BP's 2016 World Energy Review

 

 

By Charles Ellinas

June 23, 2017 -BP presented its Statistical Review of World Energy 2016 in London recently.

 

Growth in global energy consumption in 2016 was very slow, just over 1%, for a third year running, signalling a world in transition, with increases in demand driven by developing countries, while in developed countries demand was flat. China remained, yet again, the world’s largest market for energy.

What was notable in terms of the long-term transition towards low carbon energy, is that 2016 was the third consecutive year of weak growth in global primary energy consumption and little or no growth in carbon emissions, on the back of strong growth in renewable energy and further decline in coal consumption.

The biggest user of primary energy was the power sector, using over 40% in 2016. Power demand in OECD countries remained flat during the last three years, exhibiting a decoupling from GDP growth.

Oil Market

 

For the oil market, 2016 was the year of adjustment, with oil consumption increasing, even though at a lower rate than in 2015, and production growth slowing down in comparison to 2015.

Most of the production growth came from OPEC, with non-OPEC experiencing its largest decline in 25 years, due to low prices impacting US shale oil production. Strong demand and weak supply brought the market into balance, but not sufficiently to absorb excess oil inventories.

As a result prices remain low.

The resilience of US shale oil was evident last year. It responded more quickly when prices went down, and bounced back even faster when prices went up, within a few months, in comparison to conventional oil. Shale also benefited from substantial reductions in costs, with break-even prices now averaging below $40 per barrel, with more expected.

Once the market upheavals of the last three years subside, with oil demand growth outstripping production growth, excess oil inventories will start falling later in 2017. But the longer-term growth in oil consumption is expected to slow-down. BP expects this to average 0.7% per year to 2035, but others predict peak oil demand to occur between 2025 to 2035, if not earlier.

Natural Gas Market

 

The natural gas market was relatively low-key in 2016. Consumption increased by 1.5%, but at a lower rate than in 2015 or the last ten years, while net production was almost flat, at 0.3%.

Most of the fall in production is due to low gas prices, but it is also associated with the slowdown in US shale. US Henry Hub prices were about 5% lower than in 2015, but European and Asian spot LNG prices were down by 20%-30% due to a glut in supply.

However, gas consumption in Europe rose strongly, by 5.9%, helped both by the increasing competitiveness of gas relative to coal, and by weakness in European nuclear and renewable energy.

Europe’s access to plentiful supplies of pipeline gas, particularly from Russia, means that LNG imports are facing stiff competition. In terms of this battle of competing supplies, if one can call it a battle, 2016 went to cheaper pipeline gas. The increase in European gas demand was met mostly with gas from Russia and Algeria, with LNG supplies remaining flat.

Russia has a strong incentive, but also the capacity, to compete and maintain its market share in the face of growing competition from LNG supplies. However, Europe has the option of importing LNG as and when the need arises.

LNG production grew rapidly in 2016, with global supplies set to increase by a further 30% by 2020. This is equivalent to a new LNG train coming on stream every two months until 2020! In addition to keeping prices low, this is leading to a shift towards more flexible trading, shorter and smaller contracts and increased spot trading. These are likely to lead to more integrated global markets.

Coal Market

 

According to BP, an obvious loser in 2016 was the coal market, declining by 1.7%. And it did so for the second year running. Articles that appeared following the BP presentation were quick to call ‘the demise of coal’. But it is far from obvious that this is the case.

The coal market has been experiencing ups and downs over the last 40 years, with its contribution to global primary energy varying in the range 25% to 30%, averaging 27%. The decline during the last two years has been well within this range, with the 28% contribution in 2016 above the average.

There is a ‘break with the past’, but it has more to do with the fact that coal is no longer the number one fuel and consumption is not increasing, but it is remaining more or less flat. Even BP’s Energy Outlook 2017 expects the share of coal in global primary energy to remain at about 24% by 2035.

 

Renewables and Carbon Emissions

 

Gas and coal have been squeezed by the increasing contribution from renewable energy. One noticeable weak spot last year, though, was the EU, where renewable energy barely grew as load factors in both wind and solar fell back from unusually high levels in 2015.

The experience of the EU last year is a reminder of the variability that weather conditions can inject into renewable energy generation from year to year.

Renewables grew by 12% in 2016 in comparison to 2015, but provided about 7.5% of global power generation and 4% of global primary energy.

This growth in renewables represented almost a third of the 1% total growth in primary energy demand in 2016. China dominated 2016, contributing 40% of global growth, surpassing the US.

The slow growth in global primary energy, the decline in coal consumption and the increase in renewable power generation all helped keep carbon emissions flat in 2016, for the third year running.

Some of this slowdown reflects weaker GDP growth, but the majority reflects faster declines in the carbon intensity of GDP – the average amount of carbon emitted per unit of GDP – driven by accelerating improvements in both energy efficiency and the fuel mix.

But is this a break from the past that will soon start producing significant reductions in global carbon emissions needed to transform the global energy system if the 2degC target is to be achieved? Or could it be due to short-term cyclical factors that may unwind over time, or a combination of both?

It remains to be seen. We still have a very long road in front of us to get to Paris. We must retain our focus and efforts on reducing carbon emissions.

Implications

 

Energy transition is well under way, with renewables growing faster than any other source of energy and global primary energy hardly growing. With an abundance of resources and the transition to clean energy gaining momentum, fossil fuel prices are low and will stay low.

These structural changes in the global energy market are posing increasing commercial challenges to the development of East Med gas. It is imperative that policy-makers in the region understand the increasing impact of this transition and plan the future with realism, also considering other options closer at home.

 

 

Dr. Charles Ellinas is a non-resident Senior Fellow, Eurasian Energy Futures Initiative, Atlantic Council.