In This Issue
Summer Issue of The Bridge on Shale Gas: Promises and Challenges
June 15, 2014 Volume 44 Issue 2

Trends in the World Energy Balance

Monday, June 23, 2014

Author: Mark Finley and Christof Rühl

This article draws on BP’s 62nd annual Statistical Review of World Energy, published in June 2013. The Statistical Review has provided high-quality, objective, and globally consistent data on world energy markets since 1952. A widely respected and authoritative publication in the field of energy economics, it is used for reference by the media, academia, world governments, and energy companies. A new edition is published every June; the 63rd edition will be available June 16, 2014, at BP.com/statisticalreview.

The year 2012 produced a number of headlines in energy-related news. Some of the trends reported are part of long-term changes in the world energy landscape, others show adaptations to shorter-term disruptions.

The United States experienced a large increase in oil and gas supplies, while in China, Germany, and Japan—together representing a quarter of global GDP—renewables captured a greater share than nuclear power. Liquefied natural gas (LNG) trade, on the other hand, declined for the first time since coverage of gas trade began 30 years ago. And record amounts of coal, exiled from the United States by the shale gas revolution, were shipped to Europe.

Beyond those headlines, energy developments looked unsurprising. Consumption growth slowed to 1.8 percent, below its 10-year average, for all fuels (bar renewables and hydropower) and in all regions except Africa—quite in line with a lackluster global economic performance overall.

The headline figures looked relatively normal, but the energy system is good at adjusting to a changing world, and sometimes it drives change. This long-term context is the best starting point for assessing the data trail of a year in which energy markets appeared calm but actually involved lots of adjustments.

Long-Term Energy Trends

We start with the long-term trend of primary energy demand shown in Figure 1.1 Principal among these trends is the ongoing shift of the world’s economic center of gravity toward the so-called developing world, for our purposes the countries other than the 34 members of the Organization for Economic Cooperation and Development (OECD).

Figure 1

Changes in Consumption and Production

Since 1992 global energy consumption has increased by 52 percent, and during the past 10 years it increased by 30 percent, almost all of which was outside the OECD. In contrast, OECD consumption fell during 4 of the past 5 years—despite positive GDP growth in 3 of the 4 years. In 2012 OECD energy consumption declined by 1.2 percent, again despite positive GDP growth (1.4 percent), and hard on the heels of a similar result for 2011. In fact, it returned to where it was in 2002—although cumulative GDP growth was 26 percent over that same period.

There is a rarely noted corollary to this shift in the center of gravity: As the non-OECD economies industrialize, they also develop more resources. The data clearly reveal that the industrializing part of the world not only outpaced the OECD in terms of consumption growth but also contributed a fair share to energy production. In 2002–2012 the non-OECD countries accounted for 98 percent of global energy production growth. A breakdown of production growth by region during 2012 is shown in Figure 2a. Net growth in Asia outstripped that of the rest of the world, with regional growth led by China and other non-OECD producers.

Figure 2

Changes in global proved reserves2 of oil and gas since 1982 are shown in Figure 2b. Proved reserves change not only with technology and discovery but with prices as well, and this was evident in the United States when gas prices fell and some reserves became unprofitable to produce. Whereas 2012 saw growth in proved oil reserves of 15 billion barrels, proved gas reserves recorded their first decline ever in the BP database (−0.5 trillion cubic meters, Tcm), driven by lower prices and reduced drilling activity in the United States.

Even with the decline in 2012, proved gas reserves were up 21 percent since 2002 and 59 percent compared to 1992. And proved oil reserves were 28 percent higher than in 2002 and 60 percent higher than in 1992—despite the production of nearly 600 billion barrels of oil during that period.

Energy Prices

Approximately 87 percent of world energy is provided by fossil fuels, and there has been an unprecedented rise in the prices of these fuels over the past decade (Figure 3). In inflation-adjusted terms, average annual oil prices (as indicated by the North Sea marker grade of crude “Brent”) for the last five years were 230 percent higher than for the same period 10 years ago; for coal the increase was 140 percent; and for natural gas, 90 percent. Since 2008 the spread across fossil fuel prices has also widened, with oil prices significantly outstripping those of both natural gas and coal.

Figure 3

There was a moderation of sorts in 2012. Oil remained relatively stable, but at record levels; gas prices bifurcated across regions, dropping massively in the United States (−32 percent) but rising in all other regions of the world; and the price of coal declined everywhere.3 We will look at the reasons as we go along.

Higher prices take their toll. They affect demand, particularly in countries where economic growth is less energy intensive and consumers are not sheltered by subsidies. Thus changing price differentials will shape the global fuel mix, and high prices will eventually trigger supply responses.

These effects were evident in 2012. Oil, the highest priced of all fossil fuels per unit of energy content, continued a slide in global market share that started with the first oil price shock in 1973; in 2012 it was the only fossil fuel that lost market share in OECD and non-OECD countries alike.

Price spreads between natural gas and coal triggered competition between them, often across borders, with inexpensive gas displacing coal in the United States and coal displacing expensive gas in Europe. Much of this effect has resulted from the large supplies of US gas made available by hydraulic fracturing.

Global Natural Gas Balance

Two trends dominated the evolution of natural gas markets in the past few years: the rapid growth of shale gas in the United States and the expansion of global LNG. Changes in the global production, consumption, and prices of natural gas are shown in Figure 4.

Figure 4

Production and Consumption

US production continued to grow in 2012, if at a slower pace: it rose by 4.7 percent (32.9 billion cubic meters, Bcm), significantly below the record expansion—7 percent, 44.9 Bcm—of 2011. The slowdown was driven by the reorientation of US drilling away from gas and toward higher-priced oil. The impact on gas output would have been much sharper without the rapid growth in the production of oil and liquid-rich gas.

Global production grew by 1.9 percent (72 Bcm), also below average. In addition to the slowdown in US production growth, the European Union (−5.5 percent, −8.3 Bcm) and former Soviet Union (−1.4 percent, −8.9 Bcm) registered the largest regional production declines. In contrast, LNG trade declined for the first time in the BP data series, even though LNG imports to Asia continued to rise, affected by Japan’s post-Fukushima fuel shift.

Global gas consumption rose by 2.2 percent (82 Bcm) in 2012, faster than in 2011 but below the 10-year average (2.7 percent). The world’s largest volume gain in consumption (31.6 Bcm, 4.1 percent) was in the United States—a larger increase than that of any other region.

These developments, together with the continuing impact of Japan’s adjustment to the loss of nuclear power, shaped gas markets in 2012 and created an important example of interfuel competition.

Prices

Regional gas prices moved in lockstep with these patterns, as illustrated in Figure 4b. Spreads widened: US prices recorded their lowest annual average since 1999, Japanese import prices reached a new average annual record high, and UK spot prices edged up as global competition for LNG tightened the market in Europe. In the United States natural gas prices (as indicated at the Henry Hub distribution point in Louisiana) were on a declining path from late 2011 to April 2012, when they reached a low of $1.83/mmBTU.

Figure 5

As a result, many dry shale gas plays became uneconomic and producers reduced activity, as evidenced, for example, by a 46 percent decline in the overall gas rig count (Figure 5a). A switch from dry to wet4 and associated gas production, encouraged by high oil prices, helped to contain the impact: nonassociated shale gas production grew by 84 Bcm in 2011, but by a mere 10 Bcm a year later, while associated gas output rose by 12 Bcm, accounting for 36 percent of total US production growth (Figure 5b). Declining supply growth continued into 2013.

Coal to Gas Switching

Unusually warm winter weather at the start of 2012 curtailed heating demand, but US gas production continued to expand, which left markets oversupplied and inventories high. Some relief was provided by lower pipeline imports from Canada (4.4 Bcm), higher exports to Mexico (3.4 Bcm), and falling net LNG imports (4.1 Bcm).

The main balancing factor, however, was the one sector flexible enough to absorb the surplus natural gas: the power sector, which required gas prices to fall far enough to compete with coal for baseload electric power generation. The dramatic shift from coal to natural gas for electric power production in the United States is shown in Figure 6. All told, an additional 44 Bcm of gas went into the power sector in 2012, boosting gas-fired power generation by 21 percent (217 terawatt hours, TWh)—the largest new increment of any fuel in US power generation in at least 40 years—and leading to an all-time high for gas-fired power generation (1,295 TWh). As a direct result, coal-fired power generation fell to its lowest level since 1987, and US coal consumption declined by almost 12 percent in 2012, the largest decline worldwide.

Figure 6

The switch reported here accentuates a trend in gas-fired generation expansion by an average of 6.5 percent per annum and coal-fired generation decline by 5.6 percent per annum since 2007.

Impacts of Tight Oil Production

The story of “tight oil” (oil bound tightly in shale and other formations and requiring unconventional means for extraction) has been well documented. The massive resource base in the United States and innovations in horizontal drilling and hydraulic fracturing have greatly enhanced production of tight oil. In 2012 the United States recorded the largest annual gain in oil production both in the world and in US history.

The extraction of tight oil was the driver of supply growth. US oil production has expanded by 2 million barrels per day (mmb/d) over the last five years, the largest increase in the world and twice that of Iraq (1 mmb/d), which accounted for the second largest increment. Output in 2012 in North Dakota and Texas, the states with the most productive oil formations, rose by nearly 800,000 barrels per day.

The strong growth in US output, combined with lower consumption, has dramatically reduced overall US oil import requirements. Since peaking in 2005, US net imports have fallen by 4.5 mmb/d, or 36 percent—a reduction nearly as large as the entire 2012 consumption of the world’s third largest consumer, Japan. (Over that same period, Chinese net oil imports rose by 2.8 mmb/d or 84 percent.) And although the United States and European Union imported similar amounts in 2005, in 2012 US net imports were nearly one-third below those of the European Union.

Changes in Carbon Emissions

Global carbon emissions from energy consumption are estimated to have risen by 1.9 percent (723 million tonnes [Mt] of CO2) in 2012, slightly faster than primary energy consumption (1.8 percent). During the past decade, emissions grew 2.8 percent per annum, also faster than total energy consumption (2.6 percent); a slow decline in the OECD (−0.2 percent p.a.) was more than offset by growth in non-OECD countries (5.8 percent p.a.). Unsurprisingly, the largest growth in 2012 emissions associated with consumption came from China (548 Mt, 6 percent) and India (122 Mt, 6.9 percent); Japan also recorded a significant increase (92 Mt, 6.7 percent) as it adjusted to the loss of nuclear energy. These changes are shown in Figure 7.

Figure 7

The United States recorded the largest emission reductions worldwide, dropping faster than the European Union. This may seem unexpected, given the aggressive EU policy stance with regard to emission reduction. And considering just the emissions avoided through the growth of renewable power or, for that matter, reduced emissions from oil consumption, the European Union reduced more than the United States. But the effects of these measures were overwhelmed by the fuel switch in power generation discussed above—from gas to coal in the European Union and from coal to gas in the United States. In Europe, coal-fired power benefited from weak coal prices, in part due to coal displaced in the United States by cheaper shale gas, combined with relatively high regional natural gas prices.

Summary

Energy concerns everyone. Starting with many moving parts and taking the long-term perspective, there are many examples of adjustments, some of them well attuned to long-established trends—for example, the continued relative growth of the emerging economies. Some of these changes may be temporary as supply, demand, and prices continue to change and consequently influence the competition between fuels.

However, there are several key “takeaways.” First, in 2012 shale gas production in the United States enabled natural gas to “win” its competition with coal in the power generation sector, lowering overall energy costs and thus boosting the economy while at the same time moderating carbon emissions. Second, increases in tight oil production, again from hydraulic fracturing, are having a profound impact on the US oil supply picture, greatly reducing imports of petroleum and rejuvenating the country’s export business in refined products. Third, policy matters, particularly market-oriented policies that encourage competition and innovation in accessing, producing, and consuming energy.

 

FOOTNOTES

1 Primary energy refers to forms of energy before conversion to electricity or refined products.

 

 

2 Proved reserves can with reasonable certainty be economically produced under current market and operating conditions; they differ from technically recoverable reserves.

 

 

3 Editors’ note: See “Shale Gas Production: Effects on Investment and Competitiveness in the US Chemical Industry,” by T. Kevin Swift in this issue, for discussion of the effects of price differences between the United States and Europe.

 

 

4 Dry gas is basically methane. Wet gas also contains other, higher-molecular-weight hydrocarbons, called natural gas liquids, which tend to have a higher value in an environment of high oil prices.

 

 

 

FIGURE CAPTIONS

 

Figure 3   World energy prices, 1992–2012, in 2012 dollars per barrel of oil equivalent (boe). Sources: 2013 Statistical Review of World Energy; ICIS Heren Energy; Energy Intelligence Group; McCloskey; Platts.

 

FIGURE 4   Global natural gas balance. (a) Global consumption and production changes in 2012. “Other” includes Africa, South and Central America, and portions of Europe/Eurasia not included in the European Union (EU) and former Soviet Union (FSU). Bcm = billions of cubic meters. (b) International gas prices. mmBtu = million British thermal units. Sources: 2013 Statistical Review of World Energy; ICIS Heren Energy; Energy Intelligence Group.

 

FIGURE 5   (a) US rig count. (b) US natural gas production changes. “Associated” = gas produced in association with oil production. “Other” = all other natural gas production excepting shale and “associated.” Bcm = billions of cubic meters. Sources: 2013 Statistical Review of World Energy; Energy Information Administration (www.eia.gov); Baker Hughes (www.bakerhughes.com).

 

Figure 6   Coal to natural gas switching, 2002–2012. mmBtu = millions of British thermal units; RHS = right-hand scale. Sources: 2013 Statistical Review of World Energy; Energy Information Administration (www.eia.gov); Platts.

 

FIGURE 7   (a) Global carbon emissions from energy use, 1992–2012. Bt = billions of tonnes. (b) Carbon emission changes during 2012. Mt = millions of tonnes. Source: 2013 Statistical Review of World Energy

About the Author:Mark Finley is general manager of Global Energy Markets and US Economics, BP America. Christof Rühl is vice president and group chief economist, BP PLC.