BP Stat review – quick thoughts and highlights

The annual BP Statistical Review is the industry standard source for tracking energy trends, usage and sources. Full details of the Statistical Review can be found here. This year’s edition was presented yesterday, with interesting commentary made on the statistics.

Headline trends for 2015 vs 2014
Oil demand grew 1.9%
Gas demand grew 1.7%
Renewable energy grew 15.2%
Coal energy use fell 1.8%

Past episodes of price falls
The current cycle is driven by additional supply, more simialr to the cycle in the mid-1980s than the last two (demand-driven) shocks. New production from the US shales will take time to be absorbed by the market.

Key suppliers’ reactions to oil price falls makes sense
2015 was a tough year for oil prices. BP talks about the reaction to the pricing movement. Unlike the last two price falls, which were driven by demand shocks, the supply-driven price fall in 2014/15 was countered by OPEC making “offsetting adjustments to help stabilise prices”. Instead the members (most Saudi Arabia) instead sought to maximise market share at the cost of lower prices. This is well known and recognised in the market.

Interestingly, BP’s team also believe that Russia used the same strategy in its approach to European gas. Faced with increased competition from lower LNG prices, the data derived by the BP team suggests that it sought to retain market share by lowering prices more aggressively than a simple oil-price link would have suggested. Due to contractual sensitivities, this cannot be seen directly, but BP have derived a German delivered cost (see below) which fell more quickly than may have been suggested.

As the chief economist states “The important point here is that ceding market share in order to support prices is less attractive when the underlying cause of the imbalance is expected to persist, rather than be relatively short-lived”

Oil demand reaction to price falls – BP’s data suggests a bifurcation in the markets. As prices fell, demand for consumer-focused fuels (gasoline and jet) grew strongly. More industrial-focused fuels (diesel) has been slower to react.

Company reactions to price falls – On the supply side, US shale rig count fell precipitously as cashflows and financing dried up. Companies across the world have slashed capital investment budgets, delaying or cancelling projects. BP estimates 2015 capex has fallen by 25% from 2014 levels ($160bn) – the largest fall since the 1970s. Without a strong uptick in prices, we would expect a prolonged period of lower investment.

Lower absolute investment has been partially offset by falling service costs (BP indicate in the range of 20%), which means real investment has fallen less. This is an important point. As a quick and dirty analysis, the table below shows the effect of balancing investment and costs.

Of course, this doesn’t show where costs and investment have been most affected (exploration/development, onshore/ offshore etc) or the exact effect on profitability of projects

Renewables
Renewable Energy grew strongly, with Wind power (17%, 125TWh), followed by solar (32.6%, 62TWh) driven by Chinese supply. Hydro and Nuclear grew more modestly.

Carbon emissions
The headline here was that BP estimate that “carbon emissions from energy use were essentially flat last year”, in sharp contrast to the 10 year average of 1.5% growth. This was helped by China’s emissions being flat to down (-0.1%) for the first time in 20 years. This is caused both by cyclical weakness and the gradual rebalancing of the economy from heavy industry, reducing Chinese energy intensity.

Future trends
Huge amounts of attention have been given over to required improvements in the energy mix to get to a lower carbon future. Within this discussion, the growth of renewables is of particular interest. BP assumes that they grow at 8% pa, a much faster rate than previous new sources of energy have done. For example, BP look at the point that energy sources reach 1% of demand as the starting point – in this case it took 40 years for oil to reach 10% of primary energy, and gas has only reached 8% so far. There is clearly massive potential in renewables, but BP points to the long-lived industrial nature of energy production as a natural break to the rate at which new energies can grow. The replacement cycle is long, and although consumers can buy solar panels at Ikea, BP believe the major growth for renewables will be industrial investment, which is slower to invest meaningfully.

Finally, BP point to the energy mix as only one element of this equation. Energy intensity and efficiency is where huge gains can be made and this is not getting enough attention.

BP continue to assert that this switch will be better under a carbon price environment – companies and countries do not yet know the best solution and to assert subsidies and help is less efficient than letting the market solve the problem organically. Companies like BP seek to maximise shareholder value, and a carbon price will make this process easier to establish.