BP PLC Statistical Review of World Energy 2017

Jun 13, 2017 AM EDT
BP.L - BP PLC
BP PLC Statistical Review of World Energy 2017
Jun 13, 2017 / 01:30PM GMT 

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Corporate Participants
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   *  H. Lamar McKay
      BP p.l.c. - Deputy Group Chief Executive
   *  Spencer Dale
      BP p.l.c. - Group Chief Economist

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Conference Call Participants
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   *  Benjamin Combes
   *  David Elmes
   *  John Cooper
   *  Lydia Rose Emma Rainforth
      Barclays PLC, Research Division - Director and Equity Analyst 
   *  Martijn Rats
      Morgan Stanley, Research Division - MD and Head of Oil Research
   *  Nick Coleman
   *  Robert Gross
   *  Tom Langdon-Davies
   *  Dieter Helm
   *  Morten Frisch

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Presentation
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 H. Lamar McKay,  BP p.l.c. - Deputy Group Chief Executive   [1]
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 Hello, everyone. Thank you for joining us today here in St. James's Square in London. Welcome to everyone on the webcast around the world joining us, welcome. We're here today to welcome you to the BP's statistical review of world energy 2017. My name is Lamar McKay, and I'm BP's Deputy Group Chief Executive. I'm afraid Bob couldn't be with us today, but it does mean that I've got the privilege of opening proceedings for the 66th year of BP's statistical review.

 I've not -- of course, I've not been in BP for 66 years. I've been here for quite a few. But the first edition goes all the way back to 1952. And just to put that in a historical context, that's the same year that Princess Elizabeth II became Queen of the United Kingdom just over here at St. James's Palace, not very far from where we are today.

 So the stats review has a very long history. It's undergone many changes over the years, the way it is presented, the way it is accessed, the way that it looks. In fact, today's live webcast is a testament to how we're changing things. But whatever changes have taken place, the fundamental purpose of the review remains the same, and that's to provide objective energy data that begins discussions, it fuels debates, it helps decision-making for those in our industry and beyond.

 And while the stats review, of course, doesn't contain all the answers, I'd like to think and our stakeholders tell us that it is a useful reference point for which to base future decisions. And the data contained within the stats review is extensive as is the team that sits behind it. So I'd like to take the opportunity to thank everyone today that was involved in this year's project. Special thanks, of course, to Spencer Dale, our Chief Economist and his economics team. In just a moment, Spencer will take you through his team's analysis of this year's data in much more detail.

 But before that, I'd like to whet your appetite just a bit with 3 of the key findings. It was another eventful year in the energy industry as you all know. And in 2016, it was a year where we saw balance returning to the oil markets after an extended period. And this was brought about by 2 main factors: strong growth in oil demand, which was fueled by another year of weak oil prices and a weak growth in the supply of oil. Non-OPEC supply fell very sharply and one of the biggest declines that we've seen in the last 25 years. So the combination of strong demand growth and weak supply allowed the market to rebalance, daily production and consumption of oil coming into balance into the second half of last year. But of course, that left oil inventories at record-high levels, and so there's still a long way to go until the oil market returns anything close to normal.

 Secondly, we saw a shakeup in the fuel mix. With the rise of renewals -- excuse me, the rise of renewables and the continued decline of coal, renewable energy continued to grow very rapidly in 2016 at about 12%. That accounted for nearly 1/3 of the increase in primary energy growth in the world. China alone contributed about 40% of the global growth in renewables. Now that's more than the entire OECD combined, and China surpassed the U.S. to become the largest producer of renewable energy in the world.

 Now on the flip side, coal consumption fell sharply for the second consecutive year, and it was at its low -- lowest level since 2004. And what's more, here in the U.K., U.K. coal production and consumption fell back to levels that we haven't seen in 200 years, the same time as the Industrial Revolution when the coal growth started. And April of this year, in fact, the U.K. power sector recorded its first-ever coal-free day. So all this comes just 4 years after coal was the largest source of energy demand growth. So it just highlights the sheer pace by which the energy transition is taking place.

 So third and finally, the stats review estimates that the combination of this weak growth in energy demand and the changes in the fuel mix means carbon emissions from energy use remained flat in 2016. Now that's actually the third consecutive year in which we've seen little or no growth in carbon emissions. That's good news, of course, and in sharp contrast to the strong rates of growth that we've been accustomed to for the last decade or so.

 Now much of the slowing can be linked to the pace and pattern of economic growth in China. But how much of that improvement will persist into the future is still unclear. So we need to keep our focus and efforts on reducing carbon emissions. BP supports the aims set out in the COP21 meetings in Paris and is committed to playing its part in helping to achieve them.

 So there you have the 3 main takeaways as I see it from this year's stats review. To recap, we saw balance return to the oil markets, we saw the continued rise of renewables and the decline of coal. We saw flat carbon emissions last year driven by weak demand and changes in the fuel mix as we move towards a lower carbon economy. And the story for energy last year is -- that's, of course, at the very highest level. And it's one -- these conclusions that have a real practical purpose, certainly for those of us at BP. It's a picture that I'm personally very familiar with.

 I've led the work recently we've done in the past year or so updating our strategy, which we shared with investors in February. And so, for example, in that strategy, we're committed to shifting BP's upstream portfolio to advantage oil. And by that, I mean, oil at high margin or low cost and towards more gas. Gas is affordable, widely available and a cleaner burning fuel. And we think that can help reduce global carbon footprint at scale very effectively. That shift for us is coming into immediate effect. 6 of our 7 major projects that are due to come online this year are, in fact, gas projects.

 And you'll see the trends also reflected in our downstream businesses, where we've been developing and launching new lower carbon products like our new fuels and lubes. And we've got extensive research and innovation underway. It includes significant venturing investment, which we think will create opportunities for innovative and viable low carbon solutions across a range of fronts.

 And we're modernizing the whole of BP to drive efficiency and fully harness all the benefits we can of digitization, automation, the great wave of technological advances that are transforming the energy world. So that goes, of course, for the energy we use, the -- how we use it, what we use, how we produce it and above all, how safely we can produce it.

 And with that, in mind, let me now leave you in the safe hands of Spencer, who will take you through the stats review in much more detail. And once again, Spencer, let me thank you and your team on a job very well done this year on the stats review.

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 Spencer Dale,  BP p.l.c. - Group Chief Economist   [2]
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 Thank you, Lamar, and good afternoon, everyone. Let me add my thanks to everyone for sparing the time this afternoon to come to see the launch of BP's 2017 fiscal review of world energy, both everyone here in London and those joining around the world via the web. I think we had up -- at last count, over 5,000 people registered around the web. There's really core -- I got a message today, a professor from Quebec sent us a message saying his whole class was watching today's presentation, which is very cool. I hope it's useful and enjoyable. So you're all very welcome.

 This is the third statistical review that I have managed. And I must admit, I approach this task with sort of a mixture of honor and trepidation. The stats review has a well-earned reputation built up over many years for being the reference source for global energy. It's been serving this role far longer than I've been alive, and it will carry on long after me. And as Lamar just reminded me, my job is not to radically change or revamp the stats review, rather it's to maintain the commitment to accuracy and objectivity for what it's become known and trusted.

 There was an advert on the back of the Economist Magazine a couple of weeks ago that caught my eye. The advert was for an expensive watch. Now this version of the advert had a mother and a daughter. And the tagline of this advert was, "You never actually own the watch. You merely look after it for the next generation." That's exactly what it feels like leading the stats review. We may polish the face occasionally or buy a new strap, but we don't mess around with its core values and purposes.

 My role as guardian of this valued asset is made hugely easier by the work of the economics team, who, as always, has worked tirelessly over the last couple of months. And I do stress tirelessly, over the last couple of months to produce this year's review. And also by the team from Heriot-Watt University led by Mark Schaffer and Erkal Ersoy who yet again provided a valuable help and support. Many of those are here today, some of the team is watching via the webcast. Huge thanks to all of you. This is very much a team effort.

 Stability and energy don't go together. It's a bit like reliability and airline IT systems. Or perhaps, as last week reminded us, predictability and elections. Booms and busts, rebounds and reversals are the norms. But the movements and volatility seen last year in global energy markets were particularly interesting because they were driven by 2 separate forces: the continued adjustment to the short-run cyclical forces as shocks that have rocked energy markets in recent years, overlaid by growing gravitational pull from the longer-run transition that is underway, short-run adjustments and long-run transition.

 The need for near-term adjustment was most obvious within the oil market. Coal markets, as we shall see in a moment, also faced their own near-term surprises. Documenting these adjustment processes, learning how industries and markets adapt and adjust to these cyclical disturbances is meat and drink to the statistical review. It's what we do. But these near-term adjustment mechanisms are being increasingly affected by the longer-run transition that is shaping global energy markets.

 On the demand side, the shift in the center of gravity to fast-growing developing economies, led by China and India, together with the slowing in overall energy growth as it's used ever more efficiently. And on the supply side, the secular movement towards cleaner, lower carbon energy, led by renewable energy, driven by environmental needs and technological advances. This year's stats review shines a light on both factors driving energy markets in 2016, short-run adjustments and long-run transition.

 The confluence of these 2 forces can be seen clearly in the headline numbers. Primary energy group by just 1% in 2016, shown here in the purple bars, almost half the average rate seen over the previous 10 years. Some of this weakness reflected short-run factors, global GDP grew by just 3% last year, its slowest rate apart from the financial crisis, since 2002, driven in part by a slowdown in industrial production, the most energy-intensive sector of the economy.

 But the weakness is also indicative of the longer-run trend towards slower energy growth, driven by gains in energy efficiency. This is the third consecutive year in which energy consumption has grown by 1% or less, with the 5-year average growth rate shown by the dotted line at its lowest level for over 20 years. And this slowing has gone hand-in-hand with falls in energy intensity, the average amount of energy needed to produce a unit of GDP shown here by the green bars, which has also declined at historically rapid rates.

 As is now the new normal, almost all the growth in energy consumption came from developing economies. Energy demand in the OECD, shown here in green, was essentially flat. China and India led the way, contributing almost identical increments and together accounting for around half of the increase in global demand. But these similar contributions from India and China disguise sharply contrasting trends. India's energy consumption grew a similar rate to the recent past, underpinned by solid economic growth and a relatively stable economic structure. In contrast, China's energy consumption grew at less the quarter of the rate seen over the previous 10 years. You can see that by the sharp slowing or the sharp contraction in those dark blue bars.

 This break in China's energy consumption partly reflects the general slowdown in China's economic growth. But it's been greatly compounded by the particularly pronounced weakness in China's most energy-intensive sectors, particularly iron, steel and cement, whose outputs have fallen in absolute terms in recent years. So you can see from growth rates of well over 10% as they were fueling China's rapid industrialization to outright force.

 The key point here is these sectors on their own account for around 1/4 of China's total energy consumption. And so as you can see here in this chart to the right, these 3 sectors have played a major role in the recent slowing of China's energy demand. Some of the weakness in these sectors reflects a structural rebalancing of the Chinese economy towards more consumer and service-facing sectors. But the sheer scale of the slowdown suggests that some bounce back is perhaps likely, short-run adjustments and long-run transition.

 The story in terms of individual fuels also reflects a mix of these 2 forces. One symptom of the need for short-run adjustments was that the consumption of oil, natural gas and coal all grew more quickly than their production in 2016, shown here on the chart on the left, as markets responded to excess supplies. And this links to that story of energy abundance we've discussed in this room in the past.

 Renewable energy, shown in orange, was again the fastest-growing energy source, which, despite having a share of only 4%, accounted for nearly 1/3 of the increase in primary energy. That said, oil actually provided the largest contribution to growth, boosted by low oil prices. Natural gas grew at the same rate as oil, although for gas this was slower than its 10-year average.

 Perhaps the most striking development was the continuing rapid descent of coal, shown here in gray, with consumption and production falling sharply for the second consecutive year and the share of coal within primary energy declining to its lowest level since 2004.

 The speed of deterioration in the fortunes of coal over the past few years has been stark. It's only 4 years ago that coal was the largest source of global growth. Now I'm sure there will be further ups and downs in the fortunes of coal over the coming years, but the scale of the declines in recent years do seem to signal a fairly decisive break from the past. Putting this together, slower energy growth and the shift in the fuel mix away from coal and strong growth in renewables had significant implications for carbon emissions, and we'll come back to that later on.

 So that's just a very quick whistle-stop tour, big picture tour of 2016. The plan now is to peer in a little closer and look and consider each of the fuels, in turn, starting first with oil. The need for the oil market to adjust to excess supplies is well known. As some of you may recall, the adjustment of the oil market in 2015, 2 years ago, was thwarted. The market responded to the collapse in oil prices with strong demand growth and a marked slowing in non-OPEC output. But this adjustment was more than offset by a sharp increase in production by Iraq and Saudi Arabia.

 In contrast, 2016 was the year of adjustment for the oil market, with oil demand again increasing the (inaudible) and production growth slowing further.

 Consider first oil demand, which is on the left-hand side of this chart, which is estimated to have grown by 1.6 million barrels a day last year. As in 2015, this strength was almost entirely due to oil importers continuing to benefit from low oil prices, with both India and Europe posting unusually strong increases. Growth in China and the U.S., the world's 2 largest oil consumers, was more subdued relative to recent averages.

 As in 2015, the strength of overall demand disguised the tale of 2 products. Consumption growth was concentrated in consumer-led fuels, such as gasoline and jet fuel, buoyed by low oil prices. In contrast, diesel demand, which is more exposed to the weakness in industrial activity, including in the U.S. and China, declined for the first time since 2009.

 The adjustment of the supply side was driven by non-OPEC production, the green bars on the right-hand side here, which fell by 0.8 million barrels a day, its largest decline for almost 25 years. This fall was led by U.S. tight oil, whose production fell by 0.3 million barrels a day, a swing of almost 1 million barrels a day relative to the growth seen in 2015. The other area of conspicuous weakness was China, which saw its largest-ever decline in oil production.

 In contrast, OPEC production, the yellow bars, recorded another year of solid growth, with Iran, Iraq and Saudi Arabia together more than accounting for the increase. Iran's production recovered more quickly than many commentators had expected following the lifting of international sanctions at the beginning of last year, with its level of production and its share of OPEC output now back to around pre-sanction levels.

 The combination of strong demand and weak output was sufficient for the excess supply that had persisted in the oil market since the middle of 2014 to be gradually absorbed, with the oil market moving broadly into balance by the middle of last year. But that was not before inventories had increased even further from their already elevated levels. So to the level

 (technical difficulty)

 Notwithstanding that, the short cycle nature of fracking made U.S. tight oil did respond far more quickly to price signals than global conventional oil. As you can see in this chart, rigs started to fall 4 to 6 months after oil prices peaked in the middle of 2014 and picked up even more quickly within 3 or 4 months once prices started to turn at the beginning of last year. And these changing levels of activity fed through quickly into output growth, with output falling back in 2015 and 2016 and picking up more recently.

 Some commentators have talked about the surprising resilience of U.S. tight oil. But it's important to be clear about what we mean by resilience. Tight oil lived up to its billing. It did respond far more quickly to price changes than global conventional oil. And as such, dampened price volatility on both the downside and more recently, on the upside.

 For me, the resilience of tight oil is better described in terms of a toy I used to have when I was growing up. That toy was called a Weeble. Now some of you may remember, the key thing about Weebles was Weebles wobble, but they don't fall down. The short-cycle nature of U.S. tight oil means that in response to price movements, tight oil falls back far more quickly than conventional oil. But tight oil is not the marginal barrel in the longer run. Other types of oil have higher all-in costs. As such, as the market adjusts and prices recover, it will spring back just like the Weeble, exactly as we are seeing now. That's the resilience of U.S. tight oil. It may fall over, but it will bounce back.

 So what about the other principal actor in this drama, OPEC? As with many great characters in literature, OPEC took some decisive actions, which caught many observers by surprise and dramatically changed the course of events: first, by not cutting production in November 2014 and triggering a collapse in prices; and then last November, appearing to change course and agreeing along with 10 non-OPEC producers to a significant production cut. How should we think about these actions, to cut or not to cut?

 For me, the clearest explanations of these actions were given by His Excellency Khalid Al-Falih, the Saudi Arabian Minister for Energy, Industry and Mineral Resources, earlier this year. To quote Minister Al-Falih, "OPEC remains an important catalyst to the stability and sustainability of the market." But history has also demonstrated that intervention, in response to structural shifts, is largely ineffective. That's why Saudi Arabia does not support OPEC intervening to alleviate the impacts of long-term structural imbalances as opposed to addressing short-term aberrations.

 If we unpack this a bit, OPEC's power stems from its ability to shift oil production from one period to another. As such, it has the ability to smooth through the effects of temporary shocks to the oil market, lowering or raising production to offset that shock until the shock subsides.

 But its ability to respond to permanent or structural shocks is far more limited. Shifting supply from one period to another makes very little difference if the underlying shock just persists. Consider, for example, the unsuccessful attempts by OPEC to support the oil market in the first half of the 1980s as new structural sources of production came on stream for North -- from the North Sea and Alaska.

 The underlying source of the supply imbalance that emerged in 2014 was a growth of U.S. tight oil. To use the Minister's words, "This was not a short-term aberration. It was the emergence of a new source of inter-marginal supply," remember the Weeble. In contrast, the focus of OPEC's current actions is on increasing the pace at which oil stocks return to more normal levels. This is exactly the type of temporary aberration in which OPEC intervention can be effective, reducing supply until stocks have adjusted.

 So perhaps like all the best stories, the actions of the main characters make perfect sense when seen in the right context. OPEC didn't cut in November 2014 because the emergence of tight oil was a structural shock over which it had little power. In contrast, the most recent cuts are focused on the temporary issue of how quickly stocks unwind, where OPEC's actions can be effective.

 Finally, for oil, what has all this meant for prices? The persistent supply imbalance and growing inventory levels caused prices to fall towards the end of 2015 into 2016. Prices stabilized through the middle of the year as the market moved into balance and inventories leveled off before firming somewhat towards the end of 2016 in the wake of the OPEC, non-OPEC agreement. Dated Brent averaged $44 in 2016, down from $52 the year before, its lowest nominal average since 2004.

 That's all I wanted to say on the oil market. Turning next to coal. As I said, the fortunes of coal appear to have taken a decisive break from the past. At the heart of this shift are structural, long-term factors, the increasing availability and competitiveness of natural gas and renewable energy, combined with mounting government and societal pressures to shift away from coal towards cleaner, lower carbon fuels. These long-term forces have in turn given rise to policy responses that have often added even greater momentum.

 This was particularly the case in China last year, which, at the beginning of 2016, introduced a series of measures to reduce the scale of excess capacity in the domestic coal sector and improve the productivity and profitability of the remaining mines. As part of that, the government further constrained production by restricting coal mines to operate for a maximum of 276 days, down from 330.

 The impact of these measures was dramatic. Domestic coal production fell by almost 8%, by far the largest decline on record, and the price of steam coal increased by over 60%. Chinese coal consumption also declined for the third consecutive year. And for those of you who are not familiar with the Chinese policy last year, it's really worth spending some time reading about it. It's absolutely fascinating.

 The events in China spilled out over into global coal markets, with world prices taking their cue from China, dampening global demand for coal. Global coal consumption fell by 53 million tons of oil equivalent and production by a whopping 230, with U.S. coal production registering a second consecutive substantial fall.

 A particularly extreme example of this long-run movement away from coal was seen here in the U.K., with the rise in global coal prices adding to the pressure from the earlier increase in the U.K.'s carbon price floor. As a result, the U.K.'s relationship with coal completed almost an entire cycle with the U.K.'s last 3 underground coal mines closing, consumption falling back to where it was almost 200 years ago at the time of the Industrial Revolution and the U.K. power sector recording its first-ever coal-free day in April of this year. The end of an era. And it's a fascinating era, starting with the first steam locomotive, through the introduction of coal-fired power stations, the Clean Air Act and the miners' strike and then moving into its final phase with the dash for gas and more recently, the increasing role of renewables. So really fascinating history playing out in real time.

 If we turn next to natural gas, which, despite this boost from coal prices, was relatively muted last year. Global consumption increased by 1.5%, weaker than its 10-year average. While gas production, shown here on the right, was essentially flat, the slowest growth in gas output for almost 35 years other than in the immediate aftermath of the financial crisis. This subpar growth went hand-in-hand with falling prices. Henry Hub prices were 5% lower than in 2015, European and Asian spot prices were down between 20% and 30% as prices continued to adjust to increased LNG supplies.

 Much of the lackluster performance can be traced back to the U.S., particularly on the supply side where declines in gas and oil prices caused U.S. gas production to fall for the first time since the shale revolution began in the mid-2000s.

 In contrast, Australian production grew strongly as several new liquefied natural gas, LNG facilities came on-stream. If we look at the growing market for LNG, shown here on the right, although China continued to provide the main source of growth, it is striking that the increasing availability of supplies has prompted a number of new countries, including Egypt, Pakistan and Poland, to enter the market over the past couple of years. This is a good example of what economists would call Say's law, new supplies creating their own demand.

 2016 was the first sort of real year of the growth spurt we expect to see in LNG, with global supplies set to increase by around 1/3 or 30% by 2020. That's equivalent to a new LNG train coming on-stream every 2 to 3 months for the next 4 years. New train every 2 or 3 months for the next 4 years, quite astonishing growth. As the importance of LNG trade grows, global gas markets are likely to evolve quite materially. Alongside increasing market integration, we're likely to see a shift towards more flexible start of trading, supported by a deeper and more competitive market structure. Indeed, this shift is already apparent with a move towards shorter and smaller contracts and an increasing proportion of LNG trade, which is not contracted and is freely traded.

 A particularly interesting market in the context of growing LNG supplies is Europe. On the one hand, Europe's large and increasing need for imported gas, combined with its central location amongst several major LNG suppliers means it's often highlighted as a natural growth market for LNG. But on the other hand, Europe's access to plentiful supplies of pipeline gas, particularly from Russia, means LNG imports are likely to face stiff competition.

 In terms of this battle of competing supplies, 2016 went to pipeline gas. Europe's gas imports increased markedly last year on the back of strong increase in demand and weak domestic production shown here in that 2016 bar. But virtually, all of the rises in European imports were met by pipeline gas from a combination of Russian and Algerian supplies in the purple and red bars, with the imports of LNG essentially unchanged.

 The economic incentives in this battle of competing supplies are clear. Just as with OPEC's response to the emergence of U.S. tight oil, Russia has a strong incentive to compete to maintain its market share in the face of growing structural competition from LNG supplies. But this competitive process is complicated by possible concerns about Europe being overly dependent on a single source of supply and the energy security issues this might raise.

 A key question in this regard is whether the growth of global LNG trade might mitigate those concerns, by fostering a more globally integrated gas market with the option of being able to turn to LNG should the need arise. The point here, an important point here, is that Europe doesn't need to import large amounts of LNG in normal times if it has the option of doing so if and when the need arises.

 Turning finally to renewables or not, the leading light of the energy transition, which continued to grow rapidly last year, led by wind and solar. Although the share of renewable power within primary energy remained very small, as I said, its strong growth meant -- accounted for over 30% of the increase in primary energy. China continued to dominate renewables growth, contributing over 40% of the global increase, more than the entire OECD, and surpassing the U.S. to become the largest producer of renewable power.

 One notable weak spot last year was the EU, which you can see in that sort of brown bar at the bottom there, where renewable energy barely grew as load factors in both wind and solar fell back from unusually high levels in 2015. An experience of the EU last year is a reminder of the variability that weather conditions can inject into renewable energy generation from year-to-year.

 Although wind continued to provide the lion's share of the increase in renewable power, solar is catching up fast. The diffusion of solar power across the countries that are separately tracked in the stats review has been far more rapid than wind, helped by the more modular nature of the solar power together with its steeper learning curve. The fact that the transfer of wind and solar technology is not subject to owner or security restrictions has also greatly helped their rapid diffusion relative to nuclear power, which you can see plateaued at less than half the number of countries.

 That provides an overview of the different fuels. I want to conclude this afternoon by considering how these various developments came together in 2 key aspects of the global energy system, the power sector and carbon emissions.

 The power sector plays a central role in the development of global energy markets. It's by far the single biggest market for primary energy. Over 40% of primary energy went into the power sector last year. Moreover, the power sector is at the leading edge of the energy transition, both in terms of improvement in energy efficiency and in the shift towards a lower carbon fuel mix.

 Power generation increased by 2.2% in 2016, stronger than the previous year but quite a bit below its historical average. Almost all of this growth came from developing economies. Power generation within the OECD was essentially flat. Indeed, this continues a trend since around 2010, when power generation in the OECD has essentially flatlined, shown here in the purple line, leading to this widening gap between the growth of GDP and power in the OECD.

 This decoupling is pretty consistent across the OECD, which given the variations in income levels across those economies, suggested the prime driver is not some form of saturation effect as the countries become more prosperous. The timing of the decoupling immediately after the financial crisis implies it might be related to the nature of the economic recovery we have seen, a counterpart to the weak levels of investment and low productivity growth as labor has been substituted for machines. And that may be part of the story, but given the size of this gap, it seems unlikely to account for the entire breakdown.

 A key part of the explanation is likely to stem from a step change in efficiency gains due to the rapidly increasing deployment of energy-efficient appliances. One example of this is the recent take-up of LED light bulbs, which on fairly plausible assumptions, could account for a significant proportion of the saving in electricity consumption over the past couple of years.

 As I cite aside, these increasing efficiency gains highlight a slightly nerdy but important issue associated with the measurement of power and electricity. Although more than 40% of primary energy is absorbed by the power sector, when measured in terms of energy consumed at the final point of use, electricity accounts for only around 20%.

 The point here is that these final consumption measures typically don't take any account of the greater efficiency of electricity at the point of use relative to other fuels. Putting -- making this a bit more simple, you lose a lot less energy when you boil an electric kettle as opposed to putting that kettle on top of your stove and boiling it that way. But no account is taken of that greater efficiency. What we ideally need is a measure of energy services supplied by different forms of energy at their final point of use. And let me throw down the gauntlet. We'd be very happy to publish such a measure in future editions of the statistical review if anybody is able to produce a measure like that.

 In terms of the other key aspect of the energy transition, the shift to a lower carbon fuel mix, the ability of fuels to compete side-by-side in the power sector means it's also leading the way. In particular, renewable energy has accounted for a progressively larger share of the increase in power over the past 15 years. The combination of slower growth in power, together with the increasing contribution from renewable energy, has squeezed the growth of both coal and gas. This squeeze has been most pronounced for coal, but over the past 5 years has also gone to impact natural gas.

 Turning finally to carbon emissions. The good news is that carbon emissions were essentially flat in 2016. This is the third consecutive year in which we've seen little or no growth in carbon emissions, in sharp contrast to the 10 years before that, in which carbon emissions grew on average by around 2.5% per year.

 Some of this slowdown reflects weaker GDP growth, but the majority reflects faster declines in the carbon intensity of GDP, the average amount of carbon emitted per unit of GDP produced, shown here by the green bar. And if we decompose those green bars, those changes in carbon intensity, we can see that they reflect increasing improvements in both energy intensity, you need less energy to produce GDP, as well as improvements in the fuel mix, the energy you are using is cleaner, lower carbon fuel.

 So the absolute key question raised by this improved performance for carbon emissions is whether the experience of the past 3 years signals a decisive break from the past or was it largely driven by cyclical factors, which are likely to unwind over time. Long-run transition or short run adjustment?

 This chart breaks down the factors accounting for the sharp slowing in carbon emissions over the past 3 years -- the average growth over the past 3 years compared to the average growth seen in the previous 10 of 2.5% or so. And as you see, the key driver for this break in the past is China. China's carbon emissions are estimated to have actually fallen over the past 2 years after growing by almost 75% in the previous 10 years. As we saw in the context of the slowdown in China's energy consumption, there are good reasons for thinking that some of this break with the past reflects structural factors that are likely to persist: slower economic growth, a shift in the composition of growth towards less energy-intensive sectors and a movement away from coal. But some probably reflects cyclical factors, particularly the extent of the declines in China's most energy-intensive sectors, which are unlikely to keep being repeated and may well unwind in future years. We still have a very long road in front of us to get to Paris. And as Lamar said, we must retain our focus and efforts on reducing carbon emissions.

 Let me conclude. Energy markets in 2016 were affected by both the continuing need for short-run adjustments as well as the growing pull from the long-run energy transition. 2016 saw the third consecutive year of weak growth in global energy consumption and little or no growth in carbon emissions. Much of this slowing can be traced to developments in China, which as we saw probably reflected the combination of the long-run transition to a more sustainable pattern of growth in that economy, as well as a near-term cyclical slowdown in some of their key industries.

 Some of the strength we saw in the demand for individual fuels, most notably oil, largely reflected the adjustment to a period of excess supplies. But the trends in some of the other fuels, most notably the contrasting fortunes of renewables and coal, had much to do with the longer-run energy transition that is underway.

 The statistical review is hugely valued. It's seen by many as a trusted and dependable guide. It doesn't try to predict the future, but it does give a timely and accurate reading of the present situation and helps us make sense of what's happened and plan better for what lies ahead, indeed just like a much-loved watch. And even better, unlike the watch, it's available free of charge at bp.com. Thank you very much.

 It may just be me but it feels very hot in here. So if anybody has the ability to turn the air conditioning up, I think that may be helpful for people. Thank you.

------------------------------
 H. Lamar McKay,  BP p.l.c. - Deputy Group Chief Executive   [3]
------------------------------
 That's -- I think you're right. Spencer, thank you very much. Thank you, team, for another great stats review. It's time for Q&A. We've got probably about 40 minutes. Since we've got Spencer here today, let's make use of his undivided attention and try to stick pretty much to the stats review. I'll start in the room here with questions and then we'll look at the questions we're getting from the webcast as well as social media.

 So let me start here. You first, I'll go back there and then I'll come across here. And if you don't mind, your name and who you're with, please.

==============================
Questions and Answers
------------------------------
 Morten Frisch,    [1]
------------------------------
 My name is Morten Frisch from MFC. Spencer, again, thank you very much for a brilliant presentation and (inaudible) sitting next to me, who's also among the pioneers for this work. I'm sure he also thinks that you're looking after his -- the watch very well for him. But turning now to my question, you talked about OPEC, you talked about the way they want now to control stored oil, oil products and crude oil. What about the now 6,000 drilled and completed wells in the United States? How does this fit into this picture? Because the U.S. upstream industry, they haven't drilled 6,000 wells for the fun of it.

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 Spencer Dale,  BP p.l.c. - Group Chief Economist   [2]
------------------------------
 No. So the level of drilled but uncompleted wells is at historically very high levels in absolute terms. They're also very high relative to their average of completed wells. So you'd expect as the number of wells completed increases, you'd expect uncompleted wells to also rise just as our inventory story, but the levels are exceptionally high. And that will be part of the story, and we -- and that means a potential for U.S. tight oil to grow rapidly over the next few years. It just reinforces that point, the resilience of tight oil. And so if you like, there's a sort of tug-of-war going on here between OPEC and U.S. tight oil. And I sort of try to avoid giving predictions, especially predictions about the next 6 or 12 months. I guess, where I would look at it in terms of just the fundamentals, what happens to oil prices? I have no idea. But what -- in terms of the fundamentals, I look at one side of the ledger, if I think about the market being broadly imbalanced at the beginning of this year, the OPEC, non-OPEC agreement has taken about 1.8 million barrels a day of the market. On that same side of the ledger, oil demand over the last few years has grown by over 1 million barrels a day each year over the last few years. So you can put at least another 1 million barrels a day on that side of the ledger. On the other side, the main side of the ledger is strong growth in U.S. tight oil. But even the most optimistic, ardent supporters of U.S. tight oil, I've never heard speaking more than 1 million barrels a day, this year, of growth. And so just in terms of these ledgers, it looks like the side of the cuts from OPEC and the increasing demand, just relatively big compared to what U.S. tight oil can do, which is why I think we are likely to see some sort of drawing stocks through the second half of this year, quite sort of material -- there's an increasing draw stock in the second half of this year just in terms of those basic numbers. Now -- so I don't think it will happen tomorrow, which means all those numbers are wrong. But given what we know today and sitting here today, that's how I tend to think about it.

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 H. Lamar McKay,  BP p.l.c. - Deputy Group Chief Executive   [3]
------------------------------
 Yes, sir, in the back.

------------------------------
 Dieter Helm,    [4]
------------------------------
 Dieter Helm, Oxford. Spencer, as I understand what you said in the answer to the last question earlier, you seem to be describing a market which is roughly -- in all markets, roughly imbalanced now, but you have the structural features further down the line, which are part of the decarbonization and the solid -- moving to the power sector and away from the conventional fossil fuels. I mean, can I stretch you a little bit? Does this mean that you think in the short run, $50 is a low price of oil or a high price of oil? And doesn't your structural argument mean that whatever happens in the short run, as to whether you think that's going up or going down in the short run -- I think it's going down, but that's an aside -- in the long run, you must believe the oil price is going to fall as these structural features come into balance -- come into play. And you -- as you said, OPEC's role has nothing to play in that structural game but only in that short-term balance.

------------------------------
 Spencer Dale,  BP p.l.c. - Group Chief Economist   [5]
------------------------------
 And for those of you who haven't read Dieter Helm's book, I thoroughly recommend you reading, and Dieter, I'm sure may well be signing copies outside. I think the short term and the long term are somewhat different in two respects. So one thing in the short term is, I think, U.S. tight oil can act as a natural dampener of volatility in the short term. It can rise and meet demand in the short term. Our central view in the energy outlook was that oil demand will grow by around 20 million barrels a day over the next 20 years. And our best guess was tight oil can grow by around 5 million barrels a day over the next 20 years. So it can't act as a cap on prices going all the way out if those numbers are even broadly right. The second issue, which we think is very important here, is if you're a very large oil producer, you can run very significant fiscal deficits for 4 -- for 2, 3, 4, 5 years. And that's perfectly fine for you to do that. And therefore, the implications that the feedback mechanism from low oil prices on to your real economy, you can essentially -- are relatively muted over short terms. Over the long run, those feedback mechanisms start to bite. You cannot run very large fiscal deficits forever. And therefore, in the longer run, I think we need to think not only about what the cost of the extraction -- the cost of extracting oil at the ground is, you also have to think about the nature -- the economies of those major oil producers. And for them, I don't see many of those major oil producers, with economies which work anywhere near $50, let alone below $50. And I think perhaps it's where we have a slight difference Dieter, I think those long -- when you go to long run, you need to think about those really economy issues as well as these -- as well as pure operating cost issues.

------------------------------
 Unidentified Participant,    [6]
------------------------------
 Hugh Lee, I'm a consultant. It's interesting that we have a statistical review presented by an oil company that hasn't yet mentioned electric vehicles. Are you -- do have any figures on electrical vehicles to give us? And are you planning to produce statistics in future publications?

------------------------------
 Spencer Dale,  BP p.l.c. - Group Chief Economist   [7]
------------------------------
 Well, we don't produce statistics of all machines which use energy. So we don't produce statistics for internal combustion engines or washing machines or radios or so on. For those of you who I bored in this room in January of this year when we produced the energy outlook, you would have known that we spent almost half of the presentation talking about electric vehicles. So we have not -- you can accuse BP and me of many things, I think being silent on electric vehicles isn't one of them. Electric vehicles are growing very rapidly. The most recent estimates I've seen from the IEA, I think, was we got to about 2 million electric vehicles on the planet today. BP's best guess or my best guess in the energy outlook, my central view, was that we could get to about 100 million electric vehicles by 2035. But then I said, frankly, who knows. The confidence bands around that are enormous. It could easily get to 200 million or 300 million electric cars. And likewise, it could be a lot less. Those confidence band are very wide on both sides here. The key point here, and the point I stressed then was, my best guess is 100 million electric cars reduces oil demand by around 1.5 million barrels a day. This is a market which is around 100 million barrels a day. So let's suppose I'm wrong and it's a lot, lot quicker than I expect, it grows to 200 million, 300 million barrels. That's 3 million or 4 million barrels a day of oil out of a market of 100 million. So my point here is, do I think electric cars are going to grow rapidly? Absolutely, very extraordinarily rapidly. Just how rapidly, I don't know, but very rapidly. Are they going to completely change the nature of our relationship with cars? Absolutely. But are they likely to have a major impact on oil demand over the next 20 years? I can't see it, because I just don't see arithmetic implies that they will.

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 H. Lamar McKay,  BP p.l.c. - Deputy Group Chief Executive   [8]
------------------------------
 All right, let me go over here. And then we'll go to the web for a second.

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 Nick Coleman,    [9]
------------------------------
 Nick Coleman from Platts. Among your 2 key actors, Shell and OPEC, you didn't mention the offshore or deepwater oil industry, and I know most of the majors are saying that they can break even at prices below $50 a barrel, but I'm not sure if that's generally true of the offshore oil industry and especially, actually, in the North Sea where there's basically no investments happening in new production since 2014. Could you comment on what these kind of oil prices we're at now may mean for the deepwater and offshore oil industry?

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 Spencer Dale,  BP p.l.c. - Group Chief Economist   [10]
------------------------------
 Well, Lamar, do you want a go at that?

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 H. Lamar McKay,  BP p.l.c. - Deputy Group Chief Executive   [11]
------------------------------
 Well, let me just mention a couple of things. The deepwater industry, just like all of the other oil and gas provinces, are adjusting as quickly as possible to the price environment we're in. So we do have projects around the world that you know of that can meet the hurdle rates that we require even at $50 a barrel, $60 a barrel, things like Mad Dog 2, those kind of projects. Now they don't adjust as quickly or as in a -- as granular a way as you can do in tight oil in the U.S. So you can -- what Spencer's graph showed, I think, is exactly pertinent to your question is, tight oil can adjust so much quicker and so much more aggressively to price drops as well as price rises. So I think on the deepwater front, the industry's definitely adjusting, there are definitely projects coming through, but it's just not going to be as fast and at the scale that tight oil can adjust into these what some people are thinking are short-term fluctuations.

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 Spencer Dale,  BP p.l.c. - Group Chief Economist   [12]
------------------------------
 I just would add, all the analyses that I've seen suggest that things which are binary, which says this is a low cost thing and that's a high cost thing, tend to be quite misleading. There's quite significant bands of variation here. And so if you're in the right deepwater and you do it efficiently and you perhaps have some incumbency already there so you can base on the existing infrastructure, that can be very competitive. And so the idea of categorizing things as high cost, low cost, winners, losers, I think, perhaps isn't quite the right way of thinking about it. I think perhaps one of these have more nuance there, because everything -- all the analysis I've seen tends to be for different plays, you get quite wide bands. So as long as you're in the bottom of that band, you can be quite competitive in a whole range of different fields.

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 H. Lamar McKay,  BP p.l.c. - Deputy Group Chief Executive   [13]
------------------------------
 Let's go to the web and then we'll come back to the room for one second. Let's move to gas for a sec. This is from Sherwin Long in Trinidad on the web. Given the anticipated increase in global natural gas trading, how close are we to a global benchmark price similar to Brent or WTI for gas? What are the factors that would act for or against this development?

------------------------------
 Spencer Dale,  BP p.l.c. - Group Chief Economist   [14]
------------------------------
 So I think, at the moment, we're still quite a long way away. But my guess is, as this market develops and as we see an increasingly competitive and deep in competitive spot market for gas, we will start to see increasingly contracts for LNG, less gas will be traded on contract terms more will be in spot markets. And those -- and that gas, which is traded by contracts, I think those contracts will be increasingly indexed to a gas price rather than to an oil price. In the energy outlook, we argued -- we thought the natural anchor for this global gas market would be U.S. gas prices. And that was essentially based on 2 arguments. One is, it will be one of the 2 global -- major global suppliers of LNG, the U.S. and Australia. The second point, what's different about the U.S. relative to Australia? The nature where Australia is located relative to the major market in terms of Asia, means all of Australia's LNG exports are likely to be absorbed and go into Asia. In contrast where the U.S. is, the U.S. exports are likely to be far more diversified. Some will go to Asia, some will go to Europe, some will go to Central and Southern America. And essentially, the marginal barrel if you're a the U.S. LNG exporter, you'll have to decide where at the margin you want to send your LNG. Are you going to send it to Asia? Are you going to send it to Europe? Are you going to send it to South and Central America? And you're going to keep on diverting those cargos until they all come into line. And so as a result of which, the marginal price across all of those are going to be linked back, I think, ultimately to Henry Hub. Now when I've had some conversations with some people in the past, they've said, many people in Asia won't be comfortable trading a contract price in terms of Henry Hub. They will feel a long way away, they may be worried about, well are the Americans going to do something funny with this Henry Hub. And so you may well see the new Hub prices developed in different parts of Asia and contracts linked to those Asian Hub prices rather than directly to Henry Hub. But I think the economics of this market means even if you see that, the underlying anchor price there will be U.S. prices even if you see the development of some Asian Hub prices to act as a sort of focal point for contracts.

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 H. Lamar McKay,  BP p.l.c. - Deputy Group Chief Executive   [15]
------------------------------
 Okay, thanks. Over here and then we'll come back over here. Right here in the middle.

------------------------------
 Benjamin Combes,    [16]
------------------------------
 Ben Combes, PwC. Spencer, you presented an excellent chart last year, which showed the present -- the penetration of different fuel types and how quickly they reach 10% or 20% for global energy mix. And you mentioned how renewables couldn't grow that quickly, look at how other fuels have grown. I notice in this year's presentation, you talked about solar and wind being modular and how quick their penetration, almost exponential. Are you starting to rethink how quickly renewables can grow in that modular format, more like akin to products like cars or satellites, broadband television or mobile phones rather than centralized energy distribution?

------------------------------
 Spencer Dale,  BP p.l.c. - Group Chief Economist   [17]
------------------------------
 So I don't think we've seen anything yet to change that sort of central story. So for those who -- it's a great chart. For those who want to see it, it made two points. One was, that when you look at the time it took for oil or gas or nuclear to move from, say, 1% of the world's energy to 10% of the world's energy, it took -- it was measured in terms of 30, 40, 50 years. And then we said, well look, we're about 7 years, 8 years into when renewable energy hit 1%, how's it doing? And what it showed was thus far, it's grown pretty much in line with those other fuels. I mean, it was in the top end, sort of pretty much in line with nuclear than it had done with oil or gas, but in a similar vein. And I think when you look back at history, there were really significant forces pushing many of these different things. So trying to say this is more important than that is quite hard. The argument, which underlies this sort of inertia you see in global energy systems is; one, is it just takes time to shift resources and allocation across into new energies. The other one is just the sheer capital intensity of the global energy system. Power stations last for 40 years and that acts as a natural brake in terms of the speed of transition. And so we're monitoring this. Thus far, over the first sort of 8, 9 years of renewable energy, it doesn't seem to be setting off on a path completely different to other fuels of the past. But we don't know. This time history may be -- it may be different from history this time. But as I said, when I was perhaps presenting that chart a year ago, economists like to say, this time will be different. And most times when economists say, this time will be different, we're called out. So at least the message from history is it takes a long time. And in some sense, what we said was, it could get -- by about 2035, it would get -- we are -- our best central guess -- was when renewable energy would get to 10%. That would be the world's energy. That will be quicker than any fuel ever seen in history. Now the confidence bands around that 10% are massive. But suppose it goes really, really quick and gets to 15%. The punchline of that is, that still you need 85% from some other energy source and I think that's a big picture. Energy transitions are measured in periods of decades, not in short years. And I don't think renewable energy will shift that basic message from history.

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 H. Lamar McKay,  BP p.l.c. - Deputy Group Chief Executive   [18]
------------------------------
 Second row.

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 Lydia Rose Emma Rainforth,  Barclays PLC, Research Division - Director and Equity Analyst    [19]
------------------------------
 It's Lydia from Barclays here. If I could just pick up on that sense of short-term adjustments and long-run transitions. On the coal side, do you think we would have had the reduction in coal consumption that we had without the Chinese policy for this year? And linking that sort of longer-term adjustment factor, do you think you need a carbon price for that transition away from coal to continue?

------------------------------
 Spencer Dale,  BP p.l.c. - Group Chief Economist   [20]
------------------------------
 So my best guess is the Chinese policies amplified the impact, but perhaps not to a huge extent. On -- and the reason for saying that was in terms of China, I don't think Chinese coal demand is that price-sensitive, the nature of China's and the structure of the Chinese economy means. So I think it had enormous impact on Chinese production, but less so on Chinese consumption. The other economy, which has seen the largest falls in coal has been the U.S. The impact on U.S. prices going into the power system from that China story, they started to get muted, particularly when you look at year averages. And so the improvement in gas relative to coal this year in terms of the competitiveness in the U.S. was less pronounced than the year before. The big driver of what we're seeing in America isn't regulation and it's not Chinese policies, it's the success of U.S. shale gas. As U.S. shale gas has grown very strongly, the price of U.S. gas has fallen and as it's fallen, it's crowded out coal. And you may recall that this time a year ago, I mentioned that 2015 was the first year where gas overtook coal as a dominant source of power in the -- dominant source of fuel in the U.S. power system and that continued this year. I would just like to say, you talked about carbon price and we'd just like to mention a point in the U.K. So if you live in the U.K., and I say this to those people around the world. If you live in the U.K., as I'm sure is as in most parts of the world, the sort of the -- the fashionable thing to do is always criticize your own country. I think one thing the U.K. did, which has an amazing impact, was the increase in the Carbon Price Floor, which they introduced in 2015. So essentially, for those who aren't familiar with this is, the U.K. stayed within the European trading system for carbon. But they said, if prices get so low, we will stick a floor and that floor is just shy of GBP 20 a ton. And that carbon price floor was raised very significantly in 2015 and kept there in 2016. And I think that has played a major role in terms of the crowding out of coal and the crowding in of cleaner, lower carbon fuel. And I guess, the message here and it's a message I sort of bang on every time I sit on this platform is, prices work in the energy system. Prices really work in the power system, so if policy makers don't like the fuel mix in a power system, they can use prices, they can use carbon pricing to change that fuel mix. I mean, a look at the U.K. is a classic example of this working. And so when people say, well, economists say that but give me the evidence. Look at the U.K. If you like, look at the U.S., the price there was moving -- the price of gas relative to coal. But prices are really powerful here and I think that's an important message that we can take from the last 2 or 3 year's statistical reviews.

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 H. Lamar McKay,  BP p.l.c. - Deputy Group Chief Executive   [21]
------------------------------
 Okay. Here in the middle of the room.

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 David Elmes,    [22]
------------------------------
 David Elmes of Warwick Business School. You talked a lot about supply and consumption but less so about reserves. And can I also sort of put a suggestion out possibly for the review in the future? You started to introduce the different sorts of reserves in oil and gas, the traditional ones that took a number of years to happen. And you said, well, in shale we've got ones which go on and off a bit faster. We've also got significant inventories, which are a sort of reserve in some sense. And then if you look at other parts of the energy sector, hydro is a big source of reserves. And if we believe it, then all those electric vehicles are a form of sort of storage or reserve. So it’s this old question of do we sort of need to move to a more time-based view of reserves in the way that we look at the energy system?

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 Spencer Dale,  BP p.l.c. - Group Chief Economist   [23]
------------------------------
 Yes, I think that's a very fair -- it's a fair observation. So we do publish our estimates of proved reserves for oil, coal and gas. But they are -- they tend to be relatively lagged, those, and they don't have that temporal aspect that you're talking about. And I think that's sort of why if you like, OPEC can play a role, a very quick role because they can come on and off very quickly. Tight oil gives us another dimension to that. And as you say, built up of inventors gives us another form of that. And there's somehow a temporal aspect of potential supply or latent supply, how quick can supply come on, I think, is a good point. How I would do that, I'm not sure, but I can see the point.

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 H. Lamar McKay,  BP p.l.c. - Deputy Group Chief Executive   [24]
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 Let's go to the web for one sec then we'll come back into the room. Spencer, this is a little bit forward-looking, but maybe we'll combine a couple of questions here. Since -- and this is from Dale Hohm, which is -- he's with Azimuth Capital in Canada. Since 2014, capital investment for oil exploration has substantially reduced and final investment decisions for major oil development projects are a fraction of prior years. Is there a risk of an oil supply crunch by 2020, EUR 700 billion, EUR 900 billion CapEx fall since 2014.

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 Spencer Dale,  BP p.l.c. - Group Chief Economist   [25]
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 Yes, this sort of really gets to David's question. So a big sort of debate within energy markets, oil markets in particular is, we've seen this very large reductions in CapEx spending, that takes a long time to come through. So as it does come through, the question is, will we see this tightening in the oil market and that sort of supply gap, if you like, cause prices to spike up. And so when you do some estimates, you sort of add up. If you just look at the flow of investment spending in 2015, 2016 and 2017, and compare it to the numbers in 2014, so suppose they just stayed at that level. The numbers you can add up for oil and gas together can give you a number somewhere between EUR 700 billion and EUR 900 billion. Different people add up the numbers in different ways, but that's the sort of numbers that I've seen. And the question is, how much of this has come through and how much is still to come through. Now one point is, somewhere between, and again it varies, we're talking about peoples' estimates, somewhere between a 1/3 and 1/2 of that -- of their estimate has been in terms of North America. So much of it has already come through, we can see it. That was what the rigs were doing when they were coming off. And so some of this stuff has already come through. The other point to remember is, that 700 to 900 is a nominal number. As all of us, and for those of you who work in this industry, you know prices have fallen a lot. A dollar of investment today buys you an awful lot more investment than the dollar bought you 3 or 4 years ago. So real investment has not fallen to the same extent. Even so, real investment has fallen very significantly and we haven't seen all that come through. And so there's likely to be building impacts, in our estimates, sort of building in 2019, 2020, 2021. And is this likely to lead to a crunch in supply? It's hard to know, but I guess, on the other side here is two things, one is the ability of tight oil to respond. And also we know that OPEC has a fair ability to respond because it's cut back quite significantly and we know there's an awful lot of level of reserves and inventories, exactly all your points, David. So I end up in terms of this debate being -- it all depends on what's sanguine or not sanguine is. I guess my sense is, the scope for a very tight squeeze in the oil market, a very sharp rise in prices, I place less weight on because I think I've been impressed by the ability of tight oil to come back. I'm aware of the ability of OPEC to bring significant amounts of oil on stream. And I've also -- conscious just of the scale of inventories that we've got building up. So I think those 3 things should mitigate quite significantly any sort of supply crunch over the next few years.

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 H. Lamar McKay,  BP p.l.c. - Deputy Group Chief Executive   [26]
------------------------------
 Yes, over here.

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 John Cooper,    [27]
------------------------------
 John Cooper, FuelsEurope, the downstream oil industry association based in Brussels. Spencer, this is a question about the future of renewables and power in Europe and links the point about the future gas prices and also carbon prices. You describe a future world where it sounds like essentially we're going to move towards gas prices closer to the U.S. I mean, it's been a difficult market for energy-intensive industries in Europe for some years with gas prices much higher than Europe. If we see a leveling of prices, and as you know, Europe has a very low carbon price at the moment and not that much scope for improvement, what does that mean for the economics of solar and wind in the power generation sector? You've already shown a reduction in growth in Europe, do you expect that to follow through with the change in gas prices?

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 Spencer Dale,  BP p.l.c. - Group Chief Economist   [28]
------------------------------
 So I think, on gas prices, there's a sort of near-term and long-term answer here. So I do expect the growth of LNG should allow prices in Europe and Asia to start -- to come down from some of the very high levels they were at before. But my hesitation here is, at the moment, over the next few years, we're likely to see a glut of LNG, there's enormous growth of LNG. And so for many -- at the margin over the next 3, 4 years as this LNG is being absorbed, we may not see full cost recovery of all of that LNG. And so you may see prices at sort of unsustainably low levels for a period of time until the market demand has been absorbed. And within Europe, the price -- a key judgment here and a key interesting issue here will be how much of -- what would set the price in Europe in the long run? Will it be LNG, or will it be pipeline gas, particularly from Russia, this competition? And whether the idea of this is sort of increasing global nature of LNG supplies with the option of being able to go it if and when you need to sort of mitigate some of those concerns we've seen in Europe without being overly dependent on a single supplier. How does that relate? I think, the main issue here is, what I've been thinking about this is, the key issue is, will that allow gas, particularly in Europe, to compete against coal? That seems to me the big issue. At a carbon price of EUR 5 a ton, the answer is even at the sort of unsustainably low gas prices, my best guess is, no. If the rest of Europe wanted to take a chapter out of the U.K.'s book and put a price -- a carbon price floor, it's not difficult to do, the U.K. can show you can do it. We can show you the textbook of how it was done, and then I think you could start to see quite a significant shift towards a cleaner fuel mix away from coal towards gas. At the same time, we're seeing increasingly improving costs in terms of solar and wind globally. Europe has led the way on helping generate some of those costs. So I can see continued growth in renewable energy. As I said, the weakness of renewable energy in the EU this year or last year is not to do with the structural issue, it was to do with weather. And I think it reminded us about the variability that weather can introduce, but I don't think it tells us anything about a structural slowing in the penetration of renewables within the EU.

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 H. Lamar McKay,  BP p.l.c. - Deputy Group Chief Executive   [29]
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 In the kind of middle back and then we'll come back up front. Yes?

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 Robert Gross,    [30]
------------------------------
 Rob Gross, Imperial College. I just wanted to throw down a small challenge about the role of carbon prices relative to other policies. I completely agree with you about the carbon price floor keeping coal off the bars. But if we look at the wider, sort of suite of structural changes that you described, the growth of renewables, principally driven by feed-in tariffs and the growth in energy efficiency, in many cases, driven by regulation, and the growth in electric vehicles, a lot to do with capital subsidies with consumers and so on. So I wonder, could you comment on the place of, if you like, the carbon price golf club amongst the other set of clubs?

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 Spencer Dale,  BP p.l.c. - Group Chief Economist   [31]
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 So let me do this. So I do this with my economics hat on rather than my BP hat on if you like. So just as an economist, how do I think about this? So as an economist, I can see an absolute clear economic case for various forms of subsidies and support for infant inventories -- industries until they reach scale. And that's true within the energy system, that's true across all things. So the idea that we've had support for renewables as a fledging industry until they've achieved scale, I think, makes perfect sense. What as an economist I'm nervous about is, if I look at the European trading system and see the price of carbon emissions or carbon abatement at EUR 5, and I calculate the cost of carbon abatement for electric vehicle at EUR 400, EUR 500, I start to get a bit uncomfortable. Because what we sort of know is that we should have a price of carbon and we should let the most efficient way achieve that. And so that's my concern about regulation. So the idea of if I start doing regulation, then I will start to get carbon prices being very different across many different things. Now as governments, they may have -- they may wish to do that for other reasons. They may have social preferences, they may have other reasons to do that. But if you just think about our job as economists, if you like, and in some sense as advocates for Paris, is to find the least cost, most efficient way of doing -- of achieving Paris. The least cost, most efficient way of doing that is trying to rely on prices as much as possible because if we start having prices all over the place, then you're going to getting rid of carbon, which is very expensive to get rid of or you're leaving other bits of carbon in the system, which could clear off relatively cheaply and not happening. And so that's, as an economist, why I start from prices. Now we know all economic models are wrong. So, of course, you then deviate from that, but that's my basic starting point.

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 H. Lamar McKay,  BP p.l.c. - Deputy Group Chief Executive   [32]
------------------------------
 So let me go to the web for one second, we'll come back into the room. While we're on Paris and carbon, any thoughts on the U.S. exit? This is from Tim Lawson -- Tom Lawson, CITGO Petroleum, any thoughts on U.S. exit from Paris? And sticking in the economics category, short-run limited or economics equity driver?

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 Spencer Dale,  BP p.l.c. - Group Chief Economist   [33]
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 So Lamar is supposed to pick the nice questions. Here's the job -- the job of Lamar is to look at these and say, "Well, I'm not going to ask Spencer about Paris -- the U.S. withdrawal from Paris, that would be far too difficult, I'll give him something nice and easy." So in the energy outlook we republished in January of this year, the good use was, we expected carbon emissions to grow at roughly 1/3 of the pace over the next 20 years as the last 20 years. As a matter of arithmetic, when we looked at what countries were driving that, nearly all of that improvement was coming from the developing world, fast-growing developing worlds. It wasn't -- the change and improvement wasn't coming from the OECD. And it wasn't coming from America, the big driver of that improving was the developing world. Also when I look at America and look at the things which have driven the reductions in carbon emissions in America in recent years, my analysis suggest that it is not driven primarily by regulation. It's being driven primarily by economics, the power of U.S. shale gas, as U.S. shale has grown, that has crowded out coal, and that's had an enormous impact on the U.S. and the U.S. carbon emission. So those 2 things together suggest this change is not likely in a direct sense to affect some of those trends. To my sense, where the U.S. has played an absolute leading role was in terms sort of galvanizing the international community in terms of the importance of carbon and climate change and bringing everybody to the table in Paris and in energy and agreeing that successful -- the successful outcome of Paris. And so I think, the big issue here is whether -- if the U.S. withdraws from that leadership role, what impact that could have on the global international community and the momentum behind that. And I think that's too early to tell. But I think that's where we should be looking for the impact of this, not in terms of direct numbers and direct impacts, but the impact of how -- whether this momentum that we've seen and which in some sense for me the key thing about Paris, whether that momentum can be maintained, whether -- if the U.S. withdraws from some of that leadership role.

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 H. Lamar McKay,  BP p.l.c. - Deputy Group Chief Executive   [34]
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 Yes, sir?

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 Martijn Rats,  Morgan Stanley, Research Division - MD and Head of Oil Research   [35]
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 It's Martijn Rats with Morgan Stanley. I wanted to ask you, perhaps a slightly detailed question, but it's about tax. Because one of the reasons it seems to me why U.S. shale has been so resilient, as you called it, is partly because these resources happen to be located in one of the world's most attractive fiscal regimes. And if we talk about the industry adjusting to low oil prices through cost adjustments, one of the biggest categories of costs for any oil project is tax. So you could sort of conceive a scenario where if you are a non-OPEC country that isn't the U.S., and you want your resources to be developed, you start competing on tax terms with the U.S. government, which would then, of course, add to the deflationary pressures in the oil industry. I have to admit, I mean, so far this is a little bit of a theoretical idea, but I was wondering if you are sort of seeing any of this and if there are perhaps counter arguments that would sort of invalidate this logic?

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 Spencer Dale,  BP p.l.c. - Group Chief Economist   [36]
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 No, I think the logic is absolutely right, and we stressed it in the energy outlook. So if you think about this abundance, and it sort of relates to that thing we were just talking earlier about -- so if you have a world of abundance of oil, then if you're a low-cost producer, the natural thing for you to want to do over a period of time is try and use your comparative advantage to produce more of your oil and squeeze out the higher cost producers, that would be the natural -- that's how most markets work, it just doesn't work in the oil market. But the oil high-cost producers aren't likely to just sit still. The sensible thing for them would be to say, we're going to compete and reduce my tax and royalty regimes to make me more competitive. That then gets into a sort of feedback loop with their real economy, can they do that and that and their real economy still function well. But I think that's exactly right. I think that's part of the mechanism here. I think you will increasingly see high-cost producers have to compete more as this market -- if the market -- as and when the market becomes more competitive. I think those high-cost producers will have to compete more on tax and royalty regimes because that's how they are keeping themselves in the game. A particular example here, if you think about the North Sea. The North Sea, when it was a new basin, was one of the most productive basins in the world and had a very high fiscal take. Now inherently, the North Sea is one of the highest cost basins in the world, but BP are still investing billions of dollars in the North Sea now with one of our projects this year coming on stream. And it's doing that because the North Sea has made sure it remains competitive. So you can see this in a sort of cross-sectional sense with one particular -- following the life at the North Sea and I would expect high-cost producers to behave in exactly the same way.

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 H. Lamar McKay,  BP p.l.c. - Deputy Group Chief Executive   [37]
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 Right here, second row. We've probably got enough time for a couple more...

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 Tom Langdon-Davies,    [38]
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 Tom Langdon-Davies, ET Index Investment Analysts. So you've expressed a view, first of all, the floor carbon price that the U.K. suggested of GBP 20 a ton and implied carbon price with subsidies for electric vehicles of tens of times higher than that and there will be others for other subsidy regimes. Given COP21, given EU policy, would you be willing to hazard a guess within confidence bands as to a carbon price level that would lead to a successful path towards Paris?

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 Spencer Dale,  BP p.l.c. - Group Chief Economist   [39]
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 With enormous confidence bands. So let me say two things. One is, whenever you look at any scenario sort of which is getting you in the ballpark of Paris, and BP published a scenario in our energy outlook last year -- earlier this year called the even faster transition case. But you can look at the IEA for 50 scenario or you can look at the MIT 2 degree scenario, there are many. A common feature of all of that is, the vast majority of the incremental abatement in carbon, which gets you onto that path relative to a sort of as-usual path, the vast majority of that comes in the power sector. So in some sense, if you were having a serious discussion about how to get to Paris, we should be talking about power and then power and then the power again, and then we can think about other things because that's where all the abatement happens. In terms of what we looked at -- the rough numbers we looked at in the energy outlook and I think at this point, this comes with huge health warnings because I don't think at this point, we have a comparative on doing this absolute detailed modeling. Getting carbon price to $100 a ton starts to help you get -- sort of bend that path towards lower -- of getting down, but not enough. And so our even faster transition path had it even higher, so you're going towards $150 or $200 a ton. Now whether the pace of technology changes in China and stuff means you need to get to that level, I don't know. But you're going to be closer to $100 type number or above than you are of 5 or 20-type number. I think we know enough to say that. Exactly where, how much above $100, I think I'd be less keen to put my neck out.

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 H. Lamar McKay,  BP p.l.c. - Deputy Group Chief Executive   [40]
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 Okay. One last question, back here.

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 Unidentified Participant,    [41]
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 Thank you very much for your presentation. You've captured a lot of information now about Tier 2 emissions. But also in 2015, we had the sustainable development goals, which included goals for access to energy because there's still a lot of people -- are you collecting information on how many people have access to electricity? And what the trends are in that or other forms of modern energy?

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 Spencer Dale,  BP p.l.c. - Group Chief Economist   [42]
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 No, we're not. We don't measure it. I think it's an absolute key issue. You'll know better than I that well over 1 billion people on today's planet still don't have access to electricity. And I think -- so if we have a -- I don't think we have a -- I'm not sure BP has a comparative vantage in measuring those statistics. We do spend quite a long time talking about those statistics and highlighting them. And I think, the reason we do here is because anybody working in energy, be it a company like BP, be it governments, pressure groups or any NGOs, there're 2 issues going on in terms of energy. The most obvious issue is, we need to make sure that we use our energy in a sustainable way. So we need to use our energy more efficiently and we need to shift that fuel mix towards cleaner, lower carbon fuels. The other one is, we need to make sure that the supplies of energy continue to increase, and that we are able to supply the energy that the world needs to allow people to -- for other people to prosper and to grow over time. Our best guess is, it's something like 2 billion people, 1/4 of the world's population will be lifted out of low incomes into middle incomes over the next 20 years. And that increasing prosperity and improvement in living standards is only possible if there's plentiful supplies of energy. And so we need -- and all of us face this dual challenge, the world needs more energy, but it needs less CO2. And we can't ever focus on one of those and not the other. You've got to do both the problems together. And I think your access question gets to the first one. It's all right thinking hard about making sure that we do less CO2, but we've also got to go hand-in-hand with supplying more energy, otherwise we are going to leave a vast majority of the world's population behind. And trying to solve both of those together, I think, is certainly central to the strategy that Lamar was talking about earlier and I think it's central to everybody's -- in terms of everybody involved in the energy industry.

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 H. Lamar McKay,  BP p.l.c. - Deputy Group Chief Executive   [43]
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 Okay. Thank you, Spencer. Thanks to your attention here in the room and thanks to everyone on the web, 5,000 or so people, thank you very much. Spencer, I think you could go on the road with your -- some of your team here pretty...

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 Spencer Dale,  BP p.l.c. - Group Chief Economist   [44]
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 This evening.

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 H. Lamar McKay,  BP p.l.c. - Deputy Group Chief Executive   [45]
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 This evening. So hopefully, you'll be able to maybe hear from Spencer in other different venues and ways. So appreciate your attention and thank you, Spencer, and your team.

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 Spencer Dale,  BP p.l.c. - Group Chief Economist   [46]
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 Thank you very much. Thank you.




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