BP PLC Statistical Review of World Energy 2014 in London
Jun 17, 2014 AM EDT
BP.L - BP PLC
BP PLC Statistical Review of World Energy 2014 in London
Jun 17, 2014 / 01:30PM GMT
==============================
Corporate Participants
==============================
* Rob Gross
- Chair of the BIE
* Christof Ruhl
BP PLC - Group Chief Economist
==============================
Conference Call Participants
==============================
* Hugh Lee
Evico - Analyst
* Unidentified Audience Member
- Analyst
* Mansoor Ahmad
Center for International Studies and Diplomacy - Analyst
* David Holmes
Warwick Business Co - Analyst
* Modorn Trish
MFC - Analyst
==============================
Presentation
------------------------------
Rob Gross, - Chair of the BIE [1]
------------------------------
Okay, welcome everybody. As this years Chair of the BIE I'm Rob Gross, the token academic from Imperial cop college. I'd like to welcome you all to this London launch of their 63rd believe it or not 63rd addition of the statistical review that the global launch was yesterday in Moscow.
We're going to be handing it over to in a few seconds time, longing to learn more after that wonderful little infographic. This is Christof's last one of those. Sadly he's on to pastures new but there's a new departure certainly for me at least which there will be questions appearing there to alarm us from Twitter and on the web and I'm told that we are somehow beaming live into the webosphere as we speak, so Christof? Thanks.
------------------------------
Christof Ruhl, BP PLC - Group Chief Economist [2]
------------------------------
Thank you. Don't praise the day before the evening is what they say. Very good afternoon to all of you. Thank you all for coming and thank you for the introduction.
You know the drill. This is the heaviest part of what we do, not the forecasting part so we're looking at the 2013 data. We are still the first ones every year who get the complete set production consumption reserves prices trade, you name it, and then we sit down and try to make sense of it, so the purpose of this review is and has always been to provide objective data on global energy developments and then to Christof changes in global energy markets year-over-year and as rigorous a fashion as we possibly can.
Here is last years data coming up. What I will do is go briefly through the bigger picture of energy and the economy and then I have to drag you to the fuel by fuel discussion and then we come back to this big picture.
But to begin with let me step back a little. Ten years ago, the energy world looked rather different. Much of what we took for granted, what we take for granted now I should say has changed.
It is always a good first step of course to go back and see where you come from before today's world. So what have been some of the major changes over the past decade? Ten years ago, the developing world classified with us as simply the economies had started to embark on this journey of rapid economic growth.
The term BRICS economy for example, has been coined in 2001. From 2001 onward, this showed up as an energy gap. Global energy demand growth became dominated by the non-OECD, and in 2008 the non-OECD overtook the OECD and energy consumption.
China rightly or wrongly came to symbolize this assent overtaking the EU in 2007, the US in 2010, and the entire part of North America last year. Many would have found this hard to believe only 10 years ago.
Energy markets are huge in the supply chance can be sluggish, so prices started to rise and to diverge. Oil prices rose the fastest of course but many of the implications are easily forgotten.
Today we think not only of oil prices above $100 as normal, we also have many analysts gainfully employed in analyzing things like gas price spreads as an activity which would not have attracted much attention 10 years ago. One trend that has not changed is reserves growth. It was always one of our more popular statistics but saying that reserves actually had increased again after yet another year of rapid oil gas or coal consumption growth created a lot more disbelief then than it does now but increase they did.
Proved oil and gas reserves are up 27 and 19% respect every over the last 10 years ago, despite production growth of 11% and 29%. Perceptions change not only about reserves. The supply response always existed but it became widely recognized only after it triggered the emergence of new sources of supply.
The biggest item on this list has to be the emergence of unconventional oil and gas resources. This would happen in the competitive energy world of North America makes perfect economic sense today in retrospect but who would have thought. If we loosely group together fuels that may classify as new, simply by virtue of not having been around a decade ago including renewables motivated by newly found climate change policies as well as high fossil fuel prices these new fuels in quotation marks accounted for 81% of global primary energy production growth last year.
Time to look at this in more detail. Global economic growth has been softening since 2010, the year of peak economic stimuli. Last year it was 3%, a little weaker than 2012 and considerably below its long-term average, which now includes the years of boom and bust before and after the economic crisis. Economic performance softened in the OECD and non-OECD alike, but the economic growth gap between them has narrowed since the crisis.
Energy consumption followed economic growth, but with a twist. Energy consumption growth in the OECD has been flat over the last 10 years despite economic growth of 18% and if you take a particularly fitting subset, energy consumption in today's 28 member states of the European Union, last year was back at the level of 1988, despite cumulative economic growth of 55%. This of course raises the intriguing question whether, or under which circumstances, it may be possible to combine economic growth with stagnant or falling energy consumption.
Meanwhile, in the non-OECD, stronger economic growth and industrialization necessitated continued consumption growth before, during, and after the crisis. The relationship between economic and energy growth was actually quite similar in the OECD and the non-OECD, the 10 years before the crisis. After the crisis, and presumably related to the large energy intensive fiscal stimuli, which they've given themselves in the non-OECD mostly, energy intensity improved faster in the OECD.
Now 2013 has broken this pattern. Global primary energy consumption accelerated from 1.8% to 2.3%, just a tick below the 10-year average and despite slackening economic growth, but for the two subgroups, fortunes diverged. OECD energy demand rose by 1.2%, offsetting an equal decline the previous year despite slowing and lackluster economic performance and almost on a par with GDP growth. Non-OECD energy consumption, in contrast, grew by only 3.1%, the slowest rate for 13 years except for the crisis year 2009 and substantially below GDP growth.
North America, the only region globally to show above-average growth, drove the OECD acceleration, with energy demand growing even faster than GDP. The non-OECD slowdown was concentrated in Asia, with energy consumption growth below 4% for only the second time in the last 12 years, while economic growth had steadied. The contrasting experience of North America and Asia Pacific, if you drill down even deeper, reflect the different fortunes of the world's two largest energy consumers, China and the US. Together, they account for more than 70% of World Energy consumption.
In 2013, Chinese energy growth slipped from 7% to 4.7% and thus well below its long-term trend, which is more than 8.5%, although the People's Republic reported unchanged economic growth of 7.7%. The Chinese slowdown was concentrated in coal, but it is visible in oil as well. Meanwhile, US primary energy consumption grew by 2.9%, rebounding from a similar decline in 2012. Much of this was due to weather effects but beyond the weather, there are signs of underlying strengths in US industrial sector demand, in particular of oil products. These effects are visible even if you only look at the global fuel aggregates.
China is responsible for the relative weakness of coal growth and the US is responsible for the relative strengths of oil growth. We will discuss the details in a second. All told, the diverging performance of China and the US cause the energy gap between non-OECD and OECD energy consumption growth to narrow very sharply. It became the smallest since the year 2000.
But what can energy data tell us? Are these data points a harbinger things to come or just some aberration? Too early to tell, would be the appropriate answer. In our textbooks, energy demand is the consequence of economic growth. In reality, where data measurement is less than perfect, energy data often allows for conclusions about real economic activity.
Now in the present context, I find it easy to see how abundant domestic resources in the US would eventually give a boost to the economy, not just like last year to energy demand, but I would find it much harder to see how the fundamental restructuring currently under way in China could leave an imprint only on energy demand without at least eventually also affecting economic performance. Let's have a look at these developments fuel by fuel.
Oil prices over the last three years have been high but remarkably stable. In 2013, they dipped a little with data-print averaging almost $109 per barrel. This is $3 below the averages in 2011 and 2012.
This has, then, been the third consecutive year of prices above $100 in both real and nominal terms, and it has been the three-year period with the lowest price volatility since 1970. The stability of prices betray significant changes in the underlying balance between consumption and production.
In 2013, global consumption growth exceeded production growth by a wide margin, the exact opposite of the dynamics we have seen in 2012. As a result, inventories fell.
And 2013 was also yet another year of turbulence in production. We are all familiar now with the ongoing story of rapid growth in the US, but it was also yet another year of significant supply disruptions, most pronounced in North Africa and in the Middle East.
So why, against this unstable background, did prices remain so stable? We'll come back to that in detail, but first we have to go through the data.
Global oil consumption last year rose by 1.4 million-barrels per day, or 1.4%, higher than both 2012 and the long-term average. As has become the norm, growth was driven by the emerging economies of the non-OECD, which for the first time ever accounted for the majority of global oil consumption. OECD demand, in contrast, remained quite stagnant.
In the OECD, the US stood out as its consumption grew by 400,000 barrels per day, the fastest growth of any country, and in volume terms, out pacing China for the very first time since 1999. In contrast, consumption in the rest of the OECD fell by a larger than average 380,000 barrels per day, lead by a decline in Japan, where oil was backed out of power generation by renewables, coal, and improved efficiency. European consumption also dropped, with the largest decline seen in the countries most affected by the recession, such as Italy, Spain, or Greece.
Non-OECD consumption rose by 1.4 million-barrels per day, or 3.1%, well below the 10-year average. This weakness was especially pronounced in China, where demand grew by only 390,000 barrels per day, the lowest since the recession 2009. Growth in India fell to its lowest level since 2001 as subsidies were reduced, while in the Middle East growth was limited by civil unrest on the one side but also by rising use of natural gas in Saudi Arabia's power sector.
A review of oil consumption by product can help to identify underlying economic forces. Light distillates, such as gasoline, are commonly perceived as more price dependent and they were the fastest-growing product category for the second year in a row last year.
Middle distillates, commonly perceived as dependent more on economic activity, grew only slowly. The slowdown in middle distillate demand growth was again entirely driven by the developing world, where growth almost halved, and within this group it was again China which accounted for by far the largest part of the slowdown.
Distinguishing by product category also helps to disentangle the question why the US saw such a dramatic increase in oil consumption last year, up 400,000 barrels per day, remember, against an average annual decline of 110,000-barrels per year over the last 10 years. This cannot be explained by economic growth, which slowed from 2.8% to 1.9% last year.
The rise was focused in the industrial sector, which includes refining on petrochemicals, and this industrial sector contributed almost 80% of the net growth last year. Much of this growth was for light products, in particular LPG, facilitated by the robust growth of domestic natural gas liquids, which has driven down prices significantly over the last few years.
Turning to production, 2013 once again can be characterized as a tale of major supply restructures on one side and historic US growth on the other. I'll come back to that issue in a second.
Global output rose slightly in 2013, due to the largest increase non-OPEC countries since 2002. The main contributor to this growth was the US, but supplies also grew in Canada and Russia.
Russia posted a record high for the post-Soviet era. Canadian production reached an all-time high due to continued oil sands growth. These increases more than offset continued declines in mature areas, such as the North Sea.
Meanwhile, OPEC production contracted by 600,000 barrels per day. In addition to unplanned disruptions, to which we will come back, Saudi Arabia cut output by 110,000 barrels per day after producing at record levels in 2012. The declines were only partly offset by an increase in the UAE, which set a new record for itself.
Average OPEC crude production over the year was near the group's 30 million production ceiling, which has been in place since December 2011. US oil production exceeded 10 million barrels per day in 2013, reaching the highest level since 1986. Driven by tight oil plays, production rose by over 1.1 million-barrels per day.
This is the second consecutive year of above 1 million barrel-per-day growth and the second consecutive year of record US production growth. And when you look closely, it is indeed only Saudi Arabia that has ever had a bigger increase than the US in 2013. Nine times in total, to be precise, but in six of those nine times, it was based on Saudi ability to tap into existing spare production capacity.
So if you phrase it in terms of organic growth with capacity expansion, what we have seen last year in the US was the fourth biggest increase in oil production ever, any country, all times. And so far this year, US production growth has been even stronger, nearly 1.3 million barrels per day.
As in recent years, supply disruptions were large and concentrated in North Africa and the Middle East. Libya has been a focal point. Following initial outages of 1.2 million barrels per day in 2011 due to civil war, production staged a new full recovery in 2012, but then renewed unrest in the second half of 2013 lead to an average annual decline of more than 0.5 million barrels last year.
Iranian production also declined as a result of continued international sanctions. Significant losses were also seen in Syria, the two Sudans and in Yemen.
Cumulative supply disruption since the advent of the so-called Arab Spring three years ago from these countries have reached an extraordinary 3 million barrels per day. And just in brackets, when you do a rough estimates in the 10 years before the start of the Arab Spring 2011, cumulative supply disruptions were about 100,000 barrels per day per year.
We are now in a better position to return to the question of why oil prices were so stable these last three years despite the volatile shifts we have seen in production. For the biggest part, the answer has to be that the supply disruptions in Africa and the Middle East were matched precisely almost barrel by barrel by the shale-related increases in the US. It is a fair conclusion that oil markets would look rather different today had we only witnessed supply disruptions at the scale that actually happened, and vice versa, it's an equally fair conclusion to say that oil markets would look very different today had we only witnessed the so-called shale revolution in the US.
Importantly, this match is sheer coincidence. Higher prices over time of course will trigger more shale production, but virtually nothing else, either of logic or of substance, connects these two developments and so markets will remain on edge, or with a better phrase, will remain eerily calm, until one side will gain the upper hand.
In an interesting way, this current standoff finds itself reflected in the relationship between prices and inventories. Commercial inventories contracted in 2013, ending the year down almost 100 million barrels. That's the lowest year-end level since 2004.
At the start of the year, inventories were ample following strong production growth in 2012, but stronger demand growth soon corrected this and when Libyan supply collapsed in September, OECD inventories started to fall rapidly. Stocks have remained low so far this year, particularly for refined products, but there's a more settled dimension to this story of stock markets, of sorts.
The relationship between the level of OECD commercial inventories and prices has shifted since the advent of significant supply disruptions in early 2011. The shape of the forward curve since then indicates that market participants are willing to pay a higher premium relative to future prices to hold physical inventories than was the case a few years ago, a clear indication that, in fact, when you look at the picture as clear indication as you're ever likely to see of an increased desire for precautionary inventory holdings.
Even as inventories fell in late 2013, and so far this year, this higher premium has remained in place. Another way of telling that story is to say that current inventory levels under the old pre-disruption regime would have corresponded to lower spot or to higher future prices.
Global refining has been struggling for years, squeezed between excess capacity and slower throughput growth. Regional disparities are adding to the rules of the sector, with more capacity being added east of Suez and with US throughputs rising as a result of rising tight oil production.
Since crude exports from the US are legally constrained, US refineries are processing the discounted domestic crude at home and exporting products instead. 2014 so far has seen a continuation of these trends.
Global refining capacity grew by 1.4 million barrels per day, the highest net capacity addition since 2009. Capacity growth was lead by China with the Middle East not far behind.
Global crude runs, in contrast, grew by only 0.4 million barrels per day and as a result, global spare capacity is now almost 7 million barrels per day more than it was in 2005, the lowest point in our data set. Despite this dismal background, global refining margins were strong during the first year, our first half of 2013, due to a combination of cold northern hemisphere weather and refinery outages.
Last year's capacity and throughput developments meant that global average refinery utilization slipped to the lowest rate since 1987. Utilization in the non-OECD fell because of the fast pace of capacity additions but OECD refinery utilization improved a little with, US crude runs benefiting from these continued price discounts at home and for domestic crudes and because of refinery shutdowns in the rest of the OECD.
The US added new crude oil pipeline capacity that helped to alleviate the transportation bottlenecks, which are behind relative WTI prices. But with tight oil output rising at a rapid clip, logistics additions are inevitably less uniform than the ramp up in crude supply. As a result, the differential continues to be very volatile.
The new pipeline infrastructure has made it possible to move more crude to the Gulf Coast but export constraints mean that the price discounts have spread to a wider range of crudes in the US. As a consequence, US refiners exported record volumes of distillate at last year rather than replenishing domestic stocks.
Its reduced dependence on long-haul crude imports may well have also facilitated a longer-term drop in working product inventory requirements. Conversely, European crude runs last year fell to the lowest annual level since 1985. European demand is contracting and, different from Asia, today's problems can only be fixed by reducing capacity.
Let's turn to natural gas. Natural gas markets, as you know, are slowly transforming themselves on the back of two developments, the shale gas revolution, so-called, in the US and its knock-on effects and the increase integration of hitherto-segmented regional markets supported by the rapid expansion of liquefied natural gas, LNG. In 2013, both of these forces took a breather. US shale gas production growth slowed and LNG expansion remained very modest.
Globally, growth of consumption, production, and trade all slowed down. Regional price differentials narrowed. As in all other fuels, the demand slowdown was more pronounced in the developing world.
Natural gas was actually the only fuel where OECD consumption growth out paced non-OECD growth. Like oil, tracing OECD growth leads to the US, but unlike oil, China was not the reason for weak growth in the non-OECD.
To disentangle what happened, let's start with the latest chapter of the evolving US shale story. This latest chapter starts with slowing production growth, for more than 7% in 2011 to 5% in 2012 and to 1.3% in 2013. This has nothing to do with running out of shale, as some pundits have claimed, but everything to do with the fungibility of drilling rigs and power of price signals.
US gas production hit a 13-year low in 2012 and started rebounding in the wake of a cold winter early in 2013. For the year, prices were up 35% on average, almost offsetting the 2012 decline. However, because of the persistently higher oil gas price differential, this was not enough to trigger an acceleration of production growth.
It still remains more attractive to chase liquids, i.e. to continue to divert drilling rigs from shale gas into tight oil production. Almost all of the growth in gas production last year came from associated and wet shale -- wet gas. Dry shale gas was down.
Higher prices, lower storage and the demand for heating signaled by an increase in residential and commercial demand did, however, induce a dramatic pull out of natural gas from power generation. Power generation, of course, is the point where natural gas faces heads-on competition with other fuels.
Total US gas consumption grew by 2.4%, but gas-fired power generation declined by almost 9%, substituted by coal, with coal-fired generation up 5%. For the first time since 2008, gas lost market share in US power generation, falling back almost 3 percentage points. This is the biggest such loss since 1973.
On the other side of these two developments, LNG. LNG projects are large and investments can be lumpy. Currently supply growth is in the middle of a multi-year ladder, with very limited capacity expansion.
In 2013, supply is expanded by merely 0.6%. This is keeping markets tight, allocating flexible cargoes only to those willing and able to pay high prices. Small wonder, then, that we are witnessing massive adjustments.
Asia, where a fully 81% of all natural gas imports are met by LNG, remain the prime destination with about three-quarters of all cargoes headed towards that reach. And in Asia, Japan remained the world's largest LNG importer, with post-Fukushima demand for LNG persisting at record level.
But in Japan, gas-fired power plants are now operating at full capacity, and so imports stopped growing. Instead, South Korea assumed demand low for recording the world's largest import growth, and once again this was triggered by nuclear outages.
Meanwhile in China, big strides were made toward the stated political goal of increasing the share of natural gas in the natural energy mix, but currently natural gas is only about 5%. At 11% China locked the biggest increase in gas consumption in the world last year and although Chinese production listed the second largest global increment, this still left a large gap for import growth. The gap was filled by rising LNG as well as pipeline imports, the latter mostly from central Asia, and within central Asia it was Turkmenistan where tentative steps toward domestic price reform, coincidence or not, have lowered domestic demand by exactly the amount pipeline exports increased.
The flip side of higher demand growth and limited LNG availability can be that it puts the spotlight on problems with domestic production. India is the prime example. Caps on producer prices have stalled investment and last year lead to the world's largest decline in gas production.
Lack of cheaper price domestic gas and the huge price advantage of coal over LNG imports has caused large-scale substitution of gas with coal and in the end, assigned to India, also the world's largest decline in gas consumption. Ironically, almost a third of the coal, which covers for the gas, which can't be imported anymore, was itself imported.
Europe took a rain check on the competition for LNG, helped out by Russia. EU production appears in terminal decline and consumption reached the lowest level since 1999. In 2013, consumption fell by 1.1% and production by 0.5%, but imports also declined slightly.
As in the US, the year had started with a cold winter and low storage links. Demand for heating drove up gas spot prices by 12% for the year, whereas oil index prices, contract prices, fell gently and in line with the price of oil. Gas lost the competition in power generation against cheaper coal and non-fossil fuels.
In power, its market share declined by more than that of coal while non-fossil fuels gained. Overall, though, US gas consumption still fell less than coal because of the increased heating demand.
And as was the case for global oil markets, European Union imports were affected by the social unrest plaguing in parts of Africa and other areas. Falling exports from North Africa, Nigeria and also Norway meant a need for alternative deliveries.
In the event, Russia stepped into the void, eliminating the need for Europe to compete for expensive LNG. The net result was a big shift in the composition of imports, with imports from Russia rising by almost 20%, a market reversal of 2012 when Russia had lost 12% of the European gas market to Norway because Gazprom maintained oil price indexation while Norway adjusted its pricing closer to spot prices. In 2013 the rapid increase of European spot prices eroded much of this previous differential but Gazprom, by its own financial accounts, also offered discounts and rebates to sell gas on a more competitive pricing.
Russia in this way bucked the global trend. Gas production increased by 2.4%, or 12.4 Bcf, the largest production increase in the world. Happened on the back of higher capacity utilization and also with increasing output from independent gas producer. These are oil producers except Gazprom, which continues to hold the export monopoly as the only company in Russia.
Last year, independent producers accounted for 28% of Russia's production and because they offered cheaper gas, supplied 39% of Russia's consumption domestically. And this erosion of its market share at home allowed Gazprom, the export monopolist, to direct more resources abroad.
A drop in domestic gas consumption also helped. This happened in part because Russia's Far East suffered from severe flooding early in 2013. The one silver lining to this disaster was the second biggest growth in Russian hydropower on record.
Together with falling electricity demand, this reduced the call on all fuels for power generation, including on natural gas and in this way made more room for more exports. All told, Russian exports last year grew by almost 19%, 10.7 Bcf.
Now how do these differing regional stories affect the evolution of global gas trade? Trade has grown at more than twice the rate of global consumption for at least two decades, with LNG expanding even faster. Since 2011, this relationship has started to decouple, with trade growth slower than consumption and with LNG losing market share.
In 2013, gas trade expanded by only 1.8, slightly above consumption growth but considerably below the long-term average, with pipeline trade again expanding faster than LNG trade. The temporary lull in LNG supply growth should not obscure the general direction of travel towards a more interconnected gas world.
One episode from 2013 nicely illustrates the degree of integration international gas markets have already achieved. Gas, as I told you, displaced by strong hydropower growth in Russia, was exported to Europe, while LNG destined for Europe was re-exported to drought stricken South American markets. In effect, hydroelectricity from Russia, with too much rainfall, was shipped half way around the globe to South America, where there was too little rain and this in the form of natural gas.
Now let's have a quick look only at coal and the non-fossil fuels before returning to the big picture. Coal rounds out the fossil fuel picture. In developing economies, this fuel of industrialization often is a reasonable indicator of economic health.
In the OECD, coal markets are more characterized by competition with other fuels in power generation, driven by politics as much as by prices. 2013 was no exception.
Overall, coal markets slowed. Consumption growth of 3% remained below this long-term average. Production growth was the weakest since 2002. Prices fell on all regions on destocking and lower demand, while regional price differentials narrowed, with intensifying competition among suppliers.
The big story in coal markets is China, where coal accounts for 67% of the national energy mix. Coal consumption rose by 4%, less than half the 10-year average, which is more than 8%. New policies to conquer local pollution by shutting down coal-intensive production and encouraging coal substitution may have played a part, but in fact they started late in the year and these measures are truly limited by the restricted availability of natural gas.
In China, finally, the share of the service sector in GDP last year for the first time has exceeded that of the industrial sector and so moderating industrial production growth was one contributing factor. Still, it remains to me hard to reconcile this coal slowdown with steady official GDP growth.
As for where we find the data corresponding to the fuel switching which we already discussed, in India rapidly declining domestic gas production and the price advantage of coal over LNG imports caused coal consumption to rise by almost 8%, the second largest volumetric increase on record. In the OECD, US consumption rebounded on higher natural gas prices. In the European Union's shrinking energy market, coal contracted faster than gas, losing market share also to renewables.
Coal production in trade merit these patterns. Chinese coal production slowed to 1.2%, the lowest increment since 2000. This was the first time in 15 years that China did not record the world's largest increase in coal production. Indonesia did.
China became the world's largest net coal importer in 2012 and last year has seen further big end roads of cheaper coal from abroad into Chinese markets. In an environment of falling prices and rising transport costs, producers were quick to adjust. Production increased the most amount suppliers with easy access to Pacific markets, such as Indonesia and Australia, while production in the US and in Columbia declined, quite in line with falling demand in Europe and the global price differentials.
On non-fossil fuels, many of you, I suspect, just like it happened to me, will not be aware that the share of non-fossil fuels and total power generation was actually on a declining trend throughout the 1990s and early 2000s, as renewables were too small to make a difference and as the growth of hydro and nuclear failed to keep up with total power generation globally. It was only over the past decade that faster hydro growth and, in particular, the scaling up of renewables, has halted this decline.
2013 was a big year for non-fossil fuels. Growth was above average. They increased their share of global power generation to one-third and they crowded out fossil generation in Europe and in the US along the way.
Nuclear made the smallest contribution, simply by ending two years of decline. Post-Fukushima safety reviews were scaled down and fewer reactors were out of operation.
In Japan, generation continued to fall, but from extremely low levels. At the time of this presentation today, all of Japan's nuclear reactors are off line. Elsewhere, declines in some countries were matched by growth in the US and in China.
Global hydro growth slipped to 2.9%, down from 4.5% in 2012, largely because of slowing capacity additions in China and as otherwise, surprise, determined mostly by global precipitation patterns. Slow growth it may have been but it was enough to lift the share of hydropower in global power energy to a new record of 6.7%.
This leaves us with renewables, the largest contributors to non-fossil growth in 2013. Power generation from renewables grew by 16.3%. Sounds massive, but was in fact the lowest growth rate since 2009, while growth in volume terms recorded an all-time high.
Renewables made a larger contribution to primary energy growth than natural gas last year. As a share of global energy generation -- global energy electricity generation, renewable power reached 5.3% last year. This is up from 2.7% about five years earlier.
And as a share in total primary energy consumption -- total global primary energy, renewables now stand at 2.2% in power generation. This is wind, solar, geothermal biomass and if we add renewables for transport biofuels it brings the renewable total to 2.7% globally.
Renewables grew in all regions and almost all countries. The EU as a block is still ahead of the US and China, both in its annual increment and in the share of renewables and power.
The European Union now receives 15% of its electricity from renewable sources. At the same time, however, the European Union growth rate has slowed massively, from 21% in 2011 to 18% in 2012 and 13.5% in 2013, leaving even the 2013 volume increment smaller than the 2011 and 2012 increments.
It is no accident that this slowdown affects the most the very region where renewable penetration rates are highest and where, therefore, for subsidies are highest as well. The coincidence of slower growth rates with high volumetric contributions points at the underlying dilemma.
Renewables are still subsidized. Sizeable annual increments, as we see them today, reflect the scale renewables have already reached, while the slowdown of their growth indicates the weakening of financial support as they scale up and as the burden of rising subsidies on societies becomes too hard to bear.
An easy way of weaving the annual fuel-by-fuel changes into one coherent pattern is to look at how they affect the global fuel mix. With the exception of gas, which show its market share dipped to about 24%, the shares of each fuel pushed into unfamiliar territory.
Oil share declined to 33%, which is a new low in our data set and which extends a 40-year falling streak that goes back all the way to the first oil price shop in 1973. Coal share took another step on its steady march upward that had started in 2002, when non-OECD industrialization started to take off in earnest, coal share increased to 30%, the highest since 1970.
Carbon emissions per energy unit vary widely among fossil -- along different fuels, so the evolution of the fuel mix does have implications for carbon emissions. In 2013, non-fossil fuels in power enjoyed relatively strong growth, increasing the aggregate share of primary energy. Despite this, global carbon emissions grew almost as rapidly as total primary energy because of the rising share of coal.
Now, this has been a very important trend over the years. Carbon emissions have grown less rapidly than GDP, courtesy to improved energy efficiency, but they did keep pace with energy consumption. In other words, there has been no change in the carbon intensity of the fuel mix over the last decade.
In the OECD, carbon emissions per unit of energy have declined in 2013, due to the increased share of non-fossil fuels. In the normal OECD, the rising share of non-fossil fuels was offset by the rising share of coal and the declining share of natural gas. Emissions grew at the same rate as primary energy.
The net result is that carbon emissions continue far too fast for comfort, restrained by improving energy efficiency, but not affected by changes in the global fuel mix. In the US for example, much of the large decline in emissions recorded in 2012 was reversed last year as the power sector switched back to coal and away from gas. From the dimensions of this system, renewable was 2.2%, coal 30%, gas 21%, it should be easy to see how even small switches from coal to gas can dramatically impact global emissions growth.
The one region reaping benefits from changes in the fuel mix was the European Union, where strong growth of renewables in hydro contributed to declines in both coal and gas in power. EU emissions in 2013 were more than 13% below their 1990 levels. They were back, actually, to where they were in 1969. For the world as a whole, however, emissions are 55% above the 1990 level.
Let me conclude by returning to one of the issues I raised at the beginning, the linkages between energy and the economy. Specifically, I wanted to give an example of how the remarkable shift in physical energy balances, which has occurred over the last few years, will affect the global economy.
China, the US, and Russia are the world's three top energy producers and the world's three top energy consumers, in that order. Russia is also the world's largest exporter of fossil fuels, while the US and China are the second and third biggest importers after Japan. Over the last 10 years, physical energy balances for these countries, so by this I mean just the difference between domestic production and consumption, these balances have shifted.
Globally, the US had the biggest increase in oil and gas production and, who would have thought, also the largest decline in oil and gas consumption. China had the biggest increase in coal production and in the consumption of every single fossil fuel. Russia had the second biggest increment in oil production.
Working out the net results of changes in physical production and consumption shows China's deficit for oil and gas worsening by almost exactly the same magnitude by which the US deficit improved. As a result, the Chinese primary energy deficit overtook that of the US for the first time ever last year. Russia's surplus improved for every fossil fuel over this period, so far allowing it to maintain its position as the world's largest holder of an energy surplus.
These shifts in physical energy balances do have macroeconomic implications. One of them is a global balance of payment effect. Global energy trade amounts to roughly 15% of all the global trading goods and services, and changes in national energy balances, therefore, typically have a sizeable effect on any countries balance of payments.
In the US, energy imports still make up, today, about half of the trade deficit; however, on the back off of diminishing oil and gas imports, this deficit is shrinking fast. China, on the other hand, sees increased import dependence eating into its trade surplus. As of today, energy imports eat away about half of China's overall trade surplus.
Despite rapid economic growth, energy imports as a share of GDP in China almost tripled from 2003 to 2013. Russia has a sizeable trade surplus due to its energy exports; however, if expressed as a share of GDP, the non-energy related deficit doubled over the last 10 years while energy exports have grown in line with GDP. If expressed as a share of GDP, therefore, Russia's overall trade surplus is falling very fast.
If one would have asked any economist over the last 10 years or so for potential sources of trouble to the global economy, global trade imbalances would have loomed large in the response. From today's point of view, it seems as if global energy balances, by eating into the US deficit as well as into the Chinese surplus, are becoming part of the solution.
Where does all of this leave us? I've done this for 9 years now, actually 10, so please allow me for a short personal conclusion, but it applies to this year's addition as well.
Energy goes directly or indirectly into any type of economic activity. It clearly matters, therefore, and the link, as we have seen, between the economy and energy is not a one way street, but few economists devote much time to it. By taking energy matters out of this wider context, this discussion suffers and often does not reflect the attention the topic actually deserves.
Second, every year, we encounter strange twists and turns in the data, and every year in the journey to find out what happened and why, it is rigorous interrogation of the data which delivers answers. This is another aspect where more work could benefit all us in the industry as well as those who need to understand the work we do.
And finally, there is an old adage which always creeps up in the end of every stats review -- markets matter, or more often, markets work. It comes with an addendum, however -- if you let them.
In global energy and energy politics, perhaps more than elsewhere in policymaking, we see both sides of this coin. This is not what the statistic review is about but it is what falls out of the data we collect every year so far.
Thank you very much and I look forward to a good discussion.
==============================
Questions and Answers
------------------------------
Rob Gross, - Chair of the BIE [1]
------------------------------
Okay so I'm going to chair the questions. We have some roving mics and please do wait for the mic before you ask your question, because other wise it won't be audible to those on the webcast.
We've got 35 minutes or so before we close, and we will cut between you guys and what I'm told will appear on the screen in front of me from Twitter and so on. So questions, please? The gentleman here?
------------------------------
Hugh Lee, Evico - Analyst [2]
------------------------------
It's said that only one--
------------------------------
Rob Gross, - Chair of the BIE [3]
------------------------------
Your affiliation, sorry?
------------------------------
Hugh Lee, Evico - Analyst [4]
------------------------------
Sorry, Hugh Lee from [Evico]. It's said that only one-fifth of fossil fuel reserves can be burnt safely without a succeeding the two-degree rise in temperatures that the governments have agreed on. Why, then, are fossil fuel companies continuing to explore for reserves?
------------------------------
Christof Ruhl, BP PLC - Group Chief Economist [5]
------------------------------
This is a little bit red area. Some people call it the new peak oil. But first let me say the last time I looked, it was the job of investors to decide whether they wanted to invest in something because they thought it was a valuable asset or whether they wouldn't.
Secondly -- it wasn't the job of a regulator. Secondly, I do think that as we have expressed in our long-term energy outlook, we are unlikely to reach this target of 450 parts per million, which is the emissions target which climate scientists connect to the 2% temperature increase, and that -- on that one, I would fully agree.
But thirdly, one should not simply reduce this to fossil fuel reserves, because fossil fuels are not equal to fossil fuels when it comes to carbon emissions. There is a big difference, for example, between coal and gas in power generation which is obviously the biggest block, and all you need to really appreciate this difference is two pieces of information which I think everybody has.
One is if you produce one kilowatt of electricity with natural gas instead of coal, you have about half the CO2 emissions than you get by producing it as coal. The second is about the dimensions of the system. About 30% coal, 24% gas, 2.2% renewables. That means that small shifts between fossil fuels, substitution among fossil fuels, will have larger impacts than a lot of change on the renewable side.
We did calculate that. This is not a forecast. This is based on last year's data, so take this picture. If we were today to change only 1% of global power generation and to switch 1% of global power generation from coal to gas, this would generate emission savings equivalent to increasing the share -- the amount of global -- the volume of global renewables we have by 11%.
Now a 1% switch from coal to gas and global power, that is the everyday margin of error. This is in, other words, imminently doable. An increase of renewables by 11% is taking a long time, very expensive, very difficult to do.
And so the indication which that implies is that if we have learned anything, we should let markets help us in reducing these carbon efficiencies, not regulation, in my view. And of course that would call, if you had a carbon price in some areas of the world, you'd be much likely to reap the low-hanging fruits which I have just sketched by having this fossil fuel substitution, and accordingly, you have to distinguish what kind of fossil reserves companies hold. It may well turn out that if you would imply a price mechanism as the world would finally get serious about this problem, that countries' commercial companies will have gas reserves better off than their share price indicates today. May well be true. So it's not that simple. Or it is very simple, but in a different way.
------------------------------
Rob Gross, - Chair of the BIE [6]
------------------------------
Okay very good. We had a question here. While we're getting the microphone over to the gentleman with the yellow shirt, we got questions popping up in front of us which I've been told to read out so they can be audible online.
I'm going to choose -- pick one here from Yanis [Paracus] in the UK. Some of the literature suggests that the rapid growth of unconventional oil in the US is unlikely to be replicated elsewhere in the world, as the US has fairly unique infrastructure and technological advantages. Does the review reflect a similar outlook? And if so, to what extent?
------------------------------
Christof Ruhl, BP PLC - Group Chief Economist [7]
------------------------------
Well it doesn't, but for a different reason. The review always concerns last year's data. That makes it more difficult than an outlook, but I'm happy to talk about this.
We do think that unconventional production will eventually spread to other countries and will continue to grow in the US, in our outlook, until about the 2020s, when it starts to moderately decline, but more than compensated for by growth elsewhere.
But there's a more important point behind that question. You could legitimately, it's a good question, ask why is it that of all the countries in the world we have seen this unconventional growth, oil sands and tight oil, especially in Canada and in the US, surely two countries nobody had on the radar five years ago.
And the intuitive answer to this question would be -- oh, must be because that's where the resources are. We all know there's oil sands in Canada and there's a lot of shale formations, rock formations in the US, and I think one of the points which falls out clearly of any analysis of the data is that this answer almost certainly would be wrong.
We know there is more heavy oil in Venezuela than in Canada, yet nothing, absolutely nothing, came out of Venezuela in response to 10 years of high and rising prices. Now our geologists tell us that there may be more shale gas in China than in the US. Nothing came out of China in response to 10 years of high and rising prices.
You could push the analogy. You know that oil doesn't respect political boundaries. There's a lot of production growth in the Gulf of Mexico on US side, nothing on the Mexican side, not for resource distribution reasons.
What happened there is, I think, a reflection of a competitive energy market. Everybody can invest in the US and Canada and everybody did, and it was this competition which was breeding new technologies just like in a textbook. Take the shale gas, so-called -- I don't like the term, but the revolution shale gas as an example.
In the 1990s you had high gas prices and a known resource. Shale gas was known all along. It was just not economic to produce.
And then you have seen a lot of, first, small- and medium-sized companies moving into that space, trying to connect the two. Many of them lost the shirt in their process. Some of them succeed and developed these technologies, horizontal drilling and hydrofracturing, combined them. And the big guys, the Exons and BPs of this world, to be honest, only came in later to acquire these technologies.
This is like innovation proceeds in an economic 101 textbook. You have high prices, you have competition, you have people winning something and then risking something and then developing these new technologies. And I would argue that the speed with which it was spread into other regions, because we know the resources are in China, in Asia, in the former Soviet Union, in Russia in particular, that, that speed will also depend on the amount to which these countries allow for trial and error and for competition in their energy sector.
Now it is true, what the question implies, that there's a lot of perfect conditions in place in the US. Your largest drilling fleet in the world, very importantly the right to trade subsurface rights to mineral exploration, financial markets develop enough to allow for hedging, and, and, and. But to me, these conditions in place are, themselves, the mirror image of having decades and decades of a competitive energy markets.
So if people take this list and then say -- okay, 0.17 is the one which made all the difference, I disagree. I think these individual points are all-important, but they are, themselves, the reflection of a broader policy issue and I think that in this respect, where innovation comes from, the basic news is that energy markets just are not different from any other market.
It takes a lot longer, because they are a lot bigger and because the new technologies are after applied at scale, but the reaction is similar to other things. In the market of jackets, you've have high prices, takes three months until you get a supply response; for cars, maybe three years. In energy, 10 years, but for good reasons. The mechanics are not that different.
------------------------------
Rob Gross, - Chair of the BIE [8]
------------------------------
Okay. So we had the gentleman here.
------------------------------
Unidentified Audience Member, - Analyst [9]
------------------------------
Actually, interestingly, you've covered -- that internet question covers mine. I would just ask further, there was a lot of coverage of Argentina, the Vaca Muerta shale and all of that. Is that showing up in the statistics yet, or is this another energy supply which is being delayed by poor market environments?
------------------------------
Christof Ruhl, BP PLC - Group Chief Economist [10]
------------------------------
Yes and yes. It shows up in the statistics and it is yet another of these cases.
Let me step back a little bit, because Argentina is a great illustration of some other developments, globally, which are going on. When you think, it must be a year ago or so, when there was the first -- when it sunk into the public consciousness that quantitative easing, this very easy money policy in the US, eventually stopped and interest rates in the US would rise. As a reaction, we saw a lot of volatility in some emerging markets.
And what these emerging markets all had in common was that they have a trend deficit, so they had a domestic deficit and a trade deficit. In other words, they were reliant on foreign capital in flows. And therefore these - flows threatened if capital would be scarce and move to the US -- background.
When you look at these countries very closely, the overwhelming majority of them, I mean almost all of them, do have a twin deficit based on energy policy. What typically happens is they give themselves domestic subsidy, so consumption gets too high, imports are too high and they kept producer prices so investment falls off the cliff and domestic production is too low, and Argentina is a classic case for that. Argentina turned from an energy exporter, despite all its resources, to an energy importer, which imports too much energy because of subsidized prices and which doesn't produce enough energy because of restrictions on investment and on production activities.
There are other huge countries in this category. India, which we discussed during the (inaudible) is another example -- a cap on gas prices, LNG gets expensive, so they stop importing -- their domestic gas production fall, they stop importing LNG and use more coal, both imported and from home -- trade deficit there as well.
Egypt is in this category. Indonesia has slipped into this category. Alone in oil, 15% to 20% of global oil consumption is still subsidized, and yes, it does show up in the data, and yes, it makes these countries, as long as they are consumer countries, importing countries, much more vulnerable than they would be with a more competitive energy policy.
------------------------------
Rob Gross, - Chair of the BIE [11]
------------------------------
Okay. Thank you. I believe we have a question here?
------------------------------
Mansoor Ahmad, Center for International Studies and Diplomacy - Analyst [12]
------------------------------
Hi there. My name is Mansoor Ahmad from the Center for International Studies and Diplomacy. Christof, thanks for that insight.
The IEA released an energy investment outlook a couple of weeks ago. If we take your statistical review today, as well as the BP report and energy outlook a few months ago, how conservative do you think the IEA's headline figure of $42 million -- or $42 trillion of energy investment required it actually is, given your outlook today?
------------------------------
Christof Ruhl, BP PLC - Group Chief Economist [13]
------------------------------
So let me give you the safe answer first. We don't track individual investment requirements, at least not in this report. But let me give you the honest answer as well.
Personally, I don't think much of people saying we need $40 trillion by 2057 and a half, otherwise we are in trouble. These numbers are meaningless. They're too big and they are asking the wrong question.
As long as there's a functioning price mechanism and as long as people need energy and it's profitable to produce, there's no capital constraint. The capital will be around; the investments will be forthcoming.
So the only question can be -- is there in the short-term, are their investment shortfalls which would in turn find themselves reflected in higher prices down the road, and the IEA always points to the Middle East in this respect.
I don't really see that. There are individual countries, Venezuela for example, and then of course all these countries with political or social troubles where you see investment shortfalls. There are other countries with where you'll see investment going up, like now, North America.
The bigger issue here is that what we really have in oil prices is to a large extent still producer markets, where access for investment is limited and becomes subject to political considerations. That has been the case for a long time.
But I think despite oil reservations about us, one has to also hand it to Saudi Arabia, for example, that they have always done exactly what they told. There was a lot of doubt about Saudi capacity, actually, a few years ago. In the need to ramp up production 2012, we have seen they could deliver what they have promised and that is a long history in sort of doing exactly what they've said.
That at the same time they like to see higher prices more than lower prices and therefore restrict production and access to investment is a different side of the story. But overall, these kind of X trillion here or there, that's too imprecise and it's not the right question to ask, because the real question is, do you create opportunities to invest? The money will come. It's not a question of if there's enough money in the world or not.
------------------------------
Rob Gross, - Chair of the BIE [14]
------------------------------
Okay, I'm going to take a couple from Twitter or from online. So the first is from [Abby Bacar Babori] from Africa who asks what the long term impacts of increasing domestic energy consumption in producing countries is on global supplies and prices.
------------------------------
Christof Ruhl, BP PLC - Group Chief Economist [15]
------------------------------
That is a serious issue. It connects to the last question, in a way.
I've pointed out this amazing coincidence currently between supply disruptions on historically a very large scale and the balancing increase in the US of tight oil production. And because it's a coincidental balance, at some point, of course, it will tilt out.
As a side, for people who also do forecasts like me, this points at a serious dilemma, because normally when we do forecasts we don't try to forecast cycles or short-term events or things like wars or -- for example, we do our long term outlook, we don't assume that when the recession happened in 2009 that this will change the long-term outlook, because we thought it's going to be a wash. It's going to be a few lousy years and then global growth will go back to normal. Over 20 years, it doesn't make a difference.
So in this case, of these disruptions which we are seeing, these a similar questions. We have to ask ourselves -- it happened for the last three years, much bigger than in the time before. Is this something which has changed the world and we therefore need to take it into account? Or is it just something which is here for three years and then the world returns to, as we have seen, before 2011?
In the case of the disruptions, we decided there's probably something which needs to be taken seriously on two grounds, one in the past and one in the future. The reason from the past is that historically, supply disruptions always took an awful long time to come back to pre-disruption production levels.
So when you do the numbers, for example, following the really big historic supply disruptions -- the Libyan Revolution in the 1970s, the Iranian Revolution in the 1970s, the collapse of the Soviet union in 1980s, the Iraqi-Kuwait war in early 1991.
In none of those cases was oil production back to pre-disruption levels 10 years later. None of them. And some of them it has never came back.
That leads you to caution when you think about present day disruptions. Even if sanctions against Iran were to be lifted tomorrow and Libya would return to normal, there's damage to production capacity which is lost as production goes down. There's not only this technical issue, the fact is that it's always messy situations where our politics, economics and technology all go wrong and it takes time to repair.
Now I'll come to the question, in a long winded way, I admit. The other reason why we think that this is a more perennial problem now is in the future, when you look with the eyes of a very simple economist and when you believe, or if you believe, that some of the social and political and, in some instances, military upheaval which we have seen in North Africa and in the Middle East has in the bottom something to do with the economic well being of people in these countries, then there is very little reason for optimism when you look at big producing countries in the future.
What do I mean by this? Fairly simple. If you take OPEC as an aggregate and as an example for big oil producers, what do you see?
Population growth twice as high as in the other non-OECD economies. Per capita incomes, believe it or not, in OPEC as a block, unchanged since the 1970s, although they went up 170% in the rest of the non-OECD countries. And per capita energy consumption on the back of large subsidies still common in producer countries, 75% higher than in the rest of the non-OECD economies.
Why does it matter? Because it means that of course these producers will continue to export oil and gas, but there is no way that over the long term, the next 20, 30 years, with these kind of figures, they will be able to increase exports as much as they have increased over the last 30 years. And that means less revenues available to pacify the population, to modify the economies, and so on and so forth. So from a simple economic perspective, you would think that the economic conditions are not necessarily pointing in the directions of more peace and prosperity widely shared.
------------------------------
Rob Gross, - Chair of the BIE [16]
------------------------------
I had a couple of hands coming up. I had a question here.
------------------------------
David Holmes, Warwick Business Co - Analyst [17]
------------------------------
David Holmes of Warwick Business [Co]. Can I continue that theme of disruptions and ask you what the data is telling us and what do you think might be ahead in terms of the use of oil in transport markets? So in other words, what you feel are the effects of biofuels already noticeable and some views about electric vehicles in the future as two forces that might disrupt the liquid fuel markets.
------------------------------
Christof Ruhl, BP PLC - Group Chief Economist [18]
------------------------------
Very little impact. Very marginal. Okay, let me make another caveat.
One, I said we can't forecast short-term disruptions or wars or anything like that. That also holds, we cannot forecast disruptive new technologies. Nobody knows when the next steam engine or computer technology or, for that matter, the next good battery will evolve from somewhere.
And given a lot of normal learning curves and deficiency improvements, what we see is that it's extremely unlikely that pure electric vehicles will make a significant in-road, because of the cost, the weight of the battery and the restriction in the mileage you can drive with one load of battery fuels.
What we think is likely to happen, when that comes out of asking the car industrial all around, is that faced with very stiff requirements to increase fuel efficiency, they will switch more and more to hybridization. So that means you have hybrid cars with a generator or battery in between but still with petroleum, or natural gas perhaps, as their primary input.
And it seems that we have this picture for the immediate -- for the next 20 years or so that the good oil internal combustion engine, with this addition of hybrid, can generate more efficiency improvements than anything else. On biofuels, we have the potential conflict between food and fuel production and we have actually had to downcast our forecast year after year as that became more apparent.
The bigger wild card to that picture for oil is natural gas. It is conceivable that LNG and trucking and shipping and every transport makes much bigger in-roads than we today think, and it's also of course conceivable to some extent for CNG, which is quite popular in some Asian developing markets already. But by and large, we have this picture of -- or we know, actually, because it's not a forecast, it's already written in regulation with CAFE standards in the US and environmental standards in Europe of rapid improvements in fuel vehicle economy.
We also have very simple mechanics. All since 2005 and for the foreseeable future, oil for transport demand will go down in the OECD. Why? Because you have stagnant or falling populations and a high saturation rate with cars. And the efficiency improvements of new cars in the future are continuing to out pace the number of new cars.
In the non-OECD, it's the other way around. You have, if everything develops as normal, an increasing population, more and more demand for new vehicles and the number of cars growing faster than efficiency improvements can compensate. But within that picture, without assuming that non-OECD growth is somehow less efficient, which it won't be, is going to be, from what we know today, hybridization and therefore transport fuel demand still based on petroleum or possibly in the future natural gas, which is driving this development, not biofuels and not electricity. Not full electricity.
------------------------------
Rob Gross, - Chair of the BIE [19]
------------------------------
So we have a gentleman here and I'm going to ask you another one from our online audience. We have [Nevrich Garlay], who's in the UK, who says markets may work but do carbon markets work? The evidence, for example, from the emissions trading scheme in Europe would suggest not.
And are other tools proving better drivers of the transition to a low-carbon economy? And I'll throw in a quick supplemental of my own, which is that your graph on the EU de-carbonization suggests that perhaps feed-in tariffs were a particularly good, judged on de-carbonization, perhaps, driver of that transition.
------------------------------
Christof Ruhl, BP PLC - Group Chief Economist [20]
------------------------------
It depends. First of all, I agree that the emission reductions, which everybody wants and which everybody was targeting, still have not materialized. The only region in the world where this has done, has worked to some extent, was the European Union and that has been too small to make a difference.
But I would argue that this has to do with employing too much regulation and not enough markets, because the fact of the matter is that the only carbon market so far of significance in Europe which we have seen is largely not operating as it should, because those prices are too low, because there are too many permits being issued, exemptions being granted, economic developments all over the world being finest with it. It is just not doing what it is supposed to do for these low prices.
And we have seen some of the reasons why it doesn't work. In 2012, my favorite example, because the European Union never thought, when they had the carbon market, that this was good enough. They always -- in peril, they had to go and to tighten regulations and had to improve minimum requirements for renewables in major European Union countries and minimum requirements for efficiency improvements, all of which you think is a good thing -- carbon markets and requirements for efficiency and requirements for renewables combined.
Then what happened was that achieving those requirements for fuel -- for efficiency and for renewable quotas of course lowers the demand for carbon and because these policy initiatives were not connected, they had contributed to these very low carbon prices. And then what happened was in the US, completely unrelated, shale gas takes off, becomes so cheap that it massively crowds out coal from power generation. The coal lies around, becomes so cheap that it gets exported to Europe and is cheaper enough to compete with European gas, and so Europe ends up replacing gas with coal in power generating, eliminating all the advances made with these regulations which drove up required renewables.
That is the peril of regulations. That is the law of unintended consequences hitting you hard all the time. Do you know where SUV's come from, the sport utility vehicles, these large cars? Direct result of efficiency regulation.
There was, after the oil price drop regulation in the US, imposing fuel efficiency standards for cars. It was all nice and fine until somebody found out that SUVs are classified as trucks, so it didn't apply to them. Comes to the 1980s, the age of very cheap oil prices, and the SUVs spread all over the country.
There are so many examples of regulation getting unwanted consequences and, of course, so many examples of markets being sort of the more intelligent way of doing it, that I would think even the EU would have been better off today with more markets and less subsidies and less regulations.
And feed-in tariffs, I myself think, they aren't particularly fair, socially, and they are limited. Because what happens with the feed-in tariff is that if you happen to have a house and garden and you can put a big solar -- I'm German, I know what I'm talking about -- (laughter) you put a big solar panel on it, you get huge subsidies.
But everybody, including those guys sitting in dingy apartments and having not very much money, need to pay the higher feed-in tariffs. So it's a very redistributed mechanism and I don't think that you can push that so far to create the amount of renewables really necessary.
------------------------------
Rob Gross, - Chair of the BIE [21]
------------------------------
Okay, we had a question somewhere, one of these two guys?
------------------------------
Unidentified Audience Member, - Analyst [22]
------------------------------
Yes. Christof, do you have a feeling what the average unit technical cost is for US shale oil? And is that technical cost dropping as technology improves, or going up because they are going after the poorer rocks? And how low does the oil price have to drop before that resource base is wiped out as quickly as it appeared?
------------------------------
Christof Ruhl, BP PLC - Group Chief Economist [23]
------------------------------
That's a good question. What we have seen so far is, in the bigger picture, that the US is now reaping the benefits of increased efficiency improvement. So it seems like always with these waves of innovation you have the cloud of entrepreneurs inventing something new.
Then it becomes common knowledge and as it becomes adapted, efficiency improves. We have seen this last year and the year before how oil production should show, much more than the number of new rigs on new wells would indicate, pure efficiency improvement as people learn how to do it better, optimize the distance between wells and all of that stuff.
Then you ask about the cost. That depends whom you ask. General assumptions for oil in the Bakken are somewhere between $60 and $80 per barrel and for Canadian heavy is a bit more. It's about around $80, plus or minus, per barrel.
Now what is important is what you mentioned, the possibility of a supply response. When oil prices hit very low -- a very low point in the 1980s, what you had was increasing supplies, mostly from Alaska and from the North Sea, and all companies running these new supplies facing an almost binary choice.
Price has dripped. Do we shut it off, or we keep going and eat the cost and blow our costs in order to adjust to these lower prices? They all, forced by competition, kept going and tried to reduce their oil costs.
These tight oil developments are different because of the very high well intensity. If prices were to fall there, you would see a reply response much earlier.
The way this works, we have seen in shale gas when prices reached a low point in 2012, and then immediately there was a supply response with rigs moving over to oil and away from shale gas. And so the supply there is much more scalable. It's much less of a binary choice than in conventional oil, and therefore this is a relevant question.
If supply disruptions were to lose out and the world would stabilize and oil prices came under pressure, then there's first, the question how would OPEC react, and second the question, at which prices would we see a supply response. This in turn is impossible to tell because we don't know how the today $60 to $80 would look like in an environment of lower prices.
This is a very important point about oil market, which I don't find is sufficiently appreciated. Many people still think that the price of oil somehow reflects its marginal cost, like what we assume for anything else -- car is the cost of the next part to build.
In oil markets, the marginal barrel is somewhere in the desert of Saudi Arabia in excess of, it costs maybe $3.50. It's not the marginal cost that determines the oil price.
It's the other way around. What we see empirically is that historically oil and oil markets costs seem to follow prices. You must have all read these stories of a truck driver in North Dakota and a starting somewhere $100,000-X or so.
In a lower price environment, that would come down, and today's costs of producing tight oil would also come down. But how exactly this plays itself out and where the cutoff point is, we do not know.
------------------------------
Rob Gross, - Chair of the BIE [24]
------------------------------
Very interesting. Do we have anymore? Can I just get a sense of whose waiting to come in, in the room? I have a couple on the screen. Okay, so I've got a chap at the front? Yes, please.
------------------------------
Unidentified Audience Member, - Analyst [25]
------------------------------
Thanks, Christof. (Inaudible) You just raised sort of a topic there. One of the points I raised with OPEC last week is they are having to produce more and more for domestic consumption, and the question I asked them was, is the cost of the subsidies they are putting into this, the loss of revenue from subsidies, is that actually going into the production cost that they are putting forward?
------------------------------
Christof Ruhl, BP PLC - Group Chief Economist [26]
------------------------------
Well I've answered that already. The consumption per capita is very high and this is--
------------------------------
Unidentified Audience Member, - Analyst [27]
------------------------------
It's increasing all the time. Yes.
------------------------------
Christof Ruhl, BP PLC - Group Chief Economist [28]
------------------------------
But it's something which has become recognized and it is something which is -- they started to address. We have seen last year, first success out of Saudi Arabia, replacing more of its power generations with natural gas.
One of the big problems there is in the hot summer months, power demand goes up because it costs very little and in that instance, between 700,000 and 1 million barrels of crude in a hot summer day per day are burned for power generation in Saudi Arabia. They try to reduce this by finding one conventional natural gas and I would expect over time that need to change things to increase and also reaction in these countries.
------------------------------
Unidentified Audience Member, - Analyst [29]
------------------------------
I should have said I meant the subsidies that they are giving. They are giving away free oil to their people and of course the population is getting bigger, which is having the impact.
------------------------------
Christof Ruhl, BP PLC - Group Chief Economist [30]
------------------------------
Subsidies in many of these producing countries are still massive and very little has changed last year.
------------------------------
Rob Gross, - Chair of the BIE [31]
------------------------------
Okay, so there's a couple of questions left on the screen. The first is from Wilson [Ariacho], I guess. That would be in South America. Perhaps pushing back against this food-versus-fuel observation that you made earlier, asking about the potential for countries like Brazil to be potential producers to supplier, domestic and to global biofuels.
------------------------------
Christof Ruhl, BP PLC - Group Chief Economist [32]
------------------------------
Yes, we do have some instances where renewables are competitive. There's wind generation in some places in the US, I think also in Europe, and there is biofuels for example, in Brazil. Different from the US, where they stay subsidized. The subsidization phenomenon is not only in the Middle East.
But in Brazil, biofuels can compete and as a result have an increasing market share and what we have seen last year was quite a tick-up in ethanol production based on a very good sugar harvest. As long as that continues, there's no reason why it shouldn't work.
The trouble is that globally, it's not a serious alternative, because Brazil has very specific circumstances, both in terms of its agricultural structure and its population distribution, and this is something you can not easily replicate elsewhere. You see it in the US where it has deteriorated into subsidizing certain agricultural activities at the expense of the taxpayer.
------------------------------
Rob Gross, - Chair of the BIE [33]
------------------------------
Yes, okay. Now do we have anymore questions from the floor? We have, we now have two. Just wait for the microphone.
------------------------------
Unidentified Audience Member, - Analyst [34]
------------------------------
(Inaudible) European Bank for Reconstruction Development. I presume, Christof, you were in Moscow yesterday, but in any case, would you like to comment on the recent developments in the production abilities of Russian oil and (inaudible) gas?
------------------------------
Christof Ruhl, BP PLC - Group Chief Economist [35]
------------------------------
Yes, we have seen Russia again, as I said, reaching a post-Soviet high in oil production, oil production increasing by 150,000 barrels per day. What is interesting there is that the lions share of this increase comes from a large number of small companies, and we have seen in natural gas this great flexibility of their ability of driving up and down gas production, basically to adjust to European demands and also they are just driven by the increasing competitiveness of these independent producers, whose share in Russian consumption goes up so much faster than in Russian production, because of the ability to compete on price with Gazprom.
Stepping back to a bigger picture, why does this really matter? It is, again, when you look forward, it matters when you think about what happens to unconventional resources in a place like Russia.
There's (inaudible). There are many unconventional oil resources in particular, and different from shale gas, no one will tell the Russian government that this won't work or won't happen, as was the case for natural gas, remember? When the gas industry for years told them that this is just a fad and it will pass and will not come to anything.
The reason is that the Soviet Union in the 1970s was trying to produce these unconventionals and couldn't, failed. They nuked it, talking about heavy handed fracking, and it didn't work. And they were not the only ones.
This is also something which happened in the US in the 1960s, when people thought about peaceful applications of nuclear power. It didn't work, but there's a whole group still of sort of Soviet Era geologists and petroleum engineers who are always there and with interest watched developments from the US, and sooner or later, in this country, which loves to discuss strategically, a decision will have to be made.
What are we going to do? Develop further projects only going East into very hostile climate with technologies which don't even exist today? Or do we allow for a little bit more trial and error?
Do we reform the tax system? Do we allow for some competition in trying to replicate some of this non-conventional resource growth which we see elsewhere? And I think that will play a role and BP has just, as you know, probably, concluded an arrangement with Rosneft on exactly tackling one of these unconventional plays. Exactly along those lines of thought.
------------------------------
Rob Gross, - Chair of the BIE [36]
------------------------------
Okay, now we have almost -- I think we've got about 30 seconds left. If this can be a very, very quick question and I think we can just about squeeze it in, and apologies to all of the people that have been tweeting and writing questions we haven't been able to cover everything. I feel a bit like David Dimblebee. The moderator is telling me that we must wind up, so one quick final.
------------------------------
Modorn Trish, MFC - Analyst [37]
------------------------------
It's [Modorn Trish] from MFC. We've heard a lot about emissions, under reduction of emissions, Christof, but does you or do you know anybody else who actually looks at the natural seepage for example, the methane gas escaping into the atmosphere in Siberia, and how this affects the whole climate change situation?
------------------------------
Christof Ruhl, BP PLC - Group Chief Economist [38]
------------------------------
A lot of people are looking at it, or trying to look at it, so I don't think this lacks for observation. There was also the discussion about these emissions in the extraction of shale gas and I think the majority of reports come out to conclude that if you're still -- if you compare new gas-fired power plants with coal plants, even if you incorporate what one study has recorded in terms of methane leakages, you're still 50% better off using natural gas, shale gas included.
------------------------------
Rob Gross, - Chair of the BIE [39]
------------------------------
Okay, excellent round of questions. Really, really interesting conversation following on from an excellent presentation. It falls to me to thank Christof in the usual fashion. Thank you very much.
------------------------------
Christof Ruhl, BP PLC - Group Chief Economist [40]
------------------------------
Thank you.
------------------------------
Definitions
------------------------------
PRELIMINARY TRANSCRIPT: "Preliminary Transcript" indicates that the
Transcript has been published in near real-time by an experienced
professional transcriber. While the Preliminary Transcript is highly
accurate, it has not been edited to ensure the entire transcription
represents a verbatim report of the call.
EDITED TRANSCRIPT: "Edited Transcript" indicates that a team of professional
editors have listened to the event a second time to confirm that the
content of the call has been transcribed accurately and in full.
------------------------------
Disclaimer
------------------------------
Thomson Reuters reserves the right to make changes to documents, content, or other
information on this web site without obligation to notify any person of
such changes.
In the conference calls upon which Event Transcripts are based, companies
may make projections or other forward-looking statements regarding a variety
of items. Such forward-looking statements are based upon current
expectations and involve risks and uncertainties. Actual results may differ
materially from those stated in any forward-looking statement based on a
number of important factors and risks, which are more specifically
identified in the companies' most recent SEC filings. Although the companies
may indicate and believe that the assumptions underlying the forward-looking
statements are reasonable, any of the assumptions could prove inaccurate or
incorrect and, therefore, there can be no assurance that the results
contemplated in the forward-looking statements will be realized.
THE INFORMATION CONTAINED IN EVENT TRANSCRIPTS IS A TEXTUAL REPRESENTATION
OF THE APPLICABLE COMPANY'S CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO
PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS,
OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE CONFERENCE CALLS.
IN NO WAY DOES THOMSON REUTERS OR THE APPLICABLE COMPANY ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER
DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN
ANY EVENT TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S
CONFERENCE CALL ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE
MAKING ANY INVESTMENT OR OTHER DECISIONS.
------------------------------
Copyright 2018 Thomson Reuters. All Rights Reserved.
------------------------------