Finding a Global Energy Balance – BP Economist

13441776_10154160705838614_1045886350_o

BP Chief Economist Spencer Dale presented his company’s 65th edition of the Statistical Review of World Energy June 2016 in Moscow on June 10 at the Institute of World Economy and International Relations. BP has been producing the report since 1952, and the study has established itself as an authoritative source in the energy industry.

The report, which in its inaugural year, only reported on oil – now focused on the three primary global energy sources – oil, coal, and natural gas.

Oil remains the most widespread used energy in the world – in 2015 it accounted for 32.9% of total energy consumption. In 2015, it even saw its market share rise, for the first time since 1999. After oil, coal is the second biggest fuel, with 29.2% share in the energy balance, but it saw its market share decline in 2015. Natural gas made up 23.8%.

Dale’s main message for the upcoming year is to expect another year of strong growth in demand, and a continued shift towards low-carbon fuels, as well as renewables.

According to the report, global demand for primary energy only amounted to 1%, which is significantly lower than the average in the past decade (on average 1.9%).

Dale said this reflects an overall slowdown in the global economy and consequential slower growth in energy consumption, most notably in China.

Oil

“On the demand side, we are in a world where demand is in a period of transition. Over the last 10-15 years, we have seen very strong growth in global energy demand, much of that driven by China,” he said.

China’s economic boom days are over, and as Dale put it, “the days of double-digit growth and industrialization are behind us”.

Even if there is a massive increase in demand – from China or elsewhere – the massive amount of oil inventories will offset any oil price surges.

Screen Shot 2016-06-17 at 2.10.51 PM

For example, even if demand grows to a point where there is a shortage of oil, prices won’t suddenly snap back.

Dale explained: “If you have a shortage of a 1 million barrels per day, but we have a surplus of 500-600 million barrels, simple arithmetic tells you that it could easily take 12-18 months before stock levels are back to normal levels, and it’s only when you work off that significant stock overhang, will the oil market come back to balance.”

Technology is also changing the energy balance, the report says, referencing developments in both shale oil in the US, as well as renewable energy sources worldwide.

“On the supply side, we are surfing a technological wave. Over the last few years, we have seen rapid gains in technology advancements and productivity gains, which are increasing the types and abundance of energy supplies,” said Dale.

oil market

As our readers know very well, oil prices in 2015 dropped drastically. In dollar terms, the largest drop on record, and the sharpest fall in terms of percent since 1986. Prices rose slightly in early 2015 as US shale producers nixed production, but increased production by OPEC countries, especially Iraq and Saudi Arabia (account for ~90 percent of increase production) caused a sharp drop in prices overall.

We are “truly in an age of plenty in terms of supply,” Dale noted.

The growth rate of world oil production for the second year in a row outpaced global consumption growth. Production grew by 2.8 million barrels per day, or 3.2%, the highest rate since 2004. Production in Iraq (750,000 barrels per day) and Saudi Arabia (510,000 barrels per day) rose to record levels, which pushed OPEC production up 1.6 million barrels per day to 38.2 million barrels per day, even outpacing the previous record set in 2012.

“You do not need a PhD in economics to know if supply grows by 2 million barrels a day, and demand grows by 1 million barrels a day – what will happen with oil prices – and sure enough, prices fell,” said Dale.

Natural Gas

“The big picture story on natural gas is one where global production continued to grow strongly, but demand outside of the power sector was relatively muted, and these two things together causes gas prices to drop sharply around the world,” said Dale.

There is still a large variation across countries and markets.

“On the supply side, the US remained the global powerhouse for natural gas, accounting for around half of the entire increase in global production last year,” according to the economist.

Overall, BP sees three general themes from the gas market:
1) A gas increase share within power sector, especially in the US, even pricing out coal;
2) LNG overall increased, though demand from Asia decreased, and increased in Europe, North Africa, and the Middle East;
3) In order to retain market share, Gazprom responded to increased competition by lowering European prices

The rise of LNG is increasingly influencing prices. For example, a drop in demand for LNG in Asia affected prices in natural gas in Europe.

Screen Shot 2016-06-17 at 2.11.17 PM

Other interesting points of the presentation:
– Gas overtook coal in US power sector – first time ever
– Renewable energy – solar energy has increased 60-fold in the last 10 years

Russia Begins Deepwater Drilling in Vietnam

01m
Photo from Rosneft press release

Rosneft has started exploration drilling off the south coast of Vietnam, the company’s press service announced today.

The release highlights that it is the company’s first time drilling an international well as a sole operator. The Russian company, which has previously only operated deepwater offshore drilling inside of Russia, is hoping the project will give the company experience to tackle complicated domestic shelf projects that rely on American technology. Cooperation with Russian companies in offshore, Arctic, and shale drilling are banned by Western sanctions.

“I am sure that the experience gained in Vietnam will be used by the company not only in its activity in the southern seas; these acquired skills will find application in planning and implementation of upstream projects in remote areas,” Rosneft CEO Igor Sechin said in the statement.

The expected recoverable reserves of natural gas are estimated at 12.6 billion cubic meters (bcm) with 0.6 million tons of gas condensate, according to the statement. At 162 meters sea depth and design depth of about 1380, the “deepwater” well wouldn’t be allowed inside of Russia under the current sanction regime.

The well is located in the Nam Con Son Basin, 370 kilometers off the southern Vietnamese coast and will be serviced by the USAt 162 meters sea depth and design depth of about 1380, the well located at Block 06.1, will be managed by US oilfield services provider Schlumberger.

At 162 meters sea depth and design depth of about 1380 meters, the well located at Block 06.1 will be managed by US oilfield services provider Schlumberger.

Rosneft – the world’s biggest producer at 5.1 million barrels of oil equivalent per day – gained access to Vietnam’s offshore blocks when the Russian company acquired TNK-BP in March 2013. Rosneft already jointly produces gas from two offshore blocks, also in the Nam Con Son Basin. Rosneft works in cooperation with state-owned PetroVietnam and India’s ONGC in Block 06.1 and is the project operator in Block 05.3/11.

The gas fields in Block 06.1 Lai Tay and Lan Do, had an initial estimated 68 trillion cubic meters in gas reserves and condensate deposits. Drilling is carried out along with Japan Drilling Company (JDC).

Rosneft is the biggest gas producer in Vietnam, and in 2015, the gas produced in Block 06.1 satisfied 12% of Vietnam’s energy demand, and since it started pumping gas in June 2015, has produced a total of 46 billion cubic meters.

The foray into Vietnam should surprise no one, as Russia has long been building energy ties in Vietnam. As a token of partnership, Rosneft rival Gazprom Neft offered Petrovietnam partnership in an Arctic project. Beyond hydrocarbons, Vietnam has commissioned Russia to build the country’s first nuclear power plant.

Gas fields in Western Siberia – which helped make the Soviet Union and later Russia an energy power – are fast depleting, and projects in Vietnam and elsewhere are seen as cushions to keep both Rosneft and Russia’s oil output stable.

Louise Dickson