. Antonie Robertson / The National
Mark Finley, BP's general manager for Global Energy Markets & US Economics. Antonie Robertson / The National

The British oil major BP in February released the 2018 edition of its Energy Outlook, an influential report setting out in-depth future scenarios for global energy markets. This year’s report builds on an “evolving transitions scenario” - assuming that government policies, technologies and societal preferences will evolve in a manner and speed similar to the recent past – compared with the base case scenarios used in past reports.

Mark Finley, BP’s general manager for global energy markets, says the latest version is not about predicting the future. “We don’t think we can, and we don’t think anybody can,” he tells The National in an exclusive interview. “It’s about understanding the nature of uncertainty we face … what areas of energy transformation we have reasonable confidence in, and what are the things that could send the world on different pathways.”

The report outlines several plausible scenarios for the energy sector. If one common theme emerges, it’s that the need for investments by producers in new production capacity is an imperative to meet future demand, Mr Finlay says.

The purpose of the report, he says, is not to guide BP management on what the future will be; rather, it is to design a company and invest in robust structure and portfolio that can survive different scenarios around the world.

What is the longer term picture for the energy sector, and what are your views on the global energy mix?

One of the findings that has come out of the report is that the world’s energy system is heading in the direction of becoming much more competitive. First, we think energy demand is likely to grow less rapidly. Secondly, the world is heading to its most diverse energy mix by 2040.

For the first time in economic history in the industrial age, the world will not have a dominant source of energy; there will be [many] opportunities for fuels to compete against each other. For example, the growing use of electric vehicles will increase competition in the transportation sector.

We also believe that the world is heading into an age of abundance when it comes to supply, so even for fuels like oil and natural gas we see a lot of competition among the suppliers taking shape. So for these reasons – slower demand, more supply and an age of abundance – we believe that the world’s energy system is heading into a much more competitive phase. We at BP are working hard to understand that transition and how we position ourselves to compete.

Some analysts suggest demand could peak as early as 2030 as electric cars become more mainstream, but some industry leaders say the oil demand is not under threat -- what are your views?

It is certainly the case that oil demand is growing robustly. The world’s economy is strong and oil prices are still – compared to the recent past – relatively low. In the main scenario -what we call the evolving transition scenario – worldwide oil demand grows in the early years but then begins to plateau. We have [demand] growing until about 2030-35.

The key point to us is that nobody knows what the future oil demand would [look like]. We look at a scenario where you completely ban the internal combustion engine by 2040 and in that scenario we cut oil demand by cars by half. But even with that, the total oil demand – due to growing demand in air travel, marine sector and industrial applications – is still higher than what it is today.

In any of the scenarios, including meeting the Paris commitments and getting the world onto a sustainable trajectory, what happens if producers do not invest in new production capacity?

We have used a decline rate of 3 per cent (a conservative value for the sake of argument) due to lack of investments, and production will fall down to about 45 million barrel a day by 2040. For BP it is profound. What [this scenario] says is that while we don’t know what the oil demand is going to be in future, in any plausible scenario, the world needs to invest a lot to meet the future demand.

However, this is an age of abundance. Estimates of technically recoverable reserves around the world are about 2.5 trillion barrels, and that is using today’s technology. BP’s perspective is that you don’t invest willy-nilly. Even if we need to invest, we need to invest carefully and only in projects in which we have high degree of confidence, projects that are going to be able to compete in what we think is going to be an increasingly competitive environment.

What does the possibility of Arabian Gulf producers joining the shale revolution signify? What does it mean for producers in the GCC and broader Middle East?

We believe that there are large conventional resources still present in Saudi Arabia, throughout the GCC and the Middle East more broadly. We also believe that there is a lack of shale resource around the world. However, the trick is, which of these can compete in the global competitive market place?

What we have seen in the US is the combination of geology, technology, competitive practices, financial markets, a favourable policy environment and other economic factors that go into the equation. It has allowed much of the US shale industry to be competitive at well below the prices we see today.

Any smart business would want to explore a diverse set of opportunities just to understand and scope out the landscape and see what they have got and what their options are. How will that play out? The market will tell us.

We certainly believe that shale is widespread around the world. It starts with having the shale resource, but the recourse is not enough and history shows that you need to have complimenting factors to make it a success.

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Read more:

Saudi Aramco says oil demand is there to stay in foreseeable future

Aramco plans to tap shale gas basin rivaling Texas' Eagle Ford

Natural gas to account for 60 per cent of Middle East consumption by 2040, says BP

Middle East LNG demand forecast to dip as Egypt becomes self sufficient

Saudi Arabia's gas hunt

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What is the biggest threat to oil demand in the short term and beyond 2040?

In the short term what drives energy demand is economic activity. Right now the world’s economy looks strong, but we have seen, in recent history, oil demand can be impacted significantly if we are to have a recession. However, this looks unlikely if we look at the economic data. The price of oil also matters, and we have seen consumers around the world clearly responding to prices of oil in the past few years.

Over the longer term, the combination of technology and policy will impact oil demand, especially in the transportation sector, because that is where the majority of demand is coming from: that’s the thing to watch. We at BP believe that electrification of vehicles is inevitable and it’s just a question of timing.

Global institutions like the IMF and the WTO fear that US import tariffs can crimp global commerce and could potentially slow growth. Is this a threat to oil demand?

History shows that trade and economic growth and energy demand are very strongly correlated. In our projections, growth of energy, growth in economy and growth in trade all continue to be correlated. There is a very strong consensus among economists that trade is a net positive for the global economic system. Policies that boost trade and boost economic growth are constructive for global demand, and risks to that are something that we pay very close attention to.

What are your views on the economic diversification of key oil producing nations?

It is inevitable that the world will move to a competitive stance, and some of the key producers need to reform their economies to reduce their dependence on oil revenues. The scenario we have built into our outlook is that in the early years, key oil producers will try to reform their economies to position themselves to compete.

In the later years of the outlook, they will begin to assert their natural competitive advantage of being low cost producers because they have positioned their economies and their domestic oil industries to be more competitive globally.

To take an example from the natural gas sector: the big strategic producers like the US and Russia, are relatively diversified in their economies, and their dependence on that sector to run their economies is not that great. Because of that, they can behave in a more competitive manner globally.

The kind of reforms that we have been talking about [in the GCC and the wider Middle East], such as reducing subsidies, broadening the tax base and reforming the education system are all the things that an economist would say they should do. But a lot of these steps will probably take time to implement. Such reform will take vision and communication to build consensus.

How it will be followed through is the key question.