A tumultuous time for energy continues with implications for Scotland, the UK and the world.
Amid the fine art stretching in time from the early Renaissance to the end of the 19th century, researchers from Heriot-Watt University joined economists from BP in Edinburgh last Thursday at the National Gallery’s Hawthornden Lecture Theatre to present the oil and gas company’s annual statistical review of world energy.
For the past six decades, the review has provided “high-quality, objective and globally consistent data on world energy markets,” says the company and is referenced by the media, academia and governments around the world. The researchers and economists combine to “tell the story – and history – of world energy through the numbers behind the headlines,” says the university.
“In a fast-changing world,” writes Bob Dudley, Group Chief Executive in an introduction, “I believe it is important to understand both the forces behind today’s headlines as well as the underlying trends that are shaping the new energy landscape that our children and grandchildren will inherit.
“It is a singular contribution of this review to keep us firmly rooted in objective data: a rigorous understanding of where we are – and where we have been – is necessary for us to build a safe and sustainable energy future together.”
He said 2011 was unusually eventful in global energy. The Arab Spring shook markets. The earthquake and tsunami in Japan was a humanitarian disaster, he said, and one with immediate implications – in Japan and around the world – for nuclear power and other fuels. Oil prices hit an all-time record high; yet the revolution in shale gas production drove US natural gas prices lower, leading to record discounts in oil.
Global energy consumption grew by 2.5 per cent, broadly in line with the historical average but well below the 5.1 per cent seen in 2010. Emerging economies again accounted for all of the net growth in energy consumption, with demand in the OECD countries falling for a third time in the last four years.
Loss of oil supplies in Libya and elsewhere was eventually more than offset by large increases among Middle Eastern OPEC members, leading to record oil production in Saudi Arabia, the UAE, and Qatar. Meanwhile, the US recorded the largest non-OPEC production increase for a third consecutive year.
“Crises and disruptions to one side,” said Dudley, “this year’s data also confirm how a number of longer-term trends remained in place. The centre of gravity for world energy consumption continues to shift from the OECD to emerging economies, especially in Asia.
“The world is not structurally short of hydrocarbon resources – as our data on proved reserves confirms year after year – but long lead times and various forms of access constraints in some regions continue to create challenges for the ability of supply to meet demand growth at reasonable prices.
“Fossil fuels still dominate energy consumption, with a market share of 87 per cent. Renewable energy continues to gain but today accounts for only 2 per cent of energy consumption globally. Meanwhile, the fossil fuel mix is changing as well. Oil, still the leading fuel, has lost market share for 12 consecutive years. Coal was once again the fastest growing fossil fuel, with predictable consequences for carbon emissions.
“At this level, change comes only slowly to the global energy system. It is important for all of us – producers and consumers, along with our governments and everyone interested in energy – to address today’s challenges without losing sight of slower-moving structural changes, including those we are seeking to bring about.”
For the Scottish economy, oil prices can have mixed implications. Last month, world prices dropped by 15 per cent and continued to fall in the first part of this month. Brent crude oil is the “marker” for the North Sea and, according to economic consultant Tony Mackay, probably the most important price indicator in the industry. In May, it went from $119.88 per barrel to $101.89, “a massive fall,” said Mackay. By last week it was around $96.
“All consumers, particularly motorists, will undoubtedly welcome the falls. In addition to petrol and diesel purchases, crude oil prices have been a major factor in the relatively high inflation in the UK over the year or two,” said Mackay. “On the other hand, the oil and gas industry in the Aberdeen area clearly benefits from high oil and gas prices.
“They have made previously uneconomic fields viable, not just in the North Sea but in many other parts of the world. A good example of that is the recent announcement that Statoil intends to proceed with an £18bn investment to develop the Mariner and Bressay fields off Shetland, creating about 700 jobs.
“On balance, lower oil prices must benefit Scottish and UK consumers and their respective economies. The consumers massively outnumber the people working in the oil and gas industry in the Aberdeen area and elsewhere in the country.”
The oil industry in Aberdeen – and around the world – normally takes investment decisions on the basis of medium to long-term price assumptions, said Mackay. Some fields in the North Sea, for example, have produced for over 30 years, although the average field life is much less. Short-term fluctuations in prices are usually ignored.
“We are working on various new field development projects in the North Sea and elsewhere and the long-term base case price we are using for most of them is $80 per barrel (in real terms). Most of these fields will go ahead if the price does not fall below that threshold and I do not see that happening in the near future.
“In other words, I do not foresee the oil industry in the Aberdeen area worrying unduly as long as Brent crude stays above $80 per barrel. Thus the recent fall in prices will benefit Scottish consumers – albeit to a very small extent – without having an adverse effect on the oil industry in the Aberdeen area.”