BP: time of transition for energy markets
Improved efficiencies at nearly every level of the energy game has put markets in flux, according to BP’s Statistical Review of World Energy released in June.
For Alaska, that has led to a buyer’s market in the global LNG trade, fading coal demand and oil prices that will be “lower for even longer,” BP Alaska Commercial Vice President Damian Bilbao said.
Bilbao presented the highlights of the company’s annual report to the Anchorage Chamber of Commerce June 26.
“The new normal in energy consumption is growth in consumption coming from developing countries,” he said.
More than half of global economic growth in 2016 occurred in China and India, according to Bilbao. However, while China’s economy grew by about 6 percent last year, its energy consumption grew by just 1 percent.
That is in line with a change in the general relationship between economic growth and energy consumption, he said.
According to BP, global energy demand has historically grown about 2 percent per year. Inversely, the amount of energy needed to produce one unit of gross domestic product, known as energy intensity, has generally decreased by about 1 percent per year, as the world becomes more energy efficient.
In 2016, global energy demand grew slower than normal, about 1 percent, and energy intensity remained at its usual 1 percent per year decline.
“There’s something changing fundamentally about how energy demand is met globally,” Bilbao said.
Increased use of natural gas and renewable energy, which has primarily displaced coal, kept global carbon emissions virtually flat for the third consecutive year, according to BP.
The global oil trade largely rebalanced itself last year and as a result there was a modest increase in prices early this year. Lower 48 oil production declined by about 400,000 barrels per day, the first domestic production drop since 2008.
Overall non-OPEC production fell by about 800,000 barrels per day, the largest single-year decline in nearly 25 years, according to BP’s data.
Additionally, OPEC’s prescribed production cut of about 800,000 barrels per day that started in November has helped production more closely match demand, Bilbao said.
At the same time, slower than historical demand growth and the oil supply buildup has kept global oil inventories higher than expected and prices lower.
Bilbao also said lower drilling rig count figures don’t necessarily mean less production to come anymore.
The report states that new well production among Lower 48 shale drillers increased 40 percent per rig per year in 2015 and 2016. That led to oil production growth from Texas’ Permian basin despite a 75 percent drop in the number of drilling rigs in the field.
“A rig operating in the Permian today is equivalent to more than three rigs at the end of 2014,” the report states.
Those operational efficiencies have led to a resurgence in shale production in 2017, which has partially offset OPEC’s output curbs and put prices that approached $60 per barrel early this year back to the mid-$40s.
According to the Energy Information Administration, the 50-year average price for oil adjusted for inflation is just less than $50 per barrel.
Bilbao said it also shows OPEC’s influence can tweak oil markets in the short-term, but the cartel cannot stop long-term structural market shifts.
On natural gas, low prices led to just a 0.3 percent increase in production globally, which was the weakest such growth in 34 years, according to BP. However, global demand increased by just 1.5 percent, compared to the 2.3 percent 10-year average.
U.S natural gas production fell by 2.6 percent in 2016 after growing 4.2 percent per year since 2005; but that was largely offset in the world arena by Australia, which had multiple LNG projects come online last year and increased its gas production by 25 percent.
Also, for the first time in history, the U.S. is not the largest producer of renewable energy. While domestic renewable energy production grew by nearly 17 percent last year — and accounted for 19 percent of global renewables — China upped its renewable energy output by a full one-third in 2016 to become the global renewable leader.
Renewable energy only makes up about 4 percent of global energy consumption, but Bilbao said its growth is primarily being driven by economics and not political motives.
The economic viability of renewable forms of energy, and to a greater extent low natural gas prices, have put coal on the backburner.
U.S. coal production fell by 19 percent in 2016 but still accounted for 10 percent of global output.
China produced about 8 percent less coal in 2016, but still dominated the market with 46 percent of global supply. But according to BP, a move by the Chinese government to improve profitability of its coal mines could have hurt the global solid fuel market.
Among other measures, China reduced coal production in 2016 by limiting the days its mines could operate from 330 to 276. That led to coal prices in China jumping from less than $60 per metric ton in January 2016 to roughly $100 per ton by the end of the year.
“The events in China spilled over into global coal markets, with world prices taking their cue from China,” the BP report states. “This rise in global coal prices further depressed global coal demand, particularly in (the) power sector around the globe, with natural gas and renewable energy the main beneficiaries.”
Global coal consumption fell by 1.7 percent last year and production fell “by a whopping” 6.2 percent, BP notes.
Low demand for coal has caused Usibelli Coal Mine near Healy to scale back production. That has in turn hurt the Alaska Railroad, which has long hauled coal from the Interior mine to Seward for export to South American and Asian customers.
In Britain, coal has pretty much come full circle, according to BP. The country’s last three underground coal mines recently closed, its coal consumption is back to levels last seen about 200 years ago at the start of the industrial revolution and U.K. electrical generators had their first-ever coal-free day in April.
Elwood Brehmer can be reached at [email protected].