BP PLC Statistical Review of World Energy Call

Jun 08, 2016 AM EDT
BP PLC Statistical Review of World Energy Call
Jun 08, 2016 / 01:30PM GMT 

Corporate Participants
   *  Bob Dudley
      BP plc - Group Chief Executive
   *  Spencer Dale
      BP plc - Group Chief Economist

Conference Call Participants
   *  Alastair Syme
      Citigroup - Analyst
   *  David Elmes
      Warwick Business School - Analyst
   *  Roger Bentley
      Reading University - Analyst
   *  Simon Henderson
      The Washington Institute for Near East Policy - Analyst
   *  James Skinner
      The New Economic Foundation - Analyst
   *  Ben Combes
      Llewelyn Consulting and LSE Grantham - Analyst
   *  Hugh Lee
      Abaco - Analyst
   *  LeeAnn Salter
      Wall Street Journal - Analyst
   *  Nick Ruby
      Noharter - Analyst
   *  Ian Bond
      Argus - Analyst
   *  Morten Frisch
      Morten Frisch Consulting - Analyst

 Bob Dudley,  BP plc - Group Chief Executive   [1]
 Hello, everyone. We would like to keep talking but we have, I'm told, at least 2,800 people on the line on the webcast, so let's stick to time. A big hello to everyone and welcome to the launch of the 65th edition of the Statistical Review. Thank you to everyone joining us here in St. James's Square here in London, and to all of you around the world that are live on the webcast. That is definitely something we didn't do back in 1952, when we first launched the first edition, a live connection on launch day to so many people now across the globe.

 I hope you've all been able to see the archive images that were up there. We've been scrolling on the screens that go back a long time. Actually some things don't look so different. And so many things are still around today and keep getting better and better. And I think I can definitely include the Statistical Review in that category.

 It has stood the test of time and you get a lot more information today than they used to get in those early years. And we tried to make it a lot more user friendly in terms of a tool. It's more like a workbook, fact sheets, and a range of online tools -- unthinkable when we started this. But deep down, it still does essentially the same job that we set out to do in 1952, and that is to provide objective data to inform discussion, debate, and decision-making across our industry and beyond.

 We may already be halfway through 2016 -- it's quite hard to believe -- and it's been quite an eventful six months in the energy markets so far, to say the least. But we also need the historical context to help gauge where we are heading, and that's what the statistical review comes into its own.

 Spencer will take you through the data very soon, but I have three important things to do first. And the first of these is a big thank-you to the very extensive team that is involved in gathering and compiling all of this data each year. Spencer and the economics team here in BP do a great job -- a really great job -- but they also depend so much on colleagues across BP, the team at Heriot-Watt University up in Scotland, and on the cooperation of people in governments and agencies around the world who share their official data with us. Thank you, everyone, for all of you for doing that, and thank you for your trust with that data.

 The second thing -- I always find this interesting -- is to summarize what we see as the key trends that have emerged or developed over the course of the previous year, and 2015 has had some significant long-term trends coming to the fore in global supply and demand. On the energy demand side, what we're seeing is a gradual deceleration in the growth of global energy consumption. Just to be clear, consumption is still going up year on year, and we expect that to continue for some decades. But growth is not going to be at the same extraordinary pace generated by globalization over the past few decades, and by industrialization in China, in particular.

 Last year, demand growth was just 1%, about the same as in 2014, and that's much lower than the average for the past decade. Now, that partly reflects the continuing weakness in the global economy, driven by China, where energy consumption grew at its slowest rate now in almost 20 years. Even so, last year, China still continued as the world's largest growth market for energy, which it has been for 15 years in a row now.

 Now turning to the energy supply side, the long-term trend coming to the fore here has been how technological advances are fostering growth in new and varied types of energy supply. We're seeing that very clearly in the remarkable productivity gains made by shale companies, and also in the rapid gains made in renewables, particularly wind and solar. These advances meant that natural gas, oil, and renewables all recorded solid growth in 2015, with their gains made at the expense of coal. In fact, last year was the largest fall on record for coal, taking its share of the primary energy mix to its lowest level now for 10 years.

 So, we have two contrasting trends of slower demand growth and solid supply growth, and we are all experiencing the effects these are having on energy prices, which have taken them down sharply. Natural gas, oil, and coal prices all fell sharply last year, and that is feeding through into adjustments in the market, as you'd expect. And that, actually, is a good sign for future stability.

 Now, there's one further positive sign emerging for the future, and that is on carbon emissions. Last year saw a flattening of carbon emissions from energy consumption. They grew only by 0.1%, and that was the lowest growth in emissions in a quarter of a century, other than immediately right after the financial crisis. Now that's come about from a combination of slowing demand growth and a shift away from coal towards natural gas and renewables in the energy mix. And I think this is a very welcome development. But it's only a very small step in the right direction, given the scale of the challenge.

 We have a long way to go in improving energy efficiency and shifting the fuel mix towards lower carbon sources, and we're committed to playing our part in BP. We are very focused on these issues as we continue to develop and adapt our own business, and our business model, and make it resilient for the future. We have 65 years' worth of data, solid data, from the statistical review to guide our decisions as what we do.

 So what does this latest edition tell us in BP specifically? I think one big message is that today's world competitiveness matters more than ever on all fronts. We supply abundant energy -- with the supply of abundant energy, energy demand growth sluggish, and energy prices well below those of a few years ago, the success stories in our industry will be the companies that can produce and provide energy with the very highest standards of safety, reliability, and efficiency, and that should make it affordable.

 For us, safety remains priority number one, but after that we're putting value very much in front of just volume. We remain part of the US production boom through our increasingly competitive operations in the lower 48 of the US and our large Gulf of Mexico operations. And we are increasing the part we play in meeting the continued demand growth in China, in India, and other developing markets.

 And all the time we are aligning the business with the world's evolution towards a lower carbon future, which we do through our ratio of natural gas to oil in the Upstream, which is increasing. This last year was the first year BP produced more gas than it did of oil. We're also doing it through our major wind and biofuels businesses and our range of advanced fuels, lubricants, and petrochemical processing facilities in the Downstream.

 Which brings me to my third and final job, and that is to introduce our Chief Economist, Spencer Dale. Thank you again, Spencer, for the great job you and your team do to put this review together. So, let me hand it over to you. Take us through the latest data and detail.

 Spencer Dale,  BP plc - Group Chief Economist   [2]
 Thank you, Bob. And thank you all for sparing the time to come to the launch of this year's BP Statistical Review of World Energy, both all of you here today in London and all of those around the world joining us via the web. I think of upwards of 3,000 people are online at the moment. So, thank you all, and you're all very welcome.

 As Bob said, and as you can see by this big 65 behind me, we are celebrating an anniversary today, this in the sense that this is the 65th edition of the BP stats review. And I think it's fair to say it started from fairly humble origins. This is a copy of the very first one back then. It was produced by the somewhat ominous-sounding Central Planning Department of the Anglo-Iranian Oil Company, and it comprised, literally, of six typewritten sheets, with this rather cold handwritten draft graph at the back. It only covered the oil market, and there was a very clear notice to staff in the first few episodes -- the first few editions, which was, this information is strictly confidential and should not be shared with anybody outside the Company.

 Lots has changed since then. I'm pleased to say only a few years later we started to make it available -- more generally available. In 1981, the Review of World Oil was expanded to become the Statistical Review of World Energy. And in the early 1990s, even the back data started to be made available on these new-fangled discs, albeit at a price.

 Reading through the archives, one thing which hasn't changed at all over this period of time is the care and dedication that the teams responsible for putting the review together have shown. That was true for the very first team that was tasked with producing an estimate of world oil production in a world almost devoid of official statistics. And it was equally true of the economics team this year who have been burning the midnight oil, and indeed the weekend oil, over the last couple of months to put the review together.

 The value of the Review is only as good as the quality of that team's work. So thank you all very much to the economics team. Most of you are here now. Also to the team from Heriot-Watt University, which Bob mentioned, Mark Schaffer and Erkal Ersoy, who yet again produced -- provided huge help and support in putting this together. You know more than anybody else this is very much a team effort, so thank you very much -- much appreciated.

 After so many years, I'd like to think that the annual launch of the BP stats review has established itself as one of the fixtures of the great British summer. (laughter) Now, I accept it doesn't quite have the glamour of the Chelsea Flower Show, or perhaps the tension of Wimbledon tennis, but it does provide an opportunity to look back at the past year to understand better the swings and developments in energy markets that we've just lived through.

 But as well as looking back, a new Review also provides an opportunity to look forward. And we are at a point in time where it's perhaps even more interesting than usual to look ahead to future energy trends. In particular, it seems increasingly clear that global energy markets are in a state of flux. Both energy demand and supplies are changing in profound ways. This year's review provides an update on those trends and an insight into how individual markets and fuels are adjusting.

 On the demand side, it seems clear that the strong growth in energy consumption associated with the rapid industrialization of China and its integration into the global economy is waning. The days of double-digit Chinese growth, led by energy-hungry industrial production, are behind us. This transition in energy demand is reinforced by global efforts to improve energy efficiency and reduce energy intensity, efforts that will need to be redoubled if we are to have any hope of achieving the goals set out at Paris.

 If energy demand is in the process of transition, global supply is surfing a technological wave. The past few years has been characterized by rapid technological and productivity gains, increasing the abundance of global energy supplies. This is truly an age of plenty. Within fossil fuels, the poster child of these advances, of course, the US shale revolution. BP's technology outlook, published last year, estimated that the shale revolution has increased technically recoverable oil and gas resources by upwards of 15%. And data from last year suggests that productivity gains in the lower 48 continued apace.

 The technology advances within non-fossil fuels are arguably even more striking, particularly those within renewable energy, led by solar and wind power. Sharp cost reductions have gone hand in hand with rapid growth in renewable energy. Solar-power production has increased more than sixtyfold in the space of 10 years, doubling capacity every 20 months.

 The agreements reached at the COP 21 meetings in Paris are likely to lead to further policies aimed at shifting the fuel mix towards cleaner, lower-carbon fuels, with renewable energy -- along with natural gas -- the main beneficiary. These global trends of transitioning energy demand and abundant supply, which I'm going to keep coming back to over the next half an hour or so, came together in 2015, dominating energy markets. This year's Review provides a ringside seat for observing their effects and gauging their possible implications.

 So, before jumping into the detail of individual markets and fuels, it's useful to get a sense of the overall big picture. The gradual transition towards slower growth in energy demand was again last year compounded by cyclical weakness. Global economic growth remained lackluster, with much of this weakness concentrated in the more energy-intensive industrial sectors.

 The combination of the gradual transition underway in energy demand, compounded by cyclical weakness, meant global energy demand, shown here in the purple line on the slide, grew by just 1% in 2015. That's similar to the growth rate seen last year but almost half the average rate over the past 10 years. The sluggish growth in energy demand meant that energy intensity -- the average amount of energy needed to produce each unit of a GDP, shown here in the green bars -- declined by around 2%. And you can see that decline is broadly similar to the rate of decline seen for much of the past 10 years, with the exception of the period around the financial crisis. However, it's striking that in a year when prices fell so sharply, energy intensity still declined as much as it did.

 This weakness in energy demand was concentrated within developing economies, particularly China, where growth in energy consumption slowed to just 1.5%, its weakest rate of growth since the late 1990s prior to the period of rapid industrialization. And you can see in this chart here, this is where the action is in terms of what's different to the past as to what's going on in China. Even so, China remained the world's largest growth market for energy.

 The story in terms of individual fuels is one of haves and have-nots. Despite the weakness in energy demand, 2015, which you can see in this bar to the right here, saw solid growth in oil, buoyed by the sharp fall in oil prices, with its share in primary energy increasing for the first time since 1999; in natural gas, as it bounced back from the weather-induced weakness of 2014; and, as I just highlighted, in renewable energy, spurred by falling costs and improving technology. The main casualty was coal, shown here in the gray bar, which saw its largest decline on record, with its share in primary energy falling to its lowest level for a decade.

 Despite these differences across the fuels, it's possible to identify some common themes as to how these twin forces of slower demand growth and abundant supply, which I mentioned at the beginning, played out across energy markets last year. Most obviously, and somewhat predictably, is that energy prices fell sharply in response to the imbalance between demand and supply. Prices of oil, natural gas, and coal were all sharply lower.

 The extent of the price falls partly reflects that, unlike sometimes in the past, key suppliers didn't make offsetting adjustments to help stabilize prices. That's true of OPEC's response to rapid gains in US tight oil. It also appears to be the case for Russian gas exporters' response to increased competition from liquefied natural gas. The important point here is that ceding market share in order to support prices is less attractive when the underlying cause of the imbalance is expected to persist rather than be relatively short lived.

 The other common feature is that in energy markets it's become increasingly clear that prices work. There are clear signs that energy markets responded to the signal provided by lower prices. Demand in some cases was boosted, supplies in the form of current activity or future investment was severely curtailed, the fuel mix adjusted. There is still further to go, and in some markets, notably oil, the adjustment process was offset by non price-led developments. But, even so, an adjustment process does appear to be underway, which bodes well for future market stability. Markets in which prices work tend to be more stable.

 That's the big picture of 2015. Now let's dig a little deeper and consider each of the main fuels in turn, starting first with oil and refining.

 Those of you with a good memory, which I'll be impressed if you do, may recall that I showed a chart very similar to this at last year's launch. And a key point I made last year was that the sharp fall in oil prices in 2014 was a supply story. The increase in oil consumption in 2014, shown by the blue bar under 2014, was very close to its historical average. There was nothing particularly unusual about the growth of oil demand in 2014. In contrast, supply -- or perhaps more accurately non-OPEC supply, shown in the dark green bar here, had grown exceptionally strongly, led by US tight oil, triggering a sizable supply imbalance and a consequent fall in prices. That's the story for 2014.

 The story for 2015 is that the oil market responded to this sharp fall in oil prices, but this adjustment was offset by some non-price developments. So, what I'm going to do is let me build up the picture for what happened in 2015, starting first with demand. Global oil demand, as shown here in the 2015 blue bar, is estimated to have grown strongly last year, up 1.9 million barrels a day, nearly twice its 10-year average. That strength was driven by net oil imported benefiting from that cheap oil. The US, EU, China, India, all recorded unusually strong increases. In contrast, demand growth within oil exported suffering from that lower oil price and barely grew at all.

 The strength in oil demand was most pronounced in consumer-focused fuels, particularly gasoline and jet fuel, buoyed by the boost to consumers' purchasing power from low prices. Growth in diesel consumption, which is more exposed to industrial activity, was more subdued.

 In terms of non-OPEC supply, the impact of low oil prices was felt most immediately within US tight oil. US oil rigs peaked in October 2014, falling by around two-thirds by the end of last year. The strong gains in rig productivity, however, meant that the slowing in output growth was less pronounced, with total US production still increasing by around 1 million barrels a day, in 2015. In doing so, the US reinforced its position as the world's largest oil producer.

 Even so, the increase in US production was considerably smaller than in 2017 (sic - see Spencer Dale presentation, "2014"), pulled down by these falls in US tight oil, which peaked in March of last year, and are currently around 0.5 million barrels off their highs. The longer lead times and higher levels of sunk capital meant other production was less affected in US tight oil, with total non-OPEC supply increasing by around 1.3 million barrels a day, as shown on the chart. So, somewhat off from the strong levels of last year but still relatively high relative to the 10-year average.

 But don't be fooled. This comparative resilience of other types of production is largely a matter of timing. Investments in oil and gas related projects is estimated to have fallen by around $160 billion in 2015. That's around one-quarter off its 2014 level, which is the largest proportionate fall since the late 1970s. And capital has continued to fall sharply this year. Although some of that reduction has been matched by cost deflation, the lower levels of investment will inevitably detract from future supply growth. Indeed, a key issue for the next few years is the impact this reduction in CapEx will have on future output growth and the risk that this will cause the oil market to tighten excessively.

 If that was all that had happened last year, the combination of this strong growth in oil demand with a smaller increase in supply will have gone a long way just to rebalancing the market. As I said, prices work. But that wasn't all that happened last year. OPEC increased supply substantially, by 1.6 million barrels, to a new record high. Rather than a general increase in OPEC supply, it's perhaps more accurate to describe this as an increase in production of two OPEC members, Iraq and Saudi Arabia, which together accounted for a majority of this increase.

 The net result was that, despite the adjustment to lower prices, we had another year in which total supply growth was growing significantly stronger than demand growth, further adding to the supply imbalance. The adjustment to lower prices has continued this year, with recent indicators pointing to solid demand growth and further decline in non-OPEC supply. So, based on current trends, it seems likely that the market will move broadly into balance in the second half of this year.

 But to be clear, that doesn't mean the problem is solved. It simply means that the problem in terms of growing oil stocks stops getting worse. Crude and product stocks increased further last year from their already bloated levels. OECD commercial inventories at the end of 2015 were around 350 million barrels above normal levels. Although comparable data for the non-OECD are not available, it's likely that inventories there also rose further. The market will only truly return to normal when the sizeable stock overhang has been worked off.

 As you'd expect, the persistent supply in balance and growing inventory levels weighed on oil prices, which you can see fell sharply towards the back end of 2014 and into 2015. They then started to recover somewhat in the early part of last year, as demand strengthened and US tight oil peaked. But prices fell back following the increase in Iraqi and Saudi Arabia production, reaching a low point of around $36 towards December of last year.

 If we compare the recent fall in prices with previous episodes of sharp declines, the experience so far has followed a pattern closer to that seen in the mid-1980s than in either 2008-2009 or 1997-1998. Those latter two shocks were driven by sharp contractions in demand growth, which reversed relatively quickly. In contrast, the mid-1980s fall was driven in large part by new sources of supply as new production from the North Sea and Alaska came onstream. This led to a more protracted period of weak prices as the market had to gradually absorb that additional supply.

 Although different in many respects to the mid-1980s the underlying cause of the current price weakness was also supply driven, in this case an increase in supply from US tight oil. As a consequence, and as Bob suggested from the outset, prices have been lower for longer. The impact of supply shocks tend to be far more protracted than those of demand shocks.

 Turning briefly to refining, as with many things in life, one person's loss is another's gain. The sharp increase in crude supplies and falls in prices lead to a buoyant year for refining. Refinery throughput rose by 1.8 million barrels in 2015, more than triple its 10-year average, with margins increasing to near-record highs. Reflecting those divergent trends in product demand that I just spoke about, gasoline cracks reached their highest levels on record, whereas diesel cracks fell back. The increase in refining runs dwarfed the expansion in new capacity such that refining utilization increased at its fastest rate since 2010.

 So, that's what I want to say on the oil market. Just to summarize, it seems clear, and there's very clear evidence, that the market is responding to the oversupply and the fall in prices. That adjustment process was put back last year by some of those non-price developments but that adjustment process is continuing -- has continued this year as the market heads back towards balance.

 If you move away now from oil and refining, to natural gas, the big picture on natural gas last year is one in which the growth in global production remained relatively strong but demand, outside of the power sector, was subdued, leading global prices to fall sharply. Those price falls, which were exacerbated in Asia and Europe by the decline in oil prices, helped to balance the market by allowing gas to gain share in the power sector, which is the most price-sensitive component of gas demand. All told, aggregate gas consumption increased by 1.7% in 2017 (sic - see Spencer Dale presentation, "2015"), significantly stronger than the weather-induced weakness in 2014, also significantly stronger than the overall growth of energy. So, natural gas continued to gain share but slightly below its historical average.

 As always with natural gas, this broad narrative disguises considerable variation across different countries and regions. On the demand side, the key source of weakness was Asia where growth in gas consumption slowed to just 0.5%. The big drag was China, where growth fell to below 5%, down from the double-digit growth rate seen over much of the past 10 years, reflecting both a general slowdown in China's energy demand and the increase in competition from alternative fuels. On the supply side, the US remained the global powerhouse, accounting for more than half of the increase in world production. All of this increase was driven by US shale gas. Conventional US gas production fell.

 If we stand back from the detail of the country-specific movements, I thought three general features of last year's gas market struck me as particularly interesting. First, natural gas gained significant share from coal in several major power markets around the world. These gains were most striking in the US where the increasing price competitiveness of gas relative to coal, shown here in the right-hand side, allowed gas by the middle of last year to overtake coal as a dominant source of energy in the US power sector. I think this sharp shift in these shares is really quite striking to what we saw last year and is another example of prices at work in action, causing the fuel shift to change.

 The second interesting feature was a change in trade pattern of global LNG. LNG supplies rose again in 2015, with increases in Australia, Papua New Guinea, and Qatar. But the deceleration in Chinese gas consumption, combined with falls in South Korea and Japan, meant Asian LNG demand fell in 2015. As a result, LNG flows were diverted west, with increased LNG imports to both Middle East and North Africa, and Europe. This shift in the pattern of trade flows went hand in hand with a sharp narrowing in price differentials, shown here in the chart, with the Asian premium over European gas prices virtually disappearing.

 The key takeaway here is that, as global LNG supplies grow in importance -- and as a consequence, global gas trade becomes increasingly price sensitive -- the impacts of shocks and disturbances in one part of the world -- in this case, weak Asian demand -- will be increasingly transmitted to other parts of the globe. We are moving towards a globally integrated gas market.

 The final feature I want to highlight stems directly from this greater abundance of LNG flowing into Europe and the corresponding fall in European gas prices. In particular, it raises a question of how Russian exporters responded to this increased competition. Given that much of Russian gas exports to Europe are indexed to oil, one option would have been simply to have maintained that link, although with a risk of losing some demand.

 The alternative would have been for Russian exporters to compete on price in order to maintain their market share. Unfortunately, since rebates and discounts are granted on contract-specific basis, it is not possible to observe Russian gas prices directly. But to get some idea, it is possible to back out a proxy for Russian export prices to Germany by using data on average German import prices and the composition of those imports, and that proxy is shown by this red line here.

 Now, this proxy is somewhat crude, so I don't want to claim too much for it, but, as you can see, it does suggest that Russian export prices to Europe fell more quickly than a simple link to oil prices would have implied. The red line comes down following the spot price far more quickly than that green oil index line would have implied.

 As with OPEC's response to US tight oil, the option of giving up market share in order to support prices is less attractive if the source of the price weakness -- in this case, increased supplies of LNG -- is expected to persist. That's all I wanted to say on gas.

 We turn next to coal. To borrow a phrase used in a very different context, I think it's fair to say that 2015 was undoubtedly an annus horribilis for coal. Global consumption and production both recorded their largest falls on record, and coal prices fell by around 20%. To a large extent, coal was a casualty of those larger secular forces driving global supply that I discussed at the beginning, that transitioning in energy demand and the technological wave driving supply. The main manifestation of the technological wave driving energy supply was a shift in the fuel mix in the US power sector that I just mentioned. Strong growth in US shale gas forced down US gas prices, causing gas to displace coal in the power sector. That switch, reinforced by tightening environmental policies, caused US coal consumption to fall sharply, by more than 12%.

 What's interesting is, in contrast, the last time this happened was in 2012. It was the last time US coal consumption fell sharply. And what's different is this time the general abundance of global coal supplies meant that the surplus US coal couldn't easily be exported to other parts of the word. In 2012, that excess coal was exported to other parts of the world. Instead, this time around, US coal production also fell markedly, by over 10%.

 In terms of that second trend in terms of this process of transitioning energy demand, that trend is seen most starkly in China. As China's period of rapid industrialization has come to an end, its demand for coal has slowed sharply. Indeed, China's coal consumption fell for the second consecutive year, in 2015, as Chinese industrial production braked sharply and coal lost out to increasing competition in the power sector.

 The 2-trillion-ton question -- or perhaps more accurately, the 2-trillion-tons-of-oil-equivalent question -- is whether we've now seen the peak in Chinese coal consumption. There are clear, powerful, structural forces pushing in this direction, most notably the shifting pattern of Chinese growth towards slower, more service-oriented growth and the determination to switch towards cleaner, lower-carbon fuels.

 But the fall in coal consumption last year were compounded by sharp slowing in some of China's most energy-intensive and, indeed, coal-intensive sectors. Output of iron, steel, and cement all fell in absolute terms last year for the first time in almost 35 years. I just hadn't realized until we looked at the data just how big this contraction was in the most energy-intensive sectors -- outright falls for the first time in 35 years. It will be very surprising if there wasn't a strong cyclical element to these movements. The net impact of those opposing forces -- those structural trends and those cyclical ones -- to my mind, are unclear. So, I think the answer to the question is, is watch this space in terms of Chinese coal consumption.

 We turn briefly to non-fossil fuels. Non-fossil fuels grew by 3.6% in 2015, up slightly on their average over the past 10 years. As I stressed at the outset, renewable energy further reinforced its reputation as the next big thing, growing by over 15% in 2015, supported by improving technology and falling costs. Although the share of renewable energy remains small, its strong growth meant it accounted for all of the increase in global power generation in 2015 and more than one-third of the entire increase in global energy consumption. The increasing importance of renewable energy continued to be led by wind power, but solar is catching up fast, expanding by almost one-third in 2015, with China overtaking Germany and the US as the largest generator of solar power.

 Each new Stats Review contains literally thousands and thousands of data points, but perhaps the most striking number in the whole of this year's review is that for carbon emissions. In particular, the slower growth of energy demand, together with the shift in the fuel mix away from coal towards lower-carbon fuels, meant carbon emissions from energy use were essentially flat last year, the slowest growth in nearly a quarter of a century, other than in the immediate aftermath of the financial crisis.

 This marks a sharp turnaround from the growth of carbon emissions over the past 10 years, which averaged a little over 1.5% a year. This chart decomposes this turnaround in carbon emissions from the very low numbers seen in 2015, at 0.1%, compared to its average growth rate over the last 10 years of 1.5%. What factors were driving that change?

 Some of the slowdown in 2015 is a natural consequence of weaker economic growth relative to the average of the past. But as you can see from the chart, the majority reflects a faster rate of improvement in energy intensity and in the fuel mix, the purple and turquoise bars. If you consider the same decomposition, the same question, but this time framed in terms of the contributions of individual countries or regions, you can see the vast majority of the slowdown in carbon emissions can be attributed to China. Indeed, China's carbon emissions are estimated to have actually fallen slightly in 2015 for the first time in almost 20 years.

 So, the obvious question, the big question this raises, is will this sharp decline in China's carbon emissions persist? As with the fall in China's coal consumption, there are good reason for thinking that some of this slowdown reflects structural forces that are likely to persist and grow in importance. But some probably reflect cyclical factors, particularly the contraction of some of China's most energy-intensive sectors, which are unlikely to keep being repeated and may well unwind in future years.

 The developments detailed in this year's review highlights some of the profound changes taking place in global energy markets, reflecting those big secular trends that I flagged at the beginning -- the transitions in energy demand and the technological advances boosting energy supplies. I wanted to conclude by speculating, just for a moment, where these forces may lead, in particular, by considering whether the past data, particularly those compiled by the Stats Review, may contain clues to future trends. And I wanted to consider three issues which have an important influence on global energy trends over the next 20 or 30 years: China, renewable energy, and carbon emissions.

 First, on China, as I said, the recent slowing in global energy demand has been driven to a very large extent by developments there, not so much by the slowdown in economic growth but rather by the rapid declines in energy intensity. Indeed, if China's energy intensity hadn't declined over the past five years, global energy demand would be almost 5% higher, roughly equivalent to the entire energy consumption of France, Germany, and Belgium combined, even with the slowdown in Chinese GDP growth.

 Future trends in China's energy intensity matter as much, if not more so, to energy demand as its headlined economic growth, despite the fact everybody seems fixated on Chinese economic growth. However, the level at which China's energy intensity will start to stabilize is uncertain. As you can see on the chart on the left here, there is considerable variation in energy intensity across different developed economies, depending on their industrial structure or their levels of energy efficiency.

 Perhaps more instructive is the experience of Japan and South Korea at a similar stage of development, which is what we're trying to look at here with the chart on the right. We've looked at similar stages of economic development defined in terms of GDP per capita. And what you can see is the falls in energy intensity in Japan and South Korea happened somewhat later in their economic development in China, but point to extended periods of quite sharp falls in energy intensity. Although again here, there is significant variation in the level of energy intensity at which they stabilized. Ultimately much will depend on the success of China in term of its twin policy objectives of improving its level of energy efficiency and of shifting towards a more service based and, hence, less energy-intensive pattern of growth.

 Second, on the supply side, one of the key issues associated with this technological wave is how quickly the share of renewable energy within global demand is likely to grow. The key lesson from history is that it takes considerable time for new forms of energy to penetrate the global market. This chart starts the clock at the point at which each new fuel reached 1% share of primary energy. As you can see, it took more than 40 years for oil to expand to 10% of primary energy. And even after 50 years, the share of natural gas had failed to reach double digits.

 Some of that slow rate of penetration reflects the time it takes for resources and funding to be devoted in scale to new energy resources. But, equally important, the highly capital-intensive nature of the energy ecosystem, with many long-lived assets, provides a natural break on the pace at which new energies can gain ground.

 The growth rates achieved renewable energy, shown in this dark orange bar, over the past eight to nine years have been broadly comparable to those recorded by other energies at the same stage of development. Indeed, thus far, renewable energy has followed a similar path to the early development of nuclear power, shown here in yellow. But, as many of you will know, the penetration of nuclear energy plateaued relatively quickly as the pace of learning slowed and unit costs stopped falling. In contrast, in BP's energy outlook, we assume that the cost of both wind and solar power will continue to fall as they move down their learning curve, underpinning continued robust growth in renewable energy. Indeed, the path of renewable energy in the base case of the energy outlook, shown here by the dotted line, implies a quicker pace of penetration than any other fuel in modern history. But even in that case, renewable power within primary energy barely reaches 8% in 20 years' time. The simple message from history is that it takes a long time, numbering several decades, for new energies to gain a substantial foothold within global energy.

 The third issue I wanted to turn, is to return to the stalling in the growth of carbon emissions in 2015. This equated to a fall in the carbon intensity of GDP, so the average amount of carbon emissions per unit of GDP, falling by around 2.8%. As you can see from this chart, if you look at this 2.8% number there's only been two occasions in the past 50 years in which the carbon intensity of GDP has fallen by as much, and they are both coincided with sharp upward movements in oil prices. So, real progress last year.

 But before we take too much comfort, the IEA scenario, which is used by many as a benchmark scenario for the progress we need to make to achieve the goals agreed at Paris, suggests that carbon intensity of GDP has to fall at an average rate of close to 5.5% on a sustained basis for the next 20 years. So, almost double the rate of decline achieved last year, each year, for the next 20 years. So, certainly a step in the right direction towards meeting the goals agreed at Paris, but a relatively small step given the scale of the challenge.

 Let me conclude. Many people, when they reach 65, are starting to think about winding down, putting their feet up, taking life a little easier. Not so for BP Stats Review. (laughter) We are living through some profound changes in global energy markets, as growth in global energy demand transitions, driven by the changing energy needs of China and increased global focus on energy efficiency, and as technological gains increase the abundance and range of energy supplies.

 The Stats Review will have a key role in helping all of us make sense of these changes, allowing us to understand better the ups and downs in energy markets we are living through, and providing some clues as to where we might be heading next. Indeed, you might say that 65 is the new 40. Thank you.

 Bob Dudley,  BP plc - Group Chief Executive   [3]
 Well done, Spencer -- and the entire team. Maybe I'll start off with a question because this will be a question-and-answer session and for those on the web as well, there's quite a number of them lined up. We would like to ask you to stay with the topic, which is the energy markets and statistical review and the economics team. But let me ask you a question. You talked about the team burning the midnight oil at the 65th, what's it going to be at 130? Would it be solar?

 Spencer Dale,  BP plc - Group Chief Economist   [4]
 Yes, who knows, perhaps it might not be the midnight oil, no.

 Bob Dudley,  BP plc - Group Chief Executive   [5]
 So let's open it up for questions. Thank you again, Spencer. Open it up for questions, we'll -- number one, two, three, four.

Questions and Answers
 Bob Dudley,  BP plc - Group Chief Executive   [1]
 Well done, Spencer -- and the entire team. Maybe I'll start off with a question, because this will be a question-and-answer session, and for those on the web, as well. There's quite a number of them lined up.

 We would like to ask you to stay with the topic which is the energy markets, the statistical review, and the economics team. But let me ask you a question. You talked about the team burning the midnight oil at the 65th.

 What's it going to be at the 130? Would it be solar?

 Spencer Dale,  BP plc - Group Chief Economist   [2]
 Yes, who knows. Perhaps it might not be the midnight oil, no.

 Bob Dudley,  BP plc - Group Chief Executive   [3]
 Let's open it up for questions. Thank you again, Spencer.

 Open it up for questions. Number one, two, three, four.

 Alastair Syme,  Citigroup - Analyst   [4]
 Alastair Syme from Citi. Thanks, Spencer, for the presentation. Can I maybe pick your brains whether you think the change in energy intensity in China last year was a function of price or policy, how we give balance between those two? And whether there's any signs that countries like India might start to replace China in the energy mix?

 Spencer Dale,  BP plc - Group Chief Economist   [5]
 I think one would naturally assume that low prices, other things equal, would actually dampen the rate of decline in energy intensity, because there's less incentive to economize. So, the fact that you saw such a large decline in energy intensity I think is despite prices rather than because of prices.

 I think some of that is consistent with the general policy within China of trying to shift the structure of the economy away from heavy industrialized, heavy investment based growth, which tends to be very energy intensive, towards more consumer, service-based growth which is less energy intensive. However, I think the extent to which you see some of that slowdown in some of those sectors I'm not sure is entirely driven by -- may not be entirely designed by policy. So, I think this is a combination of cyclical elements along a broad policy-driven path despite the fall in prices rather than driven by the fall in prices.

 David Elmes,  Warwick Business School - Analyst   [6]
 David Elmes from Warwick Business School. You talk about prices working, but I suppose the challenge would be -- yes, but they take a bit of time and it seems to be fairly painful. I'm interested when you talked about the changes in consumption.

 Do you think that, that was a more responsive people in developed economies using more fuel in their SUVs, for instance? Or do you feel that it was more structural in terms of increased consumption in developing economies -- China, for instance -- in terms of people moving up the development scale, because they are things that have quite different responses.

 Spencer Dale,  BP plc - Group Chief Economist   [7]
 What we observed, as I said, the two splits we can see is, one is in countries which were net beneficiaries of low oil prices, because they were net oil importers and therefore they had the boost. We saw oil demand in those economies grow unusually strongly.

 We also saw more consumer-facing oil, products which are more consumer-focused, like jet fuel, gasoline, growing exceptionally strongly; whereas growth in more industrial focused oil products, like diesel, that the growth there was relatively moderate, So, I think my reading of that, this tells me it's a fairly classic substitution effect.

 Obviously as the relative price of oil goes down, and I'm seeing the household sector tend to be consuming more of it, rather than it being driven by any sort of deep structural change. Which I think would be consistent with the fact it's relatively early to see some of those structural changes coming through.

 So, just putting this in a broader context, one of the puzzles which the macroeconomic community have been grappling with is, why haven't we seen the fall in oil prices impact GDP growth to the extent we possibly thought we would have done? When you think about the impact of lower oil prices on the wide economy, you can think of it having this substitution effect, the price of oil falling relative to other goods, people consuming more oil. Also this income effect, if you like, with people being better off and consuming more generally.

 What's interesting I think is, in terms of that substitution effect, in terms of oil demand, it pretty much comes through as we would have expected. The implied elasticities are pretty consistent with what the empirical data would say once you take account of subsidies and so on and so forth, changing subsidies.

 So, the puzzle, if you like, is more to do with the income effect and not the substitution effect. I'm not sure that helps us that much further but it does help us start to identify at least a little bit of that puzzle about the impact of lower prices on the macro economy more generally.

 Roger Bentley,  Reading University - Analyst   [8]
 Roger Bentley, Reading University. That was an excellent presentation. And I have to say the statistical review has been an invaluable publication for us analysts for many years.

 But it does have one main flaw and for many years I've asked BP to add a caveat to warn analysts about the data on reserves. I have the caveat here. It's quite long.

 I'll only bring one bit of it but there's quite a few bits to it. On the proved reserves, not reserves altogether but the proved reserves, especially, these are very misleading. They should not be used to draw conclusions.

 The data are typically conservative values, so grow over time without indicating new resources available. In some countries, as we know, they are overstated, the proved reserves. We know that.

 And then, lastly, they are often not stated. I realize the difficulties BP has in getting these datas, we have great sympathy, but many of those official numbers don't change from 20, 30 years in a row -- amazing for the data we all need.

 My statement is, all reserves data should be treated with caution, proved reserves data are best ignored. (laughter) So, might I ask if BP is prepared to help in this endeavor of warning analysts that we need better data. Thank you.

 Spencer Dale,  BP plc - Group Chief Economist   [9]
 I'm not very keen to tell people to ignore the data that we just published. (laughter) I think we are very clear that these are official data, they're not our estimates, and we don't have the capacity to do that.

 There are some countries where we think the official estimates they produce are not consistent with our definition of proved reserves, and as a result of which we scale down those reserves. I think that's true of Canadian oil reserves and one other, I think Russian reserves, as well. So, we try, when there's big discrepancies, and take account of those.

 I think the way that I would read these data, I don't think I would ignore these data altogether. I think I would take the message that there's enormous amounts of proved reserves relative to production levels with an R/P ratio something like over 50 years. I think I would also draw some message from the fact that those reserves appear to be going up over time despite the fact that we keep on consuming oil.

 We are finding reserves more quickly than we are consuming oil. I think those two big picture points -- there's lots of oil and, if anything, reserves are going up as we consume it rather than going down -- are quite solid.

 Whether I would place too much emphasis that all reserves moved by 0.1% this year or that year, I think I totally agree. But those big picture ones, which I think are the ones I would emphasize in terms of our reserve picture.

 Bob Dudley,  BP plc - Group Chief Executive   [10]
 And if I could add a footnote on that about companies, companies in the OECD world, we go through really very rigorous calculations of our reserves based on production forecasts. You're talking about countries but the companies themselves are audited and reviewed every year on the calculation of what is the economic life of a reserve base, field by field by field, often well by well by well. As the price changes, that number moves each year and the adjustments have to be made.

 So, there's no misleading. The companies are very rigorous about reserves. I wouldn't say they are misleading or should be ignored.

 Spencer Dale,  BP plc - Group Chief Economist   [11]
 And if I may, just one further point to that, Bob. If I look at those proved reserves on the five major IOC balance sheets, and look at those proved reserves which have gone through all that careful scrutiny, they account for something like less than 3% of total proved reserves. So, when just thinking about reserves and which reserves may or may not be used over time, less than 3% of those total proved reserves are accounted for by the top five IOCs, I think I'm correct in saying.

 Bob Dudley,  BP plc - Group Chief Executive   [12]
 And if I could add another footnote. (laughter) When I travel and Spencer travels around and we meet different groups, I do get the feeling that people want the big oil companies to go out of business and that's somehow going to solve the issue of fossil fuels.

 We're actually a fairly small component of the fossil fuels production in the world. But we are the ones working the hardest on renewable energies and the transition to low carbon energy. So, that's just my footnote on that.

 Simon Henderson,  The Washington Institute for Near East Policy - Analyst   [13]
 Simon Henderson, The Washington Institute for Near East Policy. I was wondering what you think the implications are of statements coming out of Saudi Arabia that the Kingdom is heading towards a post oil future.

 Spencer Dale,  BP plc - Group Chief Economist   [14]
 For those of you who don't know Simon, he's one of the world's experts on Saudi Arabia. So, it's one of those tricky questions where the person who's had the question knows far more than the person responding. (laughter)

 I think it's fascinating, Simon, what's going on there at the moment. Two things, I think, are interesting.

 One is that Saudi Arabia have signaled this desire to shift away from the extent of their dependency on oil, which I think is an entirely consistent and rational response in a world where you look ahead 40, 50 or 60 years. It's almost inevitable that you're seeing increasing penetration of electric vehicles and so on. So, that seems an entirely rational thing to do.

 The second bit and the interesting fascinating economic question is -- can they do that? Reforming their economy in a way which dramatically reduces their dependency on oil is an amazing and really significant economic challenge. I think the Vision 2030 is an enormously ambitious and exciting framework, but whether they can deliver that I think we will have to see.

 And how quickly they deliver that, we're going to have to see. But I agree with you, I think it has profound implications for the future oil markets, almost regardless of how successful they are because whatever happens will be very important for the future development of oil supplies.

 So, I think this is one of the most fascinating issues that we should all be looking and monitoring over the next five, 10 years. And we'll be reading your work, Simon, to help us better understand. (laughter)

 Bob Dudley,  BP plc - Group Chief Executive   [15]
 We could use Chatham House rules and maybe you could make any comments at all -- seriously -- or no?

 Simon Henderson,  The Washington Institute for Near East Policy - Analyst   [16]
 On this occasion, I will not make a comment but Spencer and I will have a continuing conversation.

 Bob Dudley,  BP plc - Group Chief Executive   [17]
 The ultimate Chatham House rules. Okay. There's as a whole series of questions here and I think you were next but let me take a couple from the web.

 Let me take a couple from around the world. We have a question from Brazil. Taking into account the tremendous industry cuts in exploration and production due to the low price of oil, do you consider it a possible scenario a sharp drop in supply in the near future?

 Spencer Dale,  BP plc - Group Chief Economist   [18]
 I flagged this in the speech. I think this is a really big issue. I think it's a really big issue for the next three, four, five years.

 We've seen a very significant fall in investment spending, of the order around $160 billion, in term of 2015 relative to 2014. So, that's around one-quarter off investment levels in 2014. It looks like we saw another reduction of around $50 billion this year.

 So, investment spending by the end of this year will be around one-third lower than it was in 2014. You have to go back 30 years to see a comparable fall in investment spending.

 Now, at the same time, we've also seen very significant cost deflation and many of the indicators that some of the external consultancies would imply will often point to reductions in costs of the order of 20% or 25%. So, you've got a reduction in investment spending of 30%, 35%, falls in costs of 20% or 25%. That implies perhaps the overall reduction in real investment spending is significantly less than that headline number would imply, but still substantial.

 What we know from history is the impact of that investment spending, the impact will gradually build up through time. Its impact certainly isn't visible in the 2015 data and will be very visible in this year's data, or build up in 2017, 2018, 2019, 2020. So, the question will be how big an impact will that have on supply growth.

 And as I said, in a world where demand continues to grow relatively steadily, what risk will that have in terms of leading the market to tighten excessively. I don't have a punch line to that, I don't have a clear simple answer to that, but it's something we're spending an awful lot of time thinking about because the magnitudes here are significant and the implications that can have over a three-, four-, five-year cycle of the oil market I think are very important.

 Bob Dudley,  BP plc - Group Chief Executive   [19]
 And you've said to us here in BP that one of the biggest variables is actually what is Chinese economic growth rate, probably the single biggest variable.

 Another question here, this is a question from Canada. What will the share of renewable energy be in 10, 20, 30 years, which you outlines? When will the cost of renewables be less than energy produced from oil and gas?

 Spencer Dale,  BP plc - Group Chief Economist   [20]
 When will the cost of renewables be less than energy produced from oil and gas? I think one could argue in some parts of the world now -- now. One saw these amazing reports -- I have no idea how true they are -- but you saw these amazing reports for solar power in Dubai being offered at $30 a megawatt.

 That's incredibly competitive. Now whether anybody is making any money from that, whether that can still be done in a wet weekend in Scarborough in the same way as can be done in Dubai, are less clear. But the costs are coming down very dramatically here in some parts of the world for some of these technologies.

 I was trying to shout that and flag that very clearly. But that doesn't get away from that other observation I made that it still takes an awful long time to gain share. That's not denying that these are increasing in importance.

 But to actually gain significant share, just like we saw with oil, just like we saw with gas, can take many decades. So, the idea that renewable energy could reach, if I include biofuels as well in that calculation, perhaps close to 10% by 20 years' time, that would be relative to all those fuels we've seen on that picture faster than anything we've ever seen before, but still providing only 10% of the world's energy needs. And we just need to take that into account when thinking about the relative roles that fossil fuels and non-fossil fuels can continue to play over the next 20 or 30 years in terms of providing the energy the world economy needs to continue to grow and prosper.

 James Skinner,  The New Economic Foundation - Analyst   [21]
 James Skinner, Trustee Emeritus of The New Economic Foundation. You mentioned almost in passing that it would need an increase in an improvement in energy density of about 5.5% to achieve the kind of aims that were talked about at Paris. I wondered if you'd thought at all about looking at the possibility of doing, rather than an extrapolation of business as usual, taking a target such as the kinds of target that has been set at Paris and just bringing out what the implications are in terms of what needs to happen.

 People are talking a lot about leaving two-thirds of the existing reserves in the ground because of the dangers of burning them in terms of carbon. What would actually be the practical implications of doing the things we're talking about and agreed upon in Paris? Because at the moment there seems to be a gap in reality between the business as usual extrapolations that you're largely doing and the kind of changes that will have to be made if we are going to get anywhere near meeting less than 2 degrees Centigrade increase in temperature.

 Spencer Dale,  BP plc - Group Chief Economist   [22]
 Just to push back a little bit, when we do our energy outlook it's very much not a business as usual. It's trying to take account of all these trends which are going on. Which is why in our energy outlook, which we published in February, the growth rate of carbon emissions over the next 20 years was growing at less than half the rate seen over the last 20 years.

 So, it wasn't business as usual. It was extrapolation of the future. It pointed at a future which is very different to the past.

 But it was still one in which carbon emissions were growing. So, that was pointed to in our central case, carbon emissions growing by something like 20% over the next 20 years. Where that same IEA 450 Scenario I was mentioning would suggest that carbon emissions had to fall by something like 30%.

 It's an enormous gap. Which is why I said very clearly, and BP continues to say, we need to see more policy action involved in terms of if we are going to achieve the goals they'd had in Paris, and governments need to do that. And from an economist perspective, I think by far and away the most efficient way of achieving that is by doing it via carbon pricing rather than via regulation.

 Exactly what this will involve I don't know, but that's the point. That's why I like carbon pricing because I'm not clever enough to work out exactly how best to do this. If I rely on regulation I'm asking governments today to pick winners and losers for the next 20 or 30 years.

 How much of this should be done by electric vehicles, how much should this be done in renewable energy, how much by CCS? I don't know. I don't know because we don't know how technology is going to evolve.

 If you put a price, we will allow the incentives, the market then and the business community will allocate capital in a way which is the most efficiently done. So, so I don't know what the outcome will be.

 The one thing I would stress is that almost any of those scenarios which have been consistent with limiting temperatures to less than 2 degrees Centigrade have as much, if not more, of the action in terms of improving energy efficiency rather than in terms of the fuel mix. And what I find deeply frustrating is so much of the popular discussion when thinking about climate is all of the discussion seems to be focused on the fuel mix. And what's lovely about the fuel mix is it's somebody else's problem.

 And we're not having enough focus on energy efficiency, which is all our problem, it's the way we use energy. If we are going to be successful here, a big part of that will come about by using energy more efficiently. And I wish we could shift the debate to a more balanced view where it emphasizes the importance of energy efficiency as much as it does the fuel mix.

 Ben Combes,  Llewelyn Consulting and LSE Grantham - Analyst   [23]
 Ben Combes, Llewellyn Consulting and LSE Grantham. I was very interested in the discussion about the shares of energy going forward and your projection of renewables.

 Is it fair to compare long-lived capital-intensive infrastructure projects, like coal, oil, gas, and nuclear, with small-scale almost consumer durables, in the case of solar, where I can pick them up at IKEA, where you might see consumer growth in line with consumer durables rather than long-lived infrastructure? I just wonder if it's something you thought about.

 Spencer Dale,  BP plc - Group Chief Economist   [24]
 I've looked at lots of arguments about why renewable energy may be different -- and it may well be different. I guess my guess would be to actually get a serious foothold in terms of energy, to get to double digits of energy share, that's not going to be done by IKEA purchases.

 That is going to be done by renewables increasingly moving into the power sector. It may not be done by -- it may be done at smaller modular parts of the power sector. What I found striking was over the last eight to nine years the growth rate seen in -- I did it here in terms of renewable power, wind and solar together -- but if I could just separate out solar and look at comparable things, the growth rates we're seeing thus far are not exceptional compared to either gas or oil at similar rates of development.

 Now, it may be this time is different. As economists we always tend to want to think that this time is different and I guess I'm nervous about throwing away the lessons from history. So, it may be different, and in some sense I've built that in.

 I've got a faster growth rate of renewable energy than seen for any fuel in modern history. But I still only get to 8% or 10% for renewable energy. And in some sense, I do think that's the value of something like the fiscal review.

 It beds us down in history, what's happened in the past. And there's a value to us understanding that, understanding where we come from when thinking about where we are likely to go.

 Bob Dudley,  BP plc - Group Chief Executive   [25]
 And, Spencer, something you always talk about is there's really two kinds of energy use -- that for power or electricity and transportation. You might talk about how much is in transportation, how much is in power, and how the transportation one is more difficult for renewables.

 Spencer Dale,  BP plc - Group Chief Economist   [26]
 The way I think about the penetration in renewables, at one level one can think about it, it's easier to decarbonize the power sector than it is to decarbonize the transport fuel. And the reason, the argument one would make there, is within the power sector I have coal, gas and renewables competing against each other in real time, so relative prices really matter. And if you ever want a good example of that, that chart of the US power sector just screamed that at you.

 You had US gas prices fell and it led to the biggest fall in coal consumption on history because relative prices really matter because you've got competing technologies for the same fuels sitting alongside each other. That thus far, other than in a relative fleet, in a very tiny fraction of the transport system at the moment, isn't happening in terms of renewable energy within the transport sector, where oil has a clear massive advantage. Over a period of time, one would expect increasing penetration of electric vehicles but I think at the moment that appears to be a relatively slow burning issue.

 The other important thing here, and the important thing here, is two things need to happen if we're going to decarbonize transportation. One is the penetration of electric vehicles but also you need the shift in the power sector happen at the same time. At the moment, for example, we're seeing enormous growth in electric vehicles in China, but the vast majority of that electricity is being generated by coal.

 So, the net impact of that, I think most estimates would be net harmful for carbon emissions rather than net improving. So, you need a double, two changes, to happen in terms of transportation.

 Bob Dudley,  BP plc - Group Chief Executive   [27]
 And some biofuels coming.

 Hugh Lee,  Abaco - Analyst   [28]
 Hugh Lee from [Abaco]. The Carbon Tracker Report published in April concluded that the oil and gas majors creates more shareholder value by managing their future new upstream project developments to be consistent with 2 degrees centigrade warming than not being consistent with it. So, do we expect a significant reduction in upstream developments by all the oil majors as a result of that conclusion?

 Spencer Dale,  BP plc - Group Chief Economist   [29]
 I haven't seen that Carbon Tracker Report, and I'm not quite sure exactly the precise assumptions underpinning that. I think what you can rest assured is upstream investment, which Bob will be far better to talk about than I am, will continue to be driven by maximizing shareholder value.

 And this gets back to the point about the role the oil companies can play in achieving climate goals. It is very hard for us to lead if the government incentives aren't there. If governments provide the right incentive, particularly in terms of carbon pricing, that will naturally change our behavior.

 But, as you well know, we have a fiduciary issue to maximize shareholder value, so we have to respond to the prices that governments set -- not the prices they talk about but the prices they actually set. And if they change those, they change those incentives, then that will have a direct impact on our behavior.

 Bob Dudley,  BP plc - Group Chief Executive   [30]
 You've certainly seen us respond with the lower prices to the amount of capital investments we're making in the upstream right now. And I think there's all kinds of upstream investments. I believe that natural gas is the natural transition fuel to lead us to the lower carbon future.

 So, you're seeing more and more -- not all -- but more and more of our capital going into natural gas projects, big ones. We think that's actually very consistent. We have to contain methane emission, most certainly.

 That's not a good greenhouse gas. Natural gas has half of the CO2 emissions of coal, for example. And somewhat behind maybe the Tracker Report is the implication we should stop upstream investing as big oil companies.

 I assure you if we did that, those companies that have 3% of the reserves, somebody else is going to do them, and they probably aren't going to read the Tracker Report.

 LeeAnn Salter,  Wall Street Journal - Analyst   [31]
 [LeAnn Salter] from the Wall Street Journal. Thank you.

 This is a follow-on a little bit, and you may have answered somewhat. Given the findings in this Report, and given the shift in the energy market, what other changes are you making to your business strategy?

 Bob Dudley,  BP plc - Group Chief Executive   [32]
 We have a certain set of goals. Like Spencer said, we have a responsibility to investors, as all companies do. We are a company that has a reserves to production life of only 12 years. So, if we produced all of our reserves in our production, in 12 years we would not have any reserves anymore. So, it isn't a 50-year world for us.

 So, when people talk about stranded assets, we have lots of time to adjust to the price signals, to the price of carbon, a regulation, to be able to modify our portfolio over the many decades ahead. We'll still have some oil and gas longer-term projects. But we make decisions constantly to adjust.

 So, we have very big investments, which we haven't really talked that much about, that had to get through our own special circumstances in 2010 after the accident in the Gulf. We sold $75 billion of assets, really, to meet our obligations in the United States. We've retained through that a very big wind business in the United States -- 16 wind farms, more than 1,000 turbines spinning -- that actually have not really been profitable but because our belief we wanted to learn and continue to have that.

 We have a very big biofuels business in Brazil. We continue to do venturing in companies, a wide spectrum of companies, where we sometimes go in and buy 5% of a company and help a company with its technology and learn, to try to help us see what is the next technologies of the future so that we can position our own portfolio in the long term.

 That's a very exciting part of what we do as a Company. We don't talk about it because we're not going to pick winners and losers yet. But we have kids and some of us have grandchildren and we want to see the world transition here.

 We're all thinking about it. I'm actually very excited about it. And some day we'll be able to tell you more about some of those things, I think.

 Nick Ruby,  Noharter - Analyst   [33]
 Nick Ruby, [Noharter]. A very quick question close to my heart. What are we going to do with all this gas?

 It's under almost every rock we look these days. What can we do to do something about demand?

 Spencer Dale,  BP plc - Group Chief Economist   [34]
 As I said, gas demand did bounce back this year. It grew significantly stronger than global energy demand, so it's been gaining share. But it didn't grow in line with its long-run average.

 But I think there's a couple of noisy things going on here. One, I know it's a dull point but it's, unfortunately, a true point, the largest consumer of energy is the US, and they had a very mild winter this year and that had a big impact on gas demand. We also saw this slowing in China which, as I said, I think has a cyclical component to it as well as a structural component to it.

 Looking ahead, the story I see is one in which I expect continued strong energy demand growth in emerging Asia, particularly China and India, with gas gaining share in those two sectors. Supported by ample supplies of gas, particularly in terms of US shale gas, increasing LNG supplies which are enabling that gas to be transported more efficiently around the world, and also government policies encouraging a shift away from coal towards lower carbon fuels -- renewable energy but also natural gas.

 With natural gas over a period of time, it's not been seen as a competitor to renewables but increasingly been seen as a complement to renewables, helping to solve the intermittency problem as renewables increasingly take the base load. So, I think there's many reasons.

 Our central view in the energy outlook was that natural gas is likely to be the fastest growing fossil fuel, with much of that growth coming from Asia. And I don't think there's anything in this year's data which would cause me to want to revise that big picture story.

 Bob Dudley,  BP plc - Group Chief Executive   [35]
 And I'd also add, gas is a very regional thing. It's heading towards being a commodity but it's still got a long way to go to being a global commodity. The US is swimming in natural gas.

 There are countries in the Middle East that produce oil that really don't have gas. They're burning oil for power. So, there's some very big differences around the world with gas.

 Ian Bond,  Argus - Analyst   [36]
 Ian Bond from Argus. Having tracked the rise of shale oil production and then the fall in shale oil production, what's your view on how long it will take for shale oil to come back if we have $50 oil? And, also, having seen the way shale oil responds in there after price signals, do you think shale oil, combined with the new behavior of Saudi Arabia and OPEC, is something that makes prices more volatile or less volatile?

 Spencer Dale,  BP plc - Group Chief Economist   [37]
 On the first question, my sense from reading and speaking to the same people that you speak to, and reading what you write, my impression is if we get WTI moving decisively above $50 and people expect it to remain above $50, you'll start to see people wanting to bring rigs back. I'm not sure if it's noise or not but it was striking that we saw rigs actually rise last week for the first time.

 That then raises two questions about bottlenecks. One is a physical bottleneck in terms of bringing it back. Two types of physical bottlenecks -- how quickly can those rigs who are just sitting idle at the moment be brought back into action -- I'm told that if you drive along the roadside there you can see rigs rusting sitting by the roadside -- and then how quickly can they be brought back.

 Also, many people have left North Dakota. They're now running a dive shop down in Mexico or their bar in Florida.

 Nothing against North Dakota, but it may take awhile and some incentive for them to leave Mexico and Florida and go back up. So, how quickly can you get those people back in, flowing in. And then the other thing is a financial one.

 How quickly will we see banks, private equity be willing to increase their funding to actually fund increasing levels of activity. I think I, along with many other people, have been surprised that, that funding channel hasn't been cutoff more than it has been on the way down. But whether that implies that people will be willing to increase dramatically on the way up, I don't know.

 The counter argument on the other side is that many people will estimate that drilled but uncompleted wells are at very high levels, and that could generate quite significant increase in shale growth in a relatively short space of time. The reason for my very long and rambling answer is because I don't know the answer. (laughter) The punch line of economists is we tend to look backwards to try and get a sense about how the world will behave in the future.

 There is no past history for this in terms of shale coming out of a price cycle. I think we can identify the factors which will determine this but the net of this is unclear.

 Your second question was -- the obvious point is the greater price sensitivity of shale should act like a shock absorber for the oil market, dampening price volatility. Because you've got a bit of supply which can respond more quickly to price movements, prices need to respond by less dampening volatility. Your question was more complicated that which was said, but it supposed we think that OPEC behaves differently as well, what's the net impact of those two.

 My counter argument was I'm not clear there's any evidence that OPEC is behaving systematically differently. And it goes back to those points about looking at previous price declines. If you think the price decline we've just gone through is more similar to the mid 1980s, what did OPEC do then?

 They initially tried to fight it and then they realized they couldn't fight it and just did the rational thing which was to maintain their market share and let the market absorb. That's exactly what they've done this time.

 I think that what happened was, when prices fell this time, they were a lot smarter than most of the economists that were writing about it who were quite lazy and they just looked back at the previous two price episodes, which were demand driven, in terms of transitory shocks. Where it's entirely rational for OPEC in that world to cut back supply today because they know they can bring it on tomorrow.

 So, thus far I haven't seen any evidence that OPEC's behavior is changing. What changed this time, and what was different this time relative to the past two episodes, was the nature of the shock underpinning it. It was a supply shock, and a supply shock that was likely to persist rather than a temporary demand shock.

 Bob Dudley,  BP plc - Group Chief Executive   [38]
 We're going to have time for one question but the short hand in the industry, and some of you will know this, when oil conferences and people get together, the shorthanded question for what you're asked is how many DUCs are there in the US and where are they. And that means drilled uncompleted wells. So if you're at an oil conference and someone said how many DUCs are there, that's what they are talking about.

 Last question here. And thank you all very much. I know there's a lot more questions.

 We're after 4 o'clock, and we promised -- (multiple speakers)

 Morten Frisch,  Morten Frisch Consulting - Analyst   [39]
 It's Morten Frisch from Morten Frisch Consulting. First, two short comments.

 Saudi Arabia, yesterday Aramco announced that they are looking at importing natural gas, which at the LNG price of $5 per million Btu makes an awful lot of sense when it cost them more than $6 per million Btu to produce deep sour gas. That could change.

 Bob Dudley,  BP plc - Group Chief Executive   [40]
 Or for oil for power.

 Morten Frisch,  Morten Frisch Consulting - Analyst   [41]
 Yes. And using that LNG instead of oil being burned for power, that could change the dynamics in the Middle East. Then to the last question about the bottlenecks in the US is something they're looking at.

 The main bottleneck is likely to be the hydraulic fracturing crews. This is highly skilled work and lots of these people have been lost. The industry wisdom, if there is such a thing, is that the US can increase from the current 400 rigs onshore to something like 600 without too much difficult.

 And right now there are more than 1,000 rigs stacked in the desert, there are more than 140,000 oil workers laid off. So, there is a big pull there.

 Then to my question, Spencer, you talked about oil reserves also earlier. Could you say a few words about enhanced oil and gas recovery, and particularly in relation to shale oil and shale gas? What kind of recovery factors do you now see for shale oil and shale gas, because that's going to be a key question for the future?

 Spencer Dale,  BP plc - Group Chief Economist   [42]
 There are other people more qualified than I to talk about this. You know better than I do one of the features -- let me talk about tight oil.

 To the extent I know anything, I know more about tight oil than I do about shale gas. One of the features of tight oil has been the recovery rates from those are very slow relative to conventional oil. So, one typically, I think initially, one talked about recovery rates of 5% or so relative to recovery rates closer to 30% or 35% for conventional oil.

 My impression now is when I speak to people in the lower 48 they will talk about more in lines of 5% to 10%, perhaps even as much as 12% in some of the key sweet spots. This is enormously important because if the big constraint on how long and for how long and how much can US tight oil continue to grow, if the key constraint of that is the size of the resource bases, which is what we believe, if you suddenly start increasing the recovery rate by 50% you have effectively increased the resource base by 50%.

 This is huge. How much further this can go I think is hard to know. Certainly if you speak to people working in the lower 48 who are drinking from the Kool-Aid down there, they will tell you we've only just started.

 And at the moment this is not super sophisticated, what they are doing, and they can increase recovery rates very significantly. At the moment, in some sense, I'm a recipient of that information rather than somebody trying to be able to work out for myself. But what we have seen is recovery rates already improve really quite significantly in US tight oil.

 And at least if you speak to the people working directly in that, they will talk about scope to increase it significantly further still over the next five or 10 years.

 Bob Dudley,  BP plc - Group Chief Executive   [43]
 Ladies and gentlemen, thank you very much. We've got lots of people on the line. We had said we would keep this until 4 o'clock here in London.

 We're past that. Thank you all very much for coming. Great questions.

 Thank you, Spencer, and the entire economics team and our friends at Heriot-Watt. Thank you very much.

 Spencer Dale,  BP plc - Group Chief Economist   [44]
 Thank you.

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