BP: IMPROVING ENERGY EFFICIENCY
EP wrote, Spencer Dale is a relatively new kid on the energy block, who has a fresh perspective to offer on the future of the global energy sector. In October 2014, he joined BP as Group Chief Economist after a career spanning a quarter of a century in the banking industry.
For six years, between 2008 and 2014 he was on the Bank of England's Monetary Policy Committee – "all the way during the financial crisis". He chose to move from banking to energy because energy "is critical for global economic growth; it's critical for thinking about the sustainability of our planet over the next 40 or 50 years; and the chance to be involved in some of those discussions and issues and debates was too good an opportunity to turn down."
He now leads the team of analysts that produces BP's annual long-term Energy Outlook and the famous annual BP Statistical Review of World Energy, widely regarded as the "industry bible" of energy statistics. This puts him in a great position to offer insights into energy trends. In this interview, he gives his views on climate policy, the ongoing transition to a lower-carbon global energy economy, major shifts in the energy mix, and likely price trends.
One of the successes of the COP 21 climate change negotiations in Paris last year was the target to limit global warming to "well below 2°C"? How optimistic are you that humankind will be able to achieve the level of co-operation needed to achieve that target?
The global energy industry – governments, regulators, resource owners, producers like BP – faces two massive challenges over the next 20-30 years. The first is to ensure that we use energy in a sustainable way consistent with the long-term health of the planet. At the same time, it's important to make sure there are plentiful energy supplies for the fast-growing economies of the world – so that many hundreds of millions of people can be lifted out of low incomes, out of fuel poverty.
Paris was a significant step forward in addressing the first challenge. One of the messages from both our annual Energy Outlook and the BP Statistical Review of World Energy is the scale of the change that we will need to see to get close to achieving the goals set out in Paris – in terms of both energy efficiency and the fuel mix. That will require significant changes in policy, technology and consumer behaviour.
Your projections show that we will still depend heavily on fossil fuels by 2040. How likely is it that we might see disruptive change that means the transition to a lower-carbon energy economy happens much faster than people currently foresee?
It's possible that we will see forces leading to a faster transition coming from a number of different fronts – and they may all operate together. One is policy. What was striking about Paris was not only the Intended Nationally Determined Contributions (INDCs) that governments pledged but also the commitment to come back and review those pledges, to find further policy support in the future. Another is technology, which is likely to change very dramatically, both on the supply side and the demand side.
But – history tells us that it takes an awful long time for new energies to gain market share. This year's Statistical Review showed a chart which looked at the evolution of different fuels from the point at which they achieved 1% of the world's energy supply. We then looked at how that share increased over the next 50 years. It took more than 40 years for oil's share to rise from 1% to 10%. Gas, even after 50 years, still didn't provide 10%. In our Energy Outlook, we have renewable energy – meaning wind, solar and biomass – growing more quickly than any fuel in history. It still struggles to reach 10% of the world's energy supply by 2035.
A big theme in the Statistical Review was the decline of energy prices, especially oil and gas. How do you see prices evolving?
Over the next five years we are likely to see a gradual firming in oil prices. There are three things I'm looking at closely to get a sense of what's going on. One is a very significant stock overhang of oil inventories which is likely to act as a dampener on the pace at which oil prices rise. Secondly, it is striking that we've seen, for a couple of months now, the US tight oil weekly rig count rise week after week. Thirdly, working in the opposite direction, is a very significant fall in investment spending. Capex spending in oil in gas this year is likely to be around a third lower than in 2014. That has been partially offset by falls in costs but even so real investment has shrunk and that is likely to squeeze supply growth.
Those three things together will have an important bearing on how prices evolve over the medium term. Beyond that, I don't know. It's unlikely that prices will jump back to the levels we saw in 2010-2014. If you look at that period, that was a function of quite specific factors, particularly the severity of supply disruptions in the Middle East and North Africa post the Arab Spring.
For gas, there's a similar excess supply that needs to work through, in terms of very strong growth in US shale gas, compounded by weakness in Asian demand, and a growth spurt in global LNG supplies. Again, I expect the market to gradually absorb that supply so we'll see some firming in gas prices. But I am struck by the supply potential – particularly in US shale gas – which is likely to limit gas price rises in the medium to longer term.
The shale gas and shale oil revolution has transformed the energy landscape in North America. Do you expect to see this revolution replicated outside North America?
We expect North America to continue to dominate the growth of tight oil and shale gas over the next 20 years. There's a perfect set of factors in America which enables this to happen. If I look around the world, no other country comes close to meeting that perfect set of factors. However, in our Energy Outlook we do project gradually emerging growth in the rest of the world, such that towards the end of our outlook, in 10-20 years time, around half of the increase in production is coming from outside of North America.
Natural gas has become highly controversial, with some seeing it as key to mitigating climate change and others dismissing it as just another fossil fuel – and therefore part of the problem. What's your view? In particular, how important is methane leakage?
There's a danger of people lumping all fossil fuels together. Not all fossil fuels were made equal. Until there is an economically viable solution to large-scale storage of renewable power, we will need a balancing fuel to solve the intermittency problem. So, a gradual crowding out of coal and a switch to a combination of natural gas and renewable energy in the power sector is a key part of the transition that we need to see. Methane emissions are an important issue and the industry is very attuned to that. But the big picture is that natural gas is an awful lot cleaner than coal.
Generally, there seems to be a lot more emphasis on energy supply than on how we consume energy. How do you see world energy demand growth evolving? And how big a role will energy efficiency play in limiting growth?
I find it frustrating that so many people when talking about the Paris Agreement almost exclusively focus on the supply side. Energy efficiency needs to play at least as big a role, if not a bigger role, in responding to the challenges. In our Energy Outlook, we expect global GDP to more than double over the next 20 years, while energy demand increases by only 30%. The difference between those two things is improving energy efficiency or declining energy intensity. That is critical in underpinning the shift we expect to see in the rate of growth of carbon emissions. We think the energy intensity of GDP will decline much more rapidly than we've ever seen before.
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