How Big Oil sees the future By Scott Nyquist

Every year, the oil giant, BP, publishes its outlook on energy. I know that some people will automatically dismiss this work because BP produces it, but that would be a mistake. The annual report is well regarded inside and outside the industry. And the CEO, Bob Dudley, of this giant of Big Oil, interestingly, calls “the need for more downward pressure on carbon emissions” the most important takeaway of this year’s report; he also calls for a carbon price. So Dudley is no fossil, so to speak; he notes that the energy industry is in the middle of a transition, and that the competitive pressures are growing.

Here are some of the themes that BP highlights.

Source: BP

China: Its energy mix is changing markedly, and relatively rapidly. Under BP’s “Evolving Transition” scenario—essentially continuity with current trends—its emissions would peak around 2025, then begin to decline. There are two reasons. First, growth in industrial demand will be flat or even less as the country continues to shift toward less energy-intensive services. Second, China is using  less coal and more of everything else, with renewables growing fastest of all, followed by gas. Together, renewables, hydro and nuclear—all of them no-emissions sources of power—will account for 80 percent of the increase in China’s energy demand to 2040. By then, China will account for a full 30 percent of global renewable production. It will also account for almost 90 percent of the total growth in nuclear power.

India: China has been the largest source of growth in the energy market for the last several decades; it is about to be India’s turn. Its needs, BP projects, will grow 6 percent a year, four times faster than in China. Of course, it is how India’s economy grows as much as how fast that will determine how much energy it needs. If India industrializes—more manufacturing work—the pace will be even brisker. In India, too, renewables—particularly solar—will grow fast, according to BP. But so does coal, which will account for almost half (45 percent) the increase in demand, as India seeks to get power to its people; about a quarter of rural Indians lack such power. China has largely achieved that. Between 2035 and 2040, India’s demand for energy is likely to grow more than twice as fast as China, and could account for a third of the total growth in global demand.

Africa: The continent is going to play an increasingly large role in the global energy market after 2030. By 2035, projects BP, it could account for 20 percent of global demand growth. What will be interesting to see is whether, as happened with the cellphone, the continent leapfrogs existing technology to take advantage of new ones. As it develops, its role as an oil exporter diminishes and could vanish altogether.

United States: By 2040, the United States could account for 18 percent of global oil production (crude plus natural gas liquids), compared to 12 percent today. Saudi Arabia will be a distant second, at 12 percent. In terms of natural gas, the lead is even greater—a startling 24 percent of global supply. Relatively little of this will be exported, and while renewables will grow, they will do so faster elsewhere; by 2040, America’s global market share will be around 15 percent.

The global fuel mix changes: Dudley notes, “The continuing rapid growth of renewables”—at a rate of 7.5  percent a year—"is leading to the most diversified fuel mix ever seen.” And because renewables and gas are leading the growth, energy use is also increasingly less carbon intensive. 

Indeed, in the next 20 years, renewables are likely to increase their market share faster than any other kind of power—ever. BP notes that it has upgraded its own predictions regarding the sector significantly just since 2015—by 150 percent for solar over that period, because its costs fell faster than anticipated.

By 2040, in global terms, oil, gas, coal, and the rest could each account for a quarter of global primary energy. Indeed, coal’s share could be the least since the advent of the Industrial Revolution.

Carbon emissions: Under the Evolving Transitions scenario, emissions continue to rise to 2040, by about 10 percent. That is, much less than global economic growth, demonstrating increasing efficiency and greater carbon intensity; in the past 25 years, by comparison, emissions have risen 55 percent.  But on this trajectory, emissions are still much higher than envisioned (or hoped for) under the Paris climate accords.  

Buildings: These account for about 40 percent of global emissions, and final energy consumption in the sector will grow, particularly in Africa, Asia, and the Middle East, which account for about 90 percent of global growth. And it’s worth remembering why: there will be more people in these regions, and more prosperity. That translates into a desire for more comfort—the ready access to heat, light, and cooling that rich countries have taken for granted for decades.

All in all, BP’s  report is generally in the same ballpark as those from the IEA, Bloomberg, the EIA and McKinsey’s Global Energy Perspective. The high points are similar: energy demand, including that for oil and gas, continues to grow, albeit at a slower pace; renewables grow faster, and the rate of increase of emissions slows. There are wild cards—for example, how fast EVs hit the roads is anyone’s guess. Last year, BP’s  base case was for 100 million EVs by 2035. This year, it starts at 190 million. By definition, the Evolving Transitions scenario does not consider possibly disruptive changes, and of course these could occur.

All in all, though, BP’s picture is of evolution, not revolution. But when evolutions go on for long enough, the result is revolution. And that may be where we are now—not at the beginning of the end, but the end of the beginning.