Where is the Energy Market headed?

Posted: 08/07/2015

In the midst of current price volatility, it is important that our industry looks beyond the near-term horizon. BP's latest Energy Outlook highlights an increase in the global demand for energy and the supply mix likely to meet that demand. The outlook provides insights into factors that will “most likely” influence the energy landscape over the next 20 years to 2035.

Spencer Dale, BP's Group Chief Economist, presented the 2015 edition of BP's Energy Outlook at the Center on Global Energy Policy at Columbia University earlier this year.

What follows are details of 5 key trends as seen by the major.

1. Oil oversupply leads to slump, but weakness will dissipate

US tight oil compounded with natural gas liquids has accounted for the significant increase in global oil supply. Although recent disruptions have led to a decline in OPEC's crude production, it has not been enough to stop the underlying weakness. The rapid growth in US tight oil in the last three years has more than accounted for the entire increase in global demand for oil, Mr. Dale explained, but that rapid growth will not continue forever.

“Looking ahead to 2020 and beyond, we see this slowing in the growth of US tight oil, some growth in tight oil across the rest of the world ... and instead, OPEC production starts to increase again,” which will restore more normal market dynamics, Mr. Dale said.

“The underlying story underpinning the outlook in terms of the current weakness is a story in which the oil market grows out of its current weakness.”

As US tight oil flattens out in the long term, global GDP, as well as global oil demand, will continue to grow. “After a period of time, global oil demand grows sufficiently to absorb this increase in supply, and more normal market behavior is restored.” Global demand for oil is expected to grow approximately by 19 million bpd to reach 111 million bpd. “That growth is entirely accounted for by non-OECD (countries), particularly China and India,” Mr. Dale said. “An increase of 19 million bpd is roughly equivalent to introducing another market the size of America.”

2. Energy demand set to grow nearly 40% in 20 years

As the world economy continues to grow, so will the demand for energy, especially from developing countries. BP's outlook cites that in the next 20 years, energy demand is expected to increase by 37%, as the world's population is expected to reach 8.7 billion. “Over that period, global GDP is roughly doubling,” Mr. Dale stated. About one-quarter of that growth in GDP comes from the increasing population, and around three-quarters will come from increasing productivity. “That is essentially a story of the less developed economies as they increasingly adopt best practices of the industrialized world.” China and India will account for nearly 60% of global GDP growth, with 5.5% average growth per year to 2035.

Although the demand for energy remains significant, the growth rate of energy consumption is actually slower than the previous years 2000 to 2013. In OECD countries, energy consumption increases at a rate of 0.1% per year and begins to decrease from 2030. Since 2000, non-OECD Asia averaged about 7% growth per year; however, BP's outlook projects growth to slow to 2.5% per year between 2013-2035.

“We see a slowing in growth of energy demand over the next 20 years relative to the last 10 years, and that's driven to a very large extent by slowing in energy growth of non-OECD Asia,” Mr. Dale said

3. Supply boosted by unconventional oil and gas

“We expect to see growth close to 5% in North America shale gas on average in the next 20 years,” Mr. Dale stated. “In contrast, the smaller growth rate in tight oil means that although we expect to see some continued growth, that's likely to plateau out.” In 2014, US oil production growth reached a record of about 1.5 million barrels per day (bpd). “By 2035 in North America, we expect roughly 50% of the tight oil resources and 30% of the shale gas resources to be exhausted.”

Asia Pacific leads the world with the most remaining technically recoverable tight oil and shale gas resources combined at nearly 60 billion toe, according to the International Energy Agency; however, production remains concentrated in North America. Although unconventional resources are ubiquitous around the world, the factors that have enabled the unconventional revolution in North America is unlikely to be replicated elsewhere.

Meanwhile, natural gas is expected to replace coal as the fastest growing fossil fuel, as China's coal consumption plateaus from 2025 to 2035. With a solid growth in supply, in addition to environmental regulations, natural gas grows by 1.9% per year, followed by oil at 0.8% per year. Though the energy mix is shifting to lower carbon fuels, fossil fuels will continue to provide the majority of the world's energy.

4. LNG supply set to grow 7.8% p.a. to 2020

The LNG market is poised for growth and is expected to expand by 48 Bcf/d by 2035. Though Qatar claims a lion’s share of the market today, Australia is expected to move ahead with 24% market share by 2035.

Numerous projects on the books will add 22 Bcf/d by 2020. “Of the total increase of supply in LNG, around half of that is likely to come online over the next five years or so,” Mr. Dale explained. “In the early-2020s, there’s a bit of a pause as that increased supply has to be absorbed by increasing demand.” Nevertheless, demand, particularly from Asia, does exist and will lead to another more steady growth in the last 10 years or so of the outlook. “As a result of this growth, Australia together with Africa and the US all overtake Qatar as a dominant source of supply for LNG.”

The mobility of LNG supply translates to a greater integration of prices in terms of global gas prices. LNG has the mobility to respond to price signals – “as the vessel leaves the port it can turn left rather than right if the price signals, in a way traded gas pipelines can’t do,” Mr. Dale said. “That ability for LNG to respond to price signals means we’re likely to see far greater movement of gas prices across the world.”

“This increase in LNG – if it does materialize – has quite significant implications for how we think about the global gas market in terms of prices and issues with energy security and dependence on particular regions of the world.”

5. Dramatic shift in Trade Patterns

The increase in North American production is taking its toll on trade patterns with oil increasingly flowing from West to East, instead of from East to West as in the past. The US is expected to switch from being a net importer of energy to a net exporter within 2015. Mr. Dale reasons that not only is more oil being produced, but also “we expect to see increasing efficiency gains in both North America and Europe”.

“The US is charting a course toward oil self-sufficiency by the early 2030s.  At the same time, you can see the dependence of both China and India on imported oil is increasing.” Asia’s import dependency increases from 23% in 2013 to 27% by 2035, according to the BP report. Oil will account for 60% of that rise, with imports accounting for more than 80% of Asian oil consumption by 2035, the report states. “Asia’s oil imports in 2035 are almost as large as OPEC’s current entire oil production.”

The Middle East will remain the largest net energy exporter as a region, although its share of energy exports will decrease from 46% in 2013 to 36% in 2035.  Meanwhile, Russia will remain the world’s largest energy exporting country.

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