Oil experts are deeply divided in their views on the future of what is still the world's key commodity. This divergence was on display at last week's CERA Conference in Houston, which brought together industry executives, consultants, media, and government officials from around the world. Although I didn't attend in person, the organizers provided extensive streaming coverage of keynote talks and interviews with thought leaders.
From OPEC oil ministers and the head of the International Energy Agency, we heard that the world could be headed for another supply crunch within a few years, due to low investment following 2014's oil-price collapse. I've mentioned this concern before.
By contrast, the major oil companies seemed more cautious. Low oil prices caught many of them with big, expensive projects underway--too far along to stop but undermined by prices now far below the assumptions on which they were justified. Cash flow seems to be a higher priority than growth. "Peak demand", when global oil consumption stops growing and might begin shrinking, could also arrive within ten years or so, at least according to Shell's CEO, further disrupting markets.
Renewables were discussed frequently, but shale was arguably the star of the segments I watched. Big companies touted their shift toward shale assets that can be brought into production quickly, while independent E&P (exploration and production) companies highlighted both the upside and limitations of focusing on the core, or most productive, cost-effective portions of various shale regions.
With these large, and to some extent mutually contradictory trends in play, any kind of straight-line extrapolation from current or past conditions of price, supply, or demand seems sure to be swamped by uncertainties. Rather than putting my thumb on the scales for one view or another, my best service just now is improving our understanding of these risks and why they look so uncertain.
On the supply side, the relationship between short-cycle and long-cycle investments is especially interesting and a source of great uncertainty. Short-cycle supply, mainly from shale or "tight oil" wells that can be drilled and brought on-stream quickly and for only a few million dollars each--but that also tail off quickly--was the main factor in the drop from over $100 per barrel to less than $40 just a couple of years ago. It now provides many of the lowest-risk, most attractive opportunities available to the oil and gas industry. Yet the more short-cycle oil is developed, the longer the recovery of long-cycle investment is likely to be delayed, because shale is effectively putting a low ceiling on oil prices and will consume ongoing cash flow to sustain it.
Long-cycle oil, which still accounts for over 90% of global supply, is an entirely different domain. It consists mainly of large conventional oil fields that were developed years ago and continue to pump oil with relatively little continuing investment. It also includes new, big-ticket projects in places like the deep waters of the Gulf of Mexico and offshore Brazil, that add to growth but importantly offset the natural decline rates--often 4%-10% annually--that eat into the output of older oil fields every year.
Hundreds of billions of dollars of planned investment in long-cycle projects was deferred or canceled since 2014. Because such projects take years--sometimes decades--to develop from discovery to production, this investment drought implies a hole in future production. That shortfall hasn't appeared yet, because projects like BP's Thunder Horse expansion that were begun when oil was still over $100 are still periodically starting up. The impact of the long-cycle gap might also shrink or vanish entirely if enough short-cycle oil is developed in the meantime.
We might never notice this impending gap, if demand growth slowed sharply from its recent rate of more than 1 million barrels per day per year, or even started to fall. Not so long ago, few could imagine oil demand falling without hitting a wall on supply--so-called "Peak Oil"--but now it's almost harder to envision oil demand continuing to expand in light of competition from renewables, substitution from electric vehicles, and constraints imposed by climate policies intended to comply with the Paris Agreement.
The big uncertainties for these changes are time and scale. The Solar Energy Industries Association (SEIA) forecasts US solar power growing from 42 Gigawatts (GW) last year to nearly 120 GW by the end of 2022. However, that would leave solar generating just 4% of US electricity, even if electricity demand didn't grow at all in the interim. Nor does solar power compete with oil, except in the few remaining places--mainly in the Middle East--where lots of oil is burned to produced electricity, or when it powers electric cars.
With regard to EVs, Tesla's goal of producing 500,000 cars per year by the end of next year is impressively big. However, even if those Teslas replaced only conventional cars of average fuel economy, all of which were then scrapped--unlikely on both counts--they would reduce US gasoline demand by less than 0.2%. It would take more than six times as many EVs to offset last year's growth in US gasoline demand of 1.3%. Only as EV sales ramp up and conventional cars are retired in large numbers would they start to make a serious dent in oil demand. How long will it take to reach that point, and how much would a big jump in oil prices within the next few years nudge it along?
Until recently, most of the speculation that the transition away from oil and other fossil fuels could happen faster came from outside the industry. Lately, though, respected voices in the industry--or at least closer to it--have begun to raise the possibility that the shift to renewables and EVs might accelerate, affecting demand sooner than expected.
To be clear, I am still convinced that constraints on how fast capital stock turns over--vehicle fleets, HVAC, factory equipment, etc.--impose a speed limit on any large-scale transition like this. However, careful examination of the last 20 years of oil prices provides ample proof that smaller-scale shifts can have large impacts. From the Asian Economic Crisis of the late 1990s, to the massive price spike of 2006-8, followed by the financial crisis, the Arab Spring, and the shale boom, we can see that supply/demand imbalances of no more than about 2-3 million barrels per day--say 3-4% of production or consumption--were sufficient to drive oil prices as low as $10 and as high as $145 per barrel.
When we combine the big, new trends outlined above with normal uncertainties about the economy and then factor in the extreme sensitivity of oil markets to relatively modest surpluses and shortfalls, predicting the likely path for oil looks very daunting. The factors driving it may be changing, but accurate oil forecasting remains as challenging as ever. That same realization stimulated interest in scenario planning more than 40 years ago, focused on the insights available from considering multiple possible futures, rather than just one.
Showing posts with label forecast. Show all posts
Showing posts with label forecast. Show all posts
Friday, March 17, 2017
Friday, December 05, 2014
The IEA's Stressful Outlook
- The latest long-term forecast from the International Energy Agency suggests that the benefits of today's low oil prices might be temporary, with more volatility ahead.
- The report focuses on a number of risks, including the adequacy of investment in both new oil capacity and low-emission energy, and the scale of nuclear plant retirements.
For oil in particular, the IEA sees today's growth in North American production masking the consequences of the ongoing turmoil in the Middle East. In Iraq and other countries in the region, uncertainty is delaying investments that should be made now, if future supplies are to meet demand growth after US "tight oil" and other non-OPEC expansion has plateaued. And that point could come sooner than expected if drillers reduce US shale investments by 10% next year, as IEA anticipates, or if the significant governance problems of Brazil's oil sector, which were only hinted at, are not resolved soon.
The launch covered several other areas, as well, none of which escaped suggested stresses of their own. Start with natural gas. IEA sees gas on its way eventually to become the "first fuel", consistent with the view of their "Golden Age of Gas" scenario of 2011. This would be driven in part by a large increase in LNG production from new sources such as East Africa, Russia and North America, along with growth from traditional LNG suppliers in North Africa and Australia. IEA expects increased competition from LNG with pipeline gas to improve energy security, especially in Europe, but not necessarily gas prices for end users. In fact, the high relative cost of LNG could impede the displacement of coal by gas in Asia.
The presentation also highlighted the significant challenges IEA expects in the electricity sector in the period to 2040, a longer interval for which this year's WEO provides the first glimpse. A net expansion of global power generation by around 75% is more challenging than even that figure suggests, because it must incorporate the replacement of more than a third of today's generating capacity. As a result, only oil-fired generation will experience a net decline. IEA forecasts up to half of new capacity through 2040 coming from renewables, on a scale posing significant risks for power system reliability, especially in Europe.
Nuclear power, a major source of baseload low-carbon electricity, is an area of special focus in this year's report, along with Africa. The expected growth of nuclear energy over the next several decades occurs mainly in the developing world, while 38% of today's nuclear capacity--nearly 200 reactors--will be retired by 2040. Many of those retirements will occur in Europe, and the Chief Economist of the IEA, Fatih Birol, expressed concern about the policies and budgets supporting such decommissioning on an unprecedented scale.
By 2040 the balance of nuclear power capacity would have shifted from around 80% in OECD countries and 20% in today's developing countries, to roughly 50/50. While the report also draws attention to the growing policy problem of nuclear waste disposal, it identifies nuclear as "one of a limited number of options available at scale to reduce CO2 emissions."
The largest source of stress in the report appears to be the disconnect between the narrowing window for reducing greenhouse gas emissions to a level that climate models indicate would limit global warming to 2°C, and the higher emissions inherent in the IEA's central "New Policies" scenario. Meeting the 2° target would require increasing average annual investments in low-carbon energy, including energy efficiency, by a factor of four compared to 2013. At last month's G20 summit in Australia we heard that "red warning lights are once again flashing on the dashboard of the global economy." Could even the IEA's middle view of energy investments proceed if much of the world slid back into recession?
The presentation wasn't all gloomy, of course. Dr. Birol pointed out the competitive advantage that low energy costs confer on the US, and both he and IEA Executive Director Maria van der Hoevan highlighted the recent China/US emissions deal as a very positive development. (My own analysis concluded that it would still allow China's emissions to grow dramatically before peaking.) They also conceded that lower oil prices would provide oil-importing countries with some timely "breathing space." And for the first time I heard that three out of four cars sold in the world are now covered by fuel economy regulations, suggesting increases in energy efficiency to come.
It also struck me that some of the negatives in the presentation might tend to cancel each other out. If the global oil industry, especially in the Middle East, fails to invest sufficiently in the next few years to ensure that supplies continue to grow in the 2020s, then the resulting higher oil prices could accelerate the transition to natural gas and renewables, while providing greater incentives for energy efficiency. That combination might reduce emissions sooner than IEA's main forecast indicates.
Last year the IEA's World Energy Outlook failed to anticipate the drop in oil prices; how many other forecasters likewise missed it? It featured some of the same big themes repeated this year, including the ongoing shift of the energy world's center of gravity toward Asia and the scale of the global emissions challenge. On a more basic level, however, a comparison of the two documents suggests that the agency is still trying to understand the transformation of global energy markets by the parallel shale and renewable energy revolutions. They aren't alone in that, either.
A different version of this posting was previously published on the website of Pacific Energy Development Corporation.
Wednesday, July 09, 2014
ISIS Threatens Iraq's Oil Upside
- Even if its threat to Iraq's oil exports can be contained, the newly asserted "Islamic State of Iraq and Syria" has altered the political risk of projects there.
- That could hamper future production that was expected to be a major factor in meeting growing oil demand later this decade.
Iraq currently exports around 2.7 million barrels per day (MBD) of oil, or 7% of global oil exports. It is effectively the number two producer in OPEC. Having recovered beyond pre-war levels, Iraq's oil industry has been growing, while Iran's exports are constrained by international sanctions and Libya's output has become highly erratic following that country's revolution.
In the International Energy Agency's latest Medium-Term Oil Market Report Iraq accounts for 60% of OPEC's incremental production capacity through 2019 (see chart below) and nearly a fifth of all new barrels expected to come to market in that period. This is a more conservative view of Iraq's growth potential than in previous scenarios, but it still leaves Iraqi oil, together with " tight oil" in the US and elsewhere, as the bright spots of the IEA's supply forecast.
Following ISIS's capture of Mosul in northern Iraq, the Heard on the Street column in the Wall St. Journal painted a stark picture of how the destabilization of Iraq could limit investment in the country's oil industry, truncating its expansion. That would increase longer-term oil price volatility and make investments elsewhere more attractive, not just in North American tight oil but also in energy efficiency and alternatives to oil.
Warning signs seem ample. The "Islamic State in Iraq and Syria" might never capture Baghdad or directly threaten the giant oil fields of southern Iraq that are reviving with help from international firms like BP, ExxonMobil and Shell. However, ISIS's actions in the territory they now control, and the fears they incite across a much larger swath of Iraq, are sparking renewed sectarian violence and prompting foreign companies to evacuate personnel. This undermines the IEA's medium-term forecast, which despite being "laden with downside risk" will apparently not be revised in light of recent events. It also raises the potential for jumps in nearer-term oil and petroleum product prices.
It is noteworthy that oil prices haven't gone up significantly, as they did when Libya's revolution began. From February 15 to April 15, 2011 the price of UK Brent Crude jumped 22%. Iraq's troubles added about 5% to the Brent price, some of which has already dissipated. However, average US gasoline prices are $0.21 per gallon ahead of their level for the same week last year, in part because tensions in Iraq and elsewhere have forestalled the typical post-Memorial Day price drop.
The market's relatively muted response could change abruptly if the Iraqi military suffered further setbacks at the hands of ISIS and its allies, or if ISIS turned its attention to the oil infrastructure of central and southern Iraq. They attacked the country's largest refinery at Baiji, north of Baghdad, and I have seen conflicting reports of its current status.
As several analysts have noted, anything that threatened the country's oil exports, most of which pass through the Gulf port of Basra, could send oil prices substantially higher. That's because other supply outages have reduced usable spare production capacity elsewhere--oil that isn't now being produced but could ramp up quickly--to less than 4 MBD, a narrower margin than in several years. Even if lost Iraqi output were made up by Saudi Arabia and the UAE, the further contraction of spare capacity would drastically increase price volatility and boost oil prices from today's level, until Iraq's exports--or Iran's--were restored.
Nor would booming domestic oil and gas-liquids production, which is surely helping to hold down global oil prices, insulate US consumers from increases at the gas pump. The oil that US refineries process and the products they sell are still priced based on the global market. If Brent crude spikes, so will US gasoline and diesel. That would have less impact on the US economy than in the past, when imports made up a much higher share of supply, but shifting money from the pockets of consumers to those of oil company shareholders is rarely popular.
An Iraq-driven oil price spike would affect politics and geopolitics, too. An unstable Iraq makes it more difficult to maintain the sanctions pressure on Iran, particularly if the US and Iran ended up coordinating their responses in Iraq. It's even harder to envision a consensus on keeping more than 1 MBD of Iran's oil bottled up if oil prices returned to $150/bbl.
That could also complicate the debate over exporting US crude oil, already a tough sell for politicians who came up during the era of energy scarcity. As a practical matter, if exports began while prices were rising sharply for other reasons, convincing US voters that the two factors were unrelated would be challenging. A full-blown oil crisis in Iraq or the wider Middle East would likely result in the idea being tabled for an extended period.
It's tempting to view the success of ISIS in seizing territory on both sides of the Iraq/Syria border as a temporary outgrowth of Syria's civil war. If that were the case, the situation might revert to the status quo ante, once the Iraqi army--with some outside help--mopped up ISIS.
Even if this genie could be rebottled, however, the aftermath of the Iraq War and the "Arab Spring" revolutions is exerting great stresses on the post-World War I regional order, overlaid on 13 centuries of animosity between Sunnis and Shi'ites. An accident of history and geology has made this area home to much of the world's undeveloped conventional onshore oil reserves. Can its stability be restored with a few deft military and diplomatic moves, or might that require a complete rethinking of boundaries and nations, as recently suggested by the foreign affairs columnist of the Washington Post?
Warning signs seem ample. The "Islamic State in Iraq and Syria" might never capture Baghdad or directly threaten the giant oil fields of southern Iraq that are reviving with help from international firms like BP, ExxonMobil and Shell. However, ISIS's actions in the territory they now control, and the fears they incite across a much larger swath of Iraq, are sparking renewed sectarian violence and prompting foreign companies to evacuate personnel. This undermines the IEA's medium-term forecast, which despite being "laden with downside risk" will apparently not be revised in light of recent events. It also raises the potential for jumps in nearer-term oil and petroleum product prices.
It is noteworthy that oil prices haven't gone up significantly, as they did when Libya's revolution began. From February 15 to April 15, 2011 the price of UK Brent Crude jumped 22%. Iraq's troubles added about 5% to the Brent price, some of which has already dissipated. However, average US gasoline prices are $0.21 per gallon ahead of their level for the same week last year, in part because tensions in Iraq and elsewhere have forestalled the typical post-Memorial Day price drop.
The market's relatively muted response could change abruptly if the Iraqi military suffered further setbacks at the hands of ISIS and its allies, or if ISIS turned its attention to the oil infrastructure of central and southern Iraq. They attacked the country's largest refinery at Baiji, north of Baghdad, and I have seen conflicting reports of its current status.
As several analysts have noted, anything that threatened the country's oil exports, most of which pass through the Gulf port of Basra, could send oil prices substantially higher. That's because other supply outages have reduced usable spare production capacity elsewhere--oil that isn't now being produced but could ramp up quickly--to less than 4 MBD, a narrower margin than in several years. Even if lost Iraqi output were made up by Saudi Arabia and the UAE, the further contraction of spare capacity would drastically increase price volatility and boost oil prices from today's level, until Iraq's exports--or Iran's--were restored.
Nor would booming domestic oil and gas-liquids production, which is surely helping to hold down global oil prices, insulate US consumers from increases at the gas pump. The oil that US refineries process and the products they sell are still priced based on the global market. If Brent crude spikes, so will US gasoline and diesel. That would have less impact on the US economy than in the past, when imports made up a much higher share of supply, but shifting money from the pockets of consumers to those of oil company shareholders is rarely popular.
An Iraq-driven oil price spike would affect politics and geopolitics, too. An unstable Iraq makes it more difficult to maintain the sanctions pressure on Iran, particularly if the US and Iran ended up coordinating their responses in Iraq. It's even harder to envision a consensus on keeping more than 1 MBD of Iran's oil bottled up if oil prices returned to $150/bbl.
That could also complicate the debate over exporting US crude oil, already a tough sell for politicians who came up during the era of energy scarcity. As a practical matter, if exports began while prices were rising sharply for other reasons, convincing US voters that the two factors were unrelated would be challenging. A full-blown oil crisis in Iraq or the wider Middle East would likely result in the idea being tabled for an extended period.
It's tempting to view the success of ISIS in seizing territory on both sides of the Iraq/Syria border as a temporary outgrowth of Syria's civil war. If that were the case, the situation might revert to the status quo ante, once the Iraqi army--with some outside help--mopped up ISIS.
Even if this genie could be rebottled, however, the aftermath of the Iraq War and the "Arab Spring" revolutions is exerting great stresses on the post-World War I regional order, overlaid on 13 centuries of animosity between Sunnis and Shi'ites. An accident of history and geology has made this area home to much of the world's undeveloped conventional onshore oil reserves. Can its stability be restored with a few deft military and diplomatic moves, or might that require a complete rethinking of boundaries and nations, as recently suggested by the foreign affairs columnist of the Washington Post?
A different version of this posting was previously published on the website of Pacific Energy Development Corporation.
Tuesday, December 24, 2013
IEA Forecasts Sustained Energy Growth, But No "Era of Oil Abundance"
- The IEA's latest long-term forecasts highlights the growth of unconventional oil and gas, especially in North America, but does not see this leading to much lower oil prices.
- In their main scenario fossil fuels will still meet more than three-fourths of the world's energy needs by 2035, despite significant growth in renewable energy.
As in previous years, the new WEO examines the full range of energy supply and demand, with a focus this time on the sources and uses of petroleum, and the emergence of Brazil as an oil and energy power. While recognizing that they might be underestimating the potential for technology or additional resource discoveries to sustain the growth of "light tight oil", or shale oil, which together with oil sands and gas liquids is a primary driver of oil supply growth today, the IEA forecasts it would peak by 2025.
That puts the burden for supporting oil demand growth and the replacement of supplies lost to natural decline after 2025 back onto the Middle East producers. So in the IEA's view, OPEC's loss of market power appears temporary. A corollary to this is that the agency does not anticipate a sustained drop in oil prices, but rather a gradual increase of about 16% by 2035. That's because the unconventional oil helping to drive current market shifts is still relatively high-cost, compared to the large conventional oil resources of the Middle East.
Although the IEA expects the global oil market to grow from its present level of around 90 million barrels per day (MBD) to 101 MBD in 2035, that change would be less than their forecasted equivalent global growth in gas, renewables or even coal. The concentration of oil demand in transport and petrochemicals would also increase, while other uses contract slightly. This is consistent with last year's observation that the center of the oil market is shifting towards Asia, since around one-third of the total anticipated growth in oil demand is for diesel to fuel goods deliveries in Asia.
The shift toward Asia applies to other forms of energy, as well, including natural gas and the expanded use of renewable energy. This trend is already altering global energy trading patterns, and with the US becoming more energy self-sufficient the IEA sees a new role for energy exports from Canada to supply Asia. That includes both LNG and oil sands, which Fatih Birol, the IEA's chief economist, recently indicated the agency sees as only a minor, incremental threat to the climate compared to growing coal use.
An added nuance in this year's outlook is that the IEA now expects world-leading energy growth in China to be overtaken in a decade or so by faster growth in India, while rapidly growing consumption in the Middle East could result in that region posting the second-highest growth in primary energy demand through 2035, especially for natural gas.
In the launch presentation in London Dr. Birol assessed the consequences of strong North American energy growth and shifting exports and imports for the prices that industries pay for energy. Because any exports of low-cost North American shale gas must be priced to cover the cost of liquefaction and long-haul freight, plus a margin, global natural gas prices should converge somewhat but still not equalize among the major consuming regions. As a result, the IEA expects US-based energy-intensive industries to have a persistent cost advantage in both gas and electricity, enabling them to increase their share of global markets. That has implications for employment and economic growth, while sustained energy price disparities should also drive energy efficiency improvements in response.
Another issue that received prominent attention at the launch was the always controversial matter of subsidies, for both conventional and renewable energy. The IEA estimated global fossil fuel subsidies at $544 billion 2012--mainly in developing countries and Middle East oil producers--resulting in "wasteful consumption" and fewer benefits for the poor than commonly claimed. And while supporting the use of subsidies to promote greater use of renewable energy, the agency's Executive Director, Maria van der Hoeven, made a particular point about the necessity for such subsidies to be carefully targeted and very responsive to changes in technology cost.
The IEA was founded in the aftermath of the 1973-74 Arab Oil Embargo and will celebrate its 40th anniversary next year. I couldn't help thinking about that as I reviewed the updated WTO materials. They're interesting as an annual update, but also in reflecting how the world of energy has changed since the oil shocks of the 1970s.
The rapid development of unconventional oil and gas that underpins the IEA's latest forecast would likely have amazed the industry veterans I met at the start of my career, but still fit within their worldview. I think they would have found the projected growth of renewable energy, supported by climate-change-inspired subsidies that surpassed $100 billion per year in 2012 more futuristic and surprising. Yet despite the anticipated expansion of renewable energy sources over the next 22 years, the IEA envisions the share of fossil fuels in the world's total energy supply only falling from 82% today to 76% in its main "New Policies" scenario. That will seem overly cautious to many, but it underlines the challenges involved in changing such massive systems.
I'd like to wish my readers all the joys of the holiday season and a happy and prosperous New Year.
A different version of this posting was previously published on the website of Pacific Energy Development Corporation.
Thursday, December 06, 2012
IEA Expects Global Energy Focus to Shift Eastward
Last month the International Energy Agency (IEA) released its annual long-term forecast, the World Energy Outlook (WEO). Its projection that US oil output would exceed that of Saudi Arabia within five years was featured in numerous headlines, although some of the report's other findings look equally consequential. That includes the continued strong growth of energy demand in China, India and other Asian countries, and the linkages between that growth and a dramatic expansion of Iraqi oil production. The agency also set a cautionary tone concerning the increase in global greenhouse gas emissions accompanying all this growth.
In the IEA's primary "New Policies" scenario, the US overtakes Saudi Arabia in oil production by 2017, adding 4 million barrels per day (MBD) of unconventional output, mainly from shale (tight oil) deposits such as the Bakken in North Dakota. US oil imports decline significantly, due in roughly equal measure to higher production and the implementation of strict vehicle fuel economy regulations. As a consequence, the need for imports from the Middle East approaches zero within 10 years. When this change is combined with the growth in oil demand in Asia, where China alone accounts for half the forecasted global growth in oil consumption in this period, the IEA envisions Asia becoming the recipient of 90% of Middle East oil exports by 2035.
The detailed assumptions behind the IEA's conclusions weren't provided in the public release. These include crucial questions such as the assumed status of US rules barring most crude oil exports. As noted in a Reuters op-ed at the time, maximizing the potential of US unconventional resources may depend on allowing higher quality unconventional oil to seek global markets, while continuing to import oil from Latin America and the Middle East into Gulf Coast refineries geared to these heavier, higher-sulfur feedstocks. The op-ed's author also reminded us that the natural gas liquids included in the headline comparison with Saudi production are useful but quite different from crude oil, yielding little gasoline and diesel fuel.
The expected growth of energy demand in China remains extraordinary, even with the country's economic growth slowing from the levels seen a few years ago. To put this in context, when Dr. Fatih Birol, Chief Economist of the IEA, presented the new WEO to the media in London on November 12th, he suggested that China's electricity demand would grow by the equivalent of "one US and one Japan of today" by 2035. Much of that additional electricity generation is projected to come from renewables, nuclear power and domestic gas. Nevertheless, and in spite of significant increases in China's unconventional gas production, the IEA forecasts that import dependence will grow from about 15% for gas and 50% for oil today, to 40% for gas and over 80% for oil by 2035. That increase in imports would equate to additional hundreds of millions of dollars per year of outflows for energy.
In the view of the IEA, much of the extra oil demanded in Asia will be supplied by Iraq, which they project will increase its output from around 3 MBD today to 6.1 MBD in 2020 and 8.3 MBD in 2035, in the process becoming the world's second-largest oil exporter, after Russia. Since the reserves to support that growth have already been identified, with much lower production costs than many other basins, the uncertainties involved are mainly political and structural. Resolution of the current standoff with Iran over its nuclear program would provide even more Middle East oil for Asian markets.
As in its earlier "Golden Age of Gas" scenario, the IEA expects large increases in global natural gas consumption. Unconventional sources, mainly in the US, China and Australia, would contribute around half the additional production required to meet expanded demand. However, at the launch presentation in London Dr. Birol also stressed that unconventional oil and gas are still at an early stage, with significant uncertainties about the eventual magnitude of their resources. This seemed to be a particular issue for the agency's post-2020 forecast of oil production in the US and gas production in China.
Despite the rigorous analysis and level of detail involved in producing the IEA's World Energy Outlook, long-term energy forecasting should always be taken with a grain of salt. Yet whether or not the highlighted trends mature precisely in line with these projections, the shifts that the IEA identified are significant and already becoming evident in current data for energy production, consumption and trade. Even if North America failed to become a net oil exporter--which many equate with energy independence--by 2030, the movement of the center of gravity of global energy trade towards Asia is essentially pre-determined: baked in by differences in economic growth rates and resource opportunities. The economic, geopolitical and environmental consequences of that shift are just starting to take shape.
A slightly different version of this posting was previously published on the website of Pacific Energy Development Corporation.
In the IEA's primary "New Policies" scenario, the US overtakes Saudi Arabia in oil production by 2017, adding 4 million barrels per day (MBD) of unconventional output, mainly from shale (tight oil) deposits such as the Bakken in North Dakota. US oil imports decline significantly, due in roughly equal measure to higher production and the implementation of strict vehicle fuel economy regulations. As a consequence, the need for imports from the Middle East approaches zero within 10 years. When this change is combined with the growth in oil demand in Asia, where China alone accounts for half the forecasted global growth in oil consumption in this period, the IEA envisions Asia becoming the recipient of 90% of Middle East oil exports by 2035.
The detailed assumptions behind the IEA's conclusions weren't provided in the public release. These include crucial questions such as the assumed status of US rules barring most crude oil exports. As noted in a Reuters op-ed at the time, maximizing the potential of US unconventional resources may depend on allowing higher quality unconventional oil to seek global markets, while continuing to import oil from Latin America and the Middle East into Gulf Coast refineries geared to these heavier, higher-sulfur feedstocks. The op-ed's author also reminded us that the natural gas liquids included in the headline comparison with Saudi production are useful but quite different from crude oil, yielding little gasoline and diesel fuel.
The expected growth of energy demand in China remains extraordinary, even with the country's economic growth slowing from the levels seen a few years ago. To put this in context, when Dr. Fatih Birol, Chief Economist of the IEA, presented the new WEO to the media in London on November 12th, he suggested that China's electricity demand would grow by the equivalent of "one US and one Japan of today" by 2035. Much of that additional electricity generation is projected to come from renewables, nuclear power and domestic gas. Nevertheless, and in spite of significant increases in China's unconventional gas production, the IEA forecasts that import dependence will grow from about 15% for gas and 50% for oil today, to 40% for gas and over 80% for oil by 2035. That increase in imports would equate to additional hundreds of millions of dollars per year of outflows for energy.
In the view of the IEA, much of the extra oil demanded in Asia will be supplied by Iraq, which they project will increase its output from around 3 MBD today to 6.1 MBD in 2020 and 8.3 MBD in 2035, in the process becoming the world's second-largest oil exporter, after Russia. Since the reserves to support that growth have already been identified, with much lower production costs than many other basins, the uncertainties involved are mainly political and structural. Resolution of the current standoff with Iran over its nuclear program would provide even more Middle East oil for Asian markets.
As in its earlier "Golden Age of Gas" scenario, the IEA expects large increases in global natural gas consumption. Unconventional sources, mainly in the US, China and Australia, would contribute around half the additional production required to meet expanded demand. However, at the launch presentation in London Dr. Birol also stressed that unconventional oil and gas are still at an early stage, with significant uncertainties about the eventual magnitude of their resources. This seemed to be a particular issue for the agency's post-2020 forecast of oil production in the US and gas production in China.
Despite the rigorous analysis and level of detail involved in producing the IEA's World Energy Outlook, long-term energy forecasting should always be taken with a grain of salt. Yet whether or not the highlighted trends mature precisely in line with these projections, the shifts that the IEA identified are significant and already becoming evident in current data for energy production, consumption and trade. Even if North America failed to become a net oil exporter--which many equate with energy independence--by 2030, the movement of the center of gravity of global energy trade towards Asia is essentially pre-determined: baked in by differences in economic growth rates and resource opportunities. The economic, geopolitical and environmental consequences of that shift are just starting to take shape.
A slightly different version of this posting was previously published on the website of Pacific Energy Development Corporation.
Friday, January 21, 2011
Fueling the World's Growth
Several articles led me to what is apparently BP's first-ever public long-term energy forecast, "BP Energy Outlook 2030", which was released earlier this week. It's a fascinating document on several levels, and it builds on the reputation established by the BP Statistical Review, an annual compendium of historical energy data and trends. The figure that I've already seen cited in a number of places is that BP expects fossil fuels to contribute just 64% of the growth in energy over the next twenty years, compared to 83% in the last twenty. A quick internet search revealed many other tidbits that reporters and bloggers have picked up on, including a very interesting comparison of future energy security trends among China, the EU and US. I could spend hours detailing the observations that intrigued me, but I'll focus on just a few.
The mere fact of BP's releasing such a forecast seems noteworthy. Perhaps it's aimed at increasing transparency under a new CEO, as Mr. Dudley suggests in his introduction, or maybe the folks who've been creating such documents internally finally convinced management that they had at least as much PR value as the venerable Statistical Review. Their approach to the report also reminds us just how different BP's culture is from that of its UK (and Dutch) arch-rival Shell, which has long preferred scenario planning to conventional forecasting. Both have their uses, though for deep insights I also prefer scenarios and use that technique with my clients. I suggest having a look at Shell's latest publicly-available pair of scenarios looking out to 2050 for another perspective on future energy. The current edition morphs a previous version's theme of "TINA" (There Is No Alternative) into "TANIA" (There Are No Ideal Answers). Amen. And now back to BP's point of view.
The report's projection concerning how energy growth is likely to be satisfied over the next two decades is a classic half-full/half-empty proposition. On the half-full side I consider it a remarkable indication of the success of renewables and the expansion of global interest in nuclear power--it's really only a "renaissance" in the US, never having waned in many other places. The idea that the combination of these sources could be viewed in a serious base-case projection as providing more than a third of incremental energy growth would have lacked credibility not very long ago, for reasons the charts on page 10 of the report should make clear. However, I have no doubt that many will find such a projection altogether too faint-hearted, believing that we surely ought to be able to dispense with these dirty fuels entirely within two decades or less. Well, the first step toward living without oil and coal (and maybe even gas) is being able to cover 100% of future energy growth from other sources. BP makes a coherent argument that we are not yet at that point, even in the more aggressive "policy case" results they present later in the report.
From the perspective of long-term emissions reductions and future energy transformation, two other sets of figures in the outlook look more promising. First is the lengthy discussion of energy efficiency and the accelerating reduction in the energy intensity of GDP that's woven all through the document. That is the main reason why, in a view that is distinctly not a low-growth scenario, total energy demand grows by just 39% and not some much higher value. The other key point is that BP sees 57% of that growth being focused on electricity, rather than transportation fuels. Since we have many more effective low-emission options for making electricity than transportation fuels, the opportunity to reduce emissions in the future will expand significantly, even if in the short run coal is merely losing market share, while its use still increases in absolute terms.
BP's detailed projections for oil and biofuels, along with the growth of China, deserve an entire posting of their own, and perhaps I'll come back to them in the next week or two. In the meantime the last item I wanted to highlight concerns energy security, which has been such a prevalent theme in US politics and public discussion for so long. As I read the chart on page 72--and to the extent I accept its assumptions--I would not trade (energy) places with the EU or China for all the tea in the world, despite all the recent talk of US decline and Chinese ascendancy.
With regard to Europe we see the inevitable consequences of the peaking and decline of the North Sea oil and gas resources. Already more dependent than the US for imports of both oil and gas at this point, Europe will need a generation for its massive focus on renewables to stem the steady rise of its energy import dependence. China's situation is entirely different, as its explosive growth outruns the steady increases in its oil and gas production. If you want to understand why China hasn't abandoned coal and suddenly seems so interested in nuclear and renewables, this picture is worth the proverbial thousand words. Of course the US trajectory is hardly a given. Skim through the report's other charts to see how much that pleasant outcome of greatly improved energy independence depends on shale gas (page 54), fuel economy gains (page 30) and biofuels (page 40). And note that BP suggests that most of the latter will come from "first generation" sources--corn and sugar cane--in this timeframe.
The mere fact of BP's releasing such a forecast seems noteworthy. Perhaps it's aimed at increasing transparency under a new CEO, as Mr. Dudley suggests in his introduction, or maybe the folks who've been creating such documents internally finally convinced management that they had at least as much PR value as the venerable Statistical Review. Their approach to the report also reminds us just how different BP's culture is from that of its UK (and Dutch) arch-rival Shell, which has long preferred scenario planning to conventional forecasting. Both have their uses, though for deep insights I also prefer scenarios and use that technique with my clients. I suggest having a look at Shell's latest publicly-available pair of scenarios looking out to 2050 for another perspective on future energy. The current edition morphs a previous version's theme of "TINA" (There Is No Alternative) into "TANIA" (There Are No Ideal Answers). Amen. And now back to BP's point of view.
The report's projection concerning how energy growth is likely to be satisfied over the next two decades is a classic half-full/half-empty proposition. On the half-full side I consider it a remarkable indication of the success of renewables and the expansion of global interest in nuclear power--it's really only a "renaissance" in the US, never having waned in many other places. The idea that the combination of these sources could be viewed in a serious base-case projection as providing more than a third of incremental energy growth would have lacked credibility not very long ago, for reasons the charts on page 10 of the report should make clear. However, I have no doubt that many will find such a projection altogether too faint-hearted, believing that we surely ought to be able to dispense with these dirty fuels entirely within two decades or less. Well, the first step toward living without oil and coal (and maybe even gas) is being able to cover 100% of future energy growth from other sources. BP makes a coherent argument that we are not yet at that point, even in the more aggressive "policy case" results they present later in the report.
From the perspective of long-term emissions reductions and future energy transformation, two other sets of figures in the outlook look more promising. First is the lengthy discussion of energy efficiency and the accelerating reduction in the energy intensity of GDP that's woven all through the document. That is the main reason why, in a view that is distinctly not a low-growth scenario, total energy demand grows by just 39% and not some much higher value. The other key point is that BP sees 57% of that growth being focused on electricity, rather than transportation fuels. Since we have many more effective low-emission options for making electricity than transportation fuels, the opportunity to reduce emissions in the future will expand significantly, even if in the short run coal is merely losing market share, while its use still increases in absolute terms.
BP's detailed projections for oil and biofuels, along with the growth of China, deserve an entire posting of their own, and perhaps I'll come back to them in the next week or two. In the meantime the last item I wanted to highlight concerns energy security, which has been such a prevalent theme in US politics and public discussion for so long. As I read the chart on page 72--and to the extent I accept its assumptions--I would not trade (energy) places with the EU or China for all the tea in the world, despite all the recent talk of US decline and Chinese ascendancy.
With regard to Europe we see the inevitable consequences of the peaking and decline of the North Sea oil and gas resources. Already more dependent than the US for imports of both oil and gas at this point, Europe will need a generation for its massive focus on renewables to stem the steady rise of its energy import dependence. China's situation is entirely different, as its explosive growth outruns the steady increases in its oil and gas production. If you want to understand why China hasn't abandoned coal and suddenly seems so interested in nuclear and renewables, this picture is worth the proverbial thousand words. Of course the US trajectory is hardly a given. Skim through the report's other charts to see how much that pleasant outcome of greatly improved energy independence depends on shale gas (page 54), fuel economy gains (page 30) and biofuels (page 40). And note that BP suggests that most of the latter will come from "first generation" sources--corn and sugar cane--in this timeframe.
Thursday, April 10, 2008
Market Memory
Sometimes I wonder if the greatest flaw in the global oil market is that it has such a precise memory. Anyone with an internet connection can see what the price of oil was in New York fifteen minutes ago, and then view another website and track its movements all the way back to a Wednesday in March twenty-five years ago when the NYMEX West Texas Crude Oil (WTI) contract began trading. The problem with this is that, because the market can't forget, and because each moment's price is set with reference to the previous price, there is little opportunity for the market to catch its breath, weigh all of the fundamentals, and arrive at today's price from scratch. As a result, any distortions that creep in take a while to be expunged, if they ever truly are.
Most days I am grateful that I am no longer an oil trader, with one eye always glued to a screen displaying the gyrations of the global energy commodity exchanges. It's not good for one's health, even if you have a calm disposition. That's especially true these days, when a single news item can send the entire market up or down by as much as $4 per barrel from a starting point over $100/bbl. The process was different when I traded crude oil on the West Coast in the late 1980s. Although the NYMEX contract was becoming a bigger factor in the pricing of physical grades of crude oil, such as the cargoes of Alaskan North Slope crude I bought for Texaco's Los Angeles and Anacortes, WA refineries, it was still quite common to buy and sell pipeline quantities of oil at a premium or discount to posted prices--periodically-updated fixed prices at which refiners or traders solicited producers to sell them oil--or as often as not, at a fixed price unique for that deal on that day, e.g., $17.21/bbl for 2,000 bbl/day of Buena Vista Light during April 1987. (It's getting hard to believe oil was ever that cheap.)
Because of the way such deals were struck, a trader and the refinery for which he was buying had to have a very clear sense of the intrinsic value of that oil, either in terms of the products into which it could be refined, or the price at which it could be resold before delivery, if requirements changed. This process involved significant risks that could not easily be hedged, then. The stakes were high enough that, unless the counterparty was a long-term, reliable supplier or customer, deals could fall apart over a difference of 5 cents per bbl. Without suggesting that traders today are any less diligent or astute, I believe a market in which most prices are set with reference to WTI, Brent, or some other ultra-transparent exchange-traded marker entails less accountability for ensuring that the price involved is reasonable, rather than defensible--i.e., "Well, I paid the market price for it."
In a popular film of a few years ago, "Memento," the protagonist had an unusual form of amnesia and woke up each morning without any clear recollection of the previous day. He had to rely on notes he had previously scribbled to himself. What if the oil market worked that way, and each day, traders had to re-establish the price of oil from scratch, relying only on the fundamentals of supply, demand and inventory? A classical economist might suggest that the result would be no different, because the market price is merely the level at which supply and demand are balanced, every day. I'm less sure things are that simple, and I suspect that the practitioners of behavioral economics might be skeptical, as well. For example, yesterday's increase in the price of WTI to $111/bbl in response to an unanticipated 3 million bbl drop in US crude inventories only makes sense if you accept that $108/bbl accurately reflected all of the market factors before that news. However, a similar overall configuration of global inventory and spare production capacity in 2005 yielded prices in the mid-$50s to mid-$60s. $111 makes more sense as the net sum of three years of individual price movements, than as the bottom-up evaluation of all the factors in today's market.
I recently received a copy of an academic paper by a Ph.D. candidate at the University of Michigan and his professor. It tackles the question of whether the oil futures market provides a reliable forecast of future oil prices and finds that it does not. Even my view that it is a good indicator of current expectations of future prices seems shaky, in their analysis. Taken together with my concern that the market may be influenced more by its own price history than it ought to be, I conclude that decision makers, policy makers, and consumers would be well-served to take a somewhat more jaundiced view of that daily WTI settlement price that the media has grown so fond of displaying. Its impact on fuel prices and on our trade deficit is certainly real and tangible, but it might not be telling us as much about the world and the future as we have come to believe.
Most days I am grateful that I am no longer an oil trader, with one eye always glued to a screen displaying the gyrations of the global energy commodity exchanges. It's not good for one's health, even if you have a calm disposition. That's especially true these days, when a single news item can send the entire market up or down by as much as $4 per barrel from a starting point over $100/bbl. The process was different when I traded crude oil on the West Coast in the late 1980s. Although the NYMEX contract was becoming a bigger factor in the pricing of physical grades of crude oil, such as the cargoes of Alaskan North Slope crude I bought for Texaco's Los Angeles and Anacortes, WA refineries, it was still quite common to buy and sell pipeline quantities of oil at a premium or discount to posted prices--periodically-updated fixed prices at which refiners or traders solicited producers to sell them oil--or as often as not, at a fixed price unique for that deal on that day, e.g., $17.21/bbl for 2,000 bbl/day of Buena Vista Light during April 1987. (It's getting hard to believe oil was ever that cheap.)
Because of the way such deals were struck, a trader and the refinery for which he was buying had to have a very clear sense of the intrinsic value of that oil, either in terms of the products into which it could be refined, or the price at which it could be resold before delivery, if requirements changed. This process involved significant risks that could not easily be hedged, then. The stakes were high enough that, unless the counterparty was a long-term, reliable supplier or customer, deals could fall apart over a difference of 5 cents per bbl. Without suggesting that traders today are any less diligent or astute, I believe a market in which most prices are set with reference to WTI, Brent, or some other ultra-transparent exchange-traded marker entails less accountability for ensuring that the price involved is reasonable, rather than defensible--i.e., "Well, I paid the market price for it."
In a popular film of a few years ago, "Memento," the protagonist had an unusual form of amnesia and woke up each morning without any clear recollection of the previous day. He had to rely on notes he had previously scribbled to himself. What if the oil market worked that way, and each day, traders had to re-establish the price of oil from scratch, relying only on the fundamentals of supply, demand and inventory? A classical economist might suggest that the result would be no different, because the market price is merely the level at which supply and demand are balanced, every day. I'm less sure things are that simple, and I suspect that the practitioners of behavioral economics might be skeptical, as well. For example, yesterday's increase in the price of WTI to $111/bbl in response to an unanticipated 3 million bbl drop in US crude inventories only makes sense if you accept that $108/bbl accurately reflected all of the market factors before that news. However, a similar overall configuration of global inventory and spare production capacity in 2005 yielded prices in the mid-$50s to mid-$60s. $111 makes more sense as the net sum of three years of individual price movements, than as the bottom-up evaluation of all the factors in today's market.
I recently received a copy of an academic paper by a Ph.D. candidate at the University of Michigan and his professor. It tackles the question of whether the oil futures market provides a reliable forecast of future oil prices and finds that it does not. Even my view that it is a good indicator of current expectations of future prices seems shaky, in their analysis. Taken together with my concern that the market may be influenced more by its own price history than it ought to be, I conclude that decision makers, policy makers, and consumers would be well-served to take a somewhat more jaundiced view of that daily WTI settlement price that the media has grown so fond of displaying. Its impact on fuel prices and on our trade deficit is certainly real and tangible, but it might not be telling us as much about the world and the future as we have come to believe.
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