How far are we from peak oil demand?

Two years ago, Britain’s oil and gas supermajor BP Plc. (NYSE: BP) sent shockwaves through energy markets after it said the world had already passed peak oil demand. In the business Energy outlook 2020chief executive Bernard Looney promised BP would increase its spending on renewables twenty-fold to $5 billion per year by 2030 and “… not to enter new countries for oil and gas exploration”.

This announcement came as a bit of a shock considering BP’s aggressiveness in exploring new oil and gas frontiers.

When many analysts talk about peak oil, they are usually referring to when global oil demand enters a terminal and irreversible decline. According to BP, that point has already passed, with demand for oil expected to fall by at least 10% in the current decade and up to 50% in the next two. BP noted that historically, energy demand has steadily increased alongside global economic growth with little disruption; however, the COVID-19 crisis and escalating climate action may have permanently altered this playbook.

However, BP was forced to make a my culpa after it became clear that the COVID-19 pandemic that began more than two years ago has not resulted in a significant reduction in oil demand.

In his Energy outlook 2022 editionBP has revised down its forecast for global economic growth, saying that global GDP will contract by only 1.5% by 2025 from 2019 levels compared to its earlier projection of a contraction of 2, 5%.

BP notes that its formerly grim outlook was prepared before the Russian invasion of Ukraine – another black swan event – which sent global energy prices soaring and cast an uncertain shadow over Russia’s oil and gas sector. these last months.

Scenarios

In its latest report, BP offers three scenarios – all predict oil demand will exceed pre-pandemic levels by the middle of this decade before starting to fall in varying degrees.

In the most optimistic case for oil, BP forecasts crude demand to reach 101 million b/d in 2025 and remain flat until 2030. After that point, global demand will decline to 98 million b/d d by 2035 and at 92 million bpd. by 2040.

In another scenario that BP has called “net-zero”, which is the most aggressive in terms of global climate ambitions, the company pegs 2025 demand at 98m bpd and just 75m bpd. j by 2035. BP assumes that a 95% reduction in greenhouse gas (GHG) emissions must be achieved for the net zero predictions to be realized.

In the intermediate scenario, BP assumes that the world will still be broadly in line with climate targets, but with a 75% reduction in GHG emissions by 2025. This picture of the future suggests that demand for oil will be d 96 million b/d in 2025 and 85 million b/d by 2035.

However, recent events in the energy sector suggest that oil companies may have room to increase production and even relax climate targets as long as oil and gas prices remain high.

Last year, Exxon Mobil (NYSE:XOM) found itself in trouble after a small hedge fund by the name of Engine No. 1 successfully fought a battle to install three directors on Exxon’s board in a bid to push the energy giant to reduce its carbon footprint. The No. 1 engine took the resounding victory thanks to the support of black rock, Avant-garde and State Street who all voted against Exxon management.

Fortunately, Exxon was finally able to turn the tide and rally shareholders: Exxon scored a major victory last week after its shareholders supported the company’s energy transition strategy at the annual general meeting.

Only 28% of participants backed a resolution tabled by activist group Follow This calling for faster action to tackle climate change; a proposal calling for a report on low-carbon business planning received only 10.5% support, while a report on plastics production garnered a 37% favorable vote.

In other words, it looks like Exxon’s legacy fossil fuel business remains safe, at least for now, as long as it continues to return that excess cash to shareholders in the form of dividends and redemptions.

Related: Oil prices rise as EU leaders agree partial ban on Russian crude

Just like its larger peer, Chevron inc..(NYSE:CVX) shareholders voted Wednesday against a resolution asking the company to adopt targets for reducing greenhouse gas emissions, indicating its support for the measures the company has already taken to combat climate change.

Only 33% of shareholders voted in favor of the proposal, according to preliminary figures disclosed by the company, a sharp turnaround from last year when 61% of shareholders voted in favor of a similar proposal.

Meanwhile, Hess Corp. (NYSE:HES) broke with the industry trend of returning excess cash flow to shareholders after announcing plans for massive capital spending in a bid to boost production. Hess announced a capital budget of $2.6 billion for 2022; good for a 37% jump, with Bakken spending up 75% to $790 million. In the Bakken, Hess plans to operate three platforms to achieve its production target of 168 kb/d.

Change map

In yet another report published on the Geopolitical Intelligence Services blog, Carol Nakhle, CEO of Crystal Energysays the consensus is that global oil consumption will peak in the next 20 years, but demand won’t necessarily fall off a cliff after that.

Nakhle notes that in OECD countries, demand for oil peaked in 2005 at around 50 million barrels per day. The engine of global demand growth is the developing world, mainly Asia (mainly China and India – the second and third largest oil consumers in the world after the United States) and the Middle East (led by Saudi Arabia, which is also the sixth consumer in the world). In fact, between 2009 and 2019, almost all of the growth in global oil demand was driven by the developing world, with Asia expected to continue to be the center of growth in the years to come. Non-OECD countries account for about 54% of world oil consumption.

Nakhle said: “…once peak demand for oil is reached, it will plateau at some point and then decline. In a growing market, there is room for everyone. In a falling market, for a country to increase its production, another country’s supply is squeezed out, usually by price competition. In such a world, market power will shift to consumers. Today, they are desperate for oil; tomorrow they will be in a much stronger position.”

She says that once global demand for oil peaks and begins to decline, competition between producers to sell more oil and preserve market share will intensify. In a stagnant or contracting market, oil and gas producers will face new rules, very different from those they were used to. For example, OPEC’s strategy of cutting supplies to raise prices or threatening Russia to cut supplies to avoid sanctions on its oil exports will no longer be effective. To be fair, higher prices will attract additional production, as it always does. However, in a contracting market, this will force prices down, and any deliberate attempt to cut production to raise prices will simply backfire.

Ultimately, the consumer will end up owning most of the tokens.

By Alex Kimani for Oilprice.com

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Felix J. Dixon