2013-01-18

2013 January 18

The Master Resource Report 2013-01-18

BP World Energy Outlook 2030

Tight oil along with other unconventional supply will meet future demand according to BP’s World Energy Outlook 2030.

The Guardian, a UK paper put it this way. “Peak oil theories ‘increasingly groundless’, says BP chief. The US will be self-sufficient in energy by 2030…”

The article then went on to quote BP CEO Bob Dudley. “The outlook shows the degree to which once-accepted wisdom has been turned on its head. Fears over oil running out – to which BP has never subscribed – appear increasingly groundless. The US will not be increasingly dependent on energy imports, with energy set to reinvigorate its economy.” (It might just be a stretch to call “Peak Oil” an accepted wisdom.)

Here are the key points from the BP World Energy Outlook 2030 on tight oil and the global supply thru 2030.

  • Tight oil will likely expand by 7.5 Mb/d by 2030 and account for nearly half of the 16.1 Mb/d of global supply growth. Non-OPEC supplies will expand by 8.5 Mb/d versus 7.6 Mb/d for OPEC as the group will likely see its market share drop until 2018 due to the surge in tight oil supplies before recovering to 42% by the forecasting period.
  • By 2030, tight oil should reach 9% of global supplies. North America will continue to dominate output with limited growth elsewhere.
  • Both Russia and China – with robust service sectors and expected additional fiscal incentives – are expected to develop their tight oil resources reaching 1.4 Mb/d and 0.5 Mb/d by 2030, respectively. South America will also increase output due to investment in countries like Colombia and Argentina.
  • North America’s tight oil growth is expected to slow post-2020 due to today’s view of the resource base and the costs and drilling activity required to sustain output.
  • The Americas will account for 65% of incremental supply growth to 2030 as tight oil (5.7 Mb/d), oil sands (2.7 Mb/d), and biofuels (1.8 Mb/d) drive growth. The US (4.5 Mb/d) leads regional increases and will surpass its previous record output reached in 1970.
  • OPEC crude oil output will not return to the expected 2013 level of about 30 Mb/d until 2020 as non-OPEC supplies dominate global growth. From 2020-30, however, supplies will likely expand by 5.1 Mb/d as non-OPEC output growth fades.
  • The US will likely surpass Russia and Saudi Arabia in 2013 as the largest liquids producer in the world (crude and biofuels) due to tight oil and biofuels growth, but also due to expected OPEC production cuts. Russia will likely pass Saudi Arabia for the second slot in 2013 and hold that until 2023. Saudi Arabia regains the top oil producer slot by 2027.
  • The US, Saudi Arabia, and Russia will supply over a third of global liquids in our outlook.

The two graphs that follow are from the BP report. They give some scale to just how abundant BP thinks the unconventional supply will be and how important it will be in meeting global demand during the period.

Source: BP Energy Outlook 2030 -- click image for larger view

Source: BP Energy Outlook 2030 -- click image for larger view

After some further thought (I went for a two hour bike ride) I realize BP was making it very clear that future energy is going to be very expensive for a number of reasons. Unconventional oil production requires very large amounts of financial capital (money), human capital (labor) and natural capital (resources and environmental externalities). Whether it is tight oil in North Dakota, tar sands in Canada or deep water off the coast of Brazil this in not in the same capital consumption category as conventional oil extraction. The higher input requirements will come at the expense of other sectors of the economy as compete for capital and resources.

Given this elevated intensity of capital consumption (remember this is more than just money) it was not surprising to see very little mention of cost. However the report made it clear what they think oil prices will do. “In our outlook, demand growth slows and non-OPEC supplies rise – both as a result of high prices.” Due to the higher cost of these unconventional supplies prices will continue climb reducing demand predominately in OECD countries like the US.

So the conclusion seems simple from BP’s perspective. Supplies of oil will continue to increase thru the 2030 forecast period along with price. Therefore some consumers of oil today will be unable to consume any of the future supply since the price will be too high for them. Once the price is reached where consumers can no longer afford it they have entered the Peak Oil world. The mistake is to think we will all get there at the same time and that it will happen rapidly. James Kunstler titled his book “The Long Emergency”. More emphasis should be placed on the “Long” part of the story.

Note: BP’s forecast made no specific price predictions. Wise choice.

Note: Currently clients and advisors at Ravenna Capital Management do not hold positions in BP.