Open markets key to stability

Open markets can be a powerful ally for a world seeking to manage short-term disruptions to energy supply and meet long-term demand, BP group chief executive Bob Dudley declared at the June launch of the BP Statistical Review of World Energy, 2012. David Morgan reports.

The 61st edition of BP's much-referenced annual tome highlights disruptions to supplies and ever-increasing demand as the two big energy stories of 2011. Major shocks such as the Arab Spring notably the loss of Libyan oil and gas supplies for a while and the Fukushima nuclear accident in Japan had knock-on effects for energy sources and energy prices worldwide, with oil prices reaching a record average of over $100 per barrel for the first time in history, says the review. Yet the longterm background trends continued, with global energy consumption growth of 2.5% near the historical average and the emerging economies continuing to expand their share of the total. OECD countries energy demand actually shrank by around 0.8% last year, while growth of 5.3% was seen in emerging economies.

Markets provided the flexibility that was crucial to the world's ability to cope with last year's disruptions. Bob Dudley

Markets provided the flexibility that was crucial to the world's ability to cope with last year's disruptions, said Dudley. And over time, markets lead to the chain reaction of competition, innovation and growth which creates the secure and affordable energy supplies which governments and consumers are looking for.

The good news today is that we're seeing a whole range of areas where this process of competition, innovation and growth is generating results. These include shale gas; deepwater oil and gas; heavy oil; and, potentially, advanced biofuels. Citing the US as an example, Dudley noted that the shale gas revolution has meant that natural gas prices declined and reached record discounts to oil. In addition, the production of shale liquids gave the US the largest increase in oil production outside Opec for the third year in a row.

The US experience shows how an open and competitive environment drives technological innovation and unlocks resources, he added. I think the message for policy makers is to follow this model and to encourage competition wherever possible. This process also acts to support energy security by enabling countries to develop their domestic resources and by underpinning a dynamic global market, said Dudley.

Market overview

According to BP's 2012 review, last year's 2.5% increase in global energy consumption was broadly in line with the historical average but well below the 5.1% seen in 2010. Emerging economies accounted for all of the net growth, with OECD demand falling for the third time in the last four years, led by a sharp decline in Japan. China alone accounted for 71% of energy consumption growth.

Presenting the data, Christof Ruhl, BP's chief economist, said the averages hide a mixed picture by fuel, however. Oil demand grew by less than 1% the slowest rate amongst fossil fuels while gas grew by 2.2%, and coal was the only fossil fuel with above average annual consumption growth at 5.4% globally, and 8.4% in the emerging economies.

Fossil fuels still dominate energy consumption with 87% market share, while renewables rose fastest but are still only 2% of the global total. The fossil fuel mix continues to change with oil, the world's leading fuel at 33.1% of global energy use, losing share for 12 consecutive years. Oil consumption reached 88 million b/d after a below average rise of 0.6 million b/d or 0.7%. The loss of oil supplies in Libya and elsewhere was eventually more than offset by large production increases among Middle Eastern Opec members, leading to record oil production in Saudi Arabia, the UAE and Qatar.

Brent oil prices were on average 40% higher than 2010 and exceeded $100 a barrel for the first time ever; at $111.26/bbl, they were the second-highest in inflation adjusted terms, behind only 1864, explained Ruhl.

Gas prices increased broadly in line with oil prices except in North America where prices reached record discounts both to crude oil and to international gas markets. According to Ruhl, natural gas has produced some of the biggest changes in global energy markets over the last few years. There is, first, the rapid increase in trade, especially of LNG, that has connected hitherto segmented regions in an increasingly flexible manner, he said. And second, the development of unconventional resources in the US, which has everyone wondering where gas may next turn into a relatively abundant resource. Both of these developments shaped 2011. And as it happens, they also played a key role in the response to last year's disruptions.

World natural gas consumption grew by 2.2%, below average in all regions except North America where low prices due to the shale gas revolution drove robust growth. There was a record decline in EU gas consumption (9.9%) driven by the weak economy, high prices, warm weather and continued growth in renewable power generation.

Gas production globally grew by 3.1%; the US recorded 7.7% growth and is the world's biggest producer. Output grew rapidly in Qatar (+25.8%), Russia (+3.1%) and Turkmenistan (+40.6%), more than offsetting declines in Libya (75.6%) and the UK (20.8%). The EU's decline in gas production was the highest on record (11.4%).

Natural gas trades grew modestly by 4%, driven by liquefied natural gas growth of 10.1%, with Qatar (+34.8%) taking 87.7% of the LNG increase. OE