BP has developed a habit of stealing headlines. For now, it is justified. When one of the world’s biggest crude producers — one still paying for causing the worst oil spill in US history — tries to take leadership of the energy transition, it is worth listening.

Anjli Raval’s note on BP Week is our first item today. Our second is on Nord Stream 2, another Gazprom pipeline at the centre of a diplomatic dispute. But the infrastructure, for all the debate surrounding it, may not really be needed. Meanwhile, bankruptcies in the oil patch continue to rise: see Data Drill.

Thanks for reading. Let us know your thoughts and ideas at energy.source@ft.com. If this has been forwarded to you, please sign up for the newsletter here. — Derek

BP calls time on the oil growth story

It’s ‘BP Week’, as the UK oil major dubs it.

Bernard Looney, the chief executive, is on a mission over the next few days to convince investors that his strategy to cut production by 40 per cent and rapidly increase renewables spending by 2030 will work. To make his case, he has timed the launch of the company’s annual energy outlook with a series of presentations from top managers.

Here are the highlights:

BP has modelled three scenarios for the energy transition. The first is a “business as usual” (BAU) case, which assumes that government policies, technologies and societal preferences evolve in a manner and speed in line with the recent past. (Former chief Bob Dudley’s branding folks called this scenario “evolving transition”, which tells you a little about how approaches differ between the two management teams.)

Two other scenarios model more aggressive policies to tackle climate change: “rapid” and “net zero”, the latter of which is aligned with the Paris climate goals. 

BP is at pains to say these are not predictions of how things will definitely play out, but a guide to the uncertainty. Spencer Dale, the candid chief economist of BP, said: “We can’t predict the future; all the scenarios discussed in this year’s outlook will be wrong.” Yet Mr Looney has called the report “instrumental” for guiding the new strategy for the energy transition, which is why we are paying attention and you should too.

All three models show that the era of endless oil demand growth is pretty much over. In the BAU scenario, oil demand recovers from the coronavirus and plateaus in the early 2030s. In the other two models, consumption never recovers as changes to work and travel patterns stick.

One way or another, the outlooks make BP the first supermajor to call time on what has been more than 100 years of untrammelled growth that has left oil to dominate the energy mix. 

Bernard Looney is on a mission to sell his vision for BP’s future © AP

 Other points:

  • Global energy demand grows in all the scenarios, driven by rising wealth and higher living standards in emerging economies where populations are swelling rapidly. In BAU it is 25 per cent higher by 2050.

  • The share of hydrocarbons in the global energy mix declines in all three models, while renewable energy’s increases as the world electrifies. The range for how things might play out is wide. Fossil fuels’ share could decline from around 85 per cent in 2018 to anywhere between 65 per cent to 20 per cent by 2050.

  • Gas is more resilient than oil: its demand increases over the next 30 years by a third in BAU. Carbon capture technologies give it staying power in the energy mix. But if governments and the public come after gas in the way they have for oil, it could peak in the mid-2030s under the rapid scenario and the mid-2020s in the net zero model. 

  • Renewables are the fastest growing segment, with wind and solar leading the charge. Their share of the energy mix grows from around 5 per cent in 2018 to as much as 60 per cent by 2050 should governments adopt the strongest policies on climate action and if there is a “significant acceleration” in the build out of renewable generation capacity. In BAU, it only gets to 20 per cent.

  • Electricity, generated largely by renewables, will account for as much as 50 per cent of energy consumption in 2050 in the net zero model, from 20 per cent in 2018. In BAU it only rises to 34 per cent and 45 per cent in the rapid model.

It all amounts to a dramatic shift from last year’s outlook. So much so that Mr Looney on Monday had to clarify that “the outlook is not informed by our strategy”, but the other way round.

He added:

“Our new strategy is going to transform BP into a very different company. Not overnight, given our size and scale. But fast, because the world needs change.”

(Anjli Raval)

The pipeline no one really needs

Does it matter if Nord Stream 2, Gazprom’s project to double its sub-Baltic Sea natural gas pipeline infrastructure to Germany, remains unfinished?

That seems possible following the poisoning of Alexei Navalny, a Russian opposition leader. Even before the assassination attempt, the US had in July expanded earlier sanctions against Nord Stream 2 — a move the Atlantic Council said marked a “major escalation”.

The project has been divisive: pitting opponents of Russian expansionism, especially its meddling in the affairs of countries on its borders, against corporate European interests that refer back to decades of reliable energy imports from Russia, even during the Soviet period.

Yet stopping the pipeline hardly seems the most dramatic outcome. Gazprom would lose some face, but for other parties the absence of Nord Stream 2 would be, at worst, inconvenient. Some outcomes include:

  • The five lenders to the project, including Shell and Wintershall, would need to negotiate with Gazprom some way of being repaid their combined €9.5bn investment.

  • Customers that expected to buy gas from Eugal, a Gazprom-backed pipeline in Germany to be connected to Nord Stream 2, would need alternative suppliers.

For all the debate, Nord Stream 2 may not really be needed. © REUTERS

It would also bring the US two strategic victories:

  1. Without Nord Stream 2, Gazprom may need to rely on Ukraine’s existing transit network to ship that gas to Europe — a US aim. (Gazprom’s entire strategy in building new pipelines to Europe was to skip Ukraine.)

  2. By curbing Russian supplies to Europe, prices would rise and a market would open again for US liquefied natural gas exporters, which have struggled to find buyers recently.

That’s the theory. James Henderson, head of the gas programme at the Oxford Institute for Energy Studies, disagrees.

“If you believe Russian gas is the cheapest supplier to Europe,” said Mr Henderson, “then by potentially limiting the growth of Russian gas supply you have price implications for Europe over the longer term. But not now. Definitely not now — we’re obviously oversupplied.”

Rising LNG export capacity — from Australia to Qatar — coupled with the pandemic’s hit to global GDP and demand mean the world is awash in excess supplies. Yet a modest recent rise in Henry Hub prices in the US means American LNG — once dubbed “freedom gas” by the Department of Energy — is too expensive now for Europe, which can also turn to supplies from Norway, Nigeria, Qatar or elsewhere.

Meanwhile, Nord Stream 2 opponents say Europe could cope without the pipeline with increased energy efficiency to contain demand and more renewables to handle supply.

Either way, the outlook for European gas demand, which stagnated by 1.2 per cent between 2008 and 2018, is not so rosy. BP’s latest outlook expects it to decline by 0.9 to 4.7 per cent by 2050, depending on the pace of decarbonisation.

Line chart of billion cubic metres per year showing Not like the old days: EU natural gas demand


It leaves Nord Stream 2 as “surplus capacity”, said Mr Henderson — a replacement for Ukrainian pipes that Europe may never find a use for anyway.

“We may never have needed Nord Stream 2 from a capacity perspective, because gas demand may now start to go into decline if we decarbonise aggressively.”

(Derek Brower)

Data Drill

April’s oil price crash is still reverberating around the sector. The tally of oilfield services companies that have fallen into bankruptcy this year shot up by 50 per cent in August, data from law firm Haynes & Boone shows, with 12 more companies filing for protection.

Services groups — responsible for everything from laying pipes to drilling wells — have borne the brunt of the fallout as operators cut costs. At $34bn, the amount of debt held by those services providers to hit the wall so far this year is more than four times the 2019 total.

Column chart of Number of filings (North America) showing Oilfield services bankruptcies soar in August

Power Points

  • As California clamps down on emissions, US refiners are exploring ways to make “renewable diesel” from animal fat and cooking oil, writes Gregory Meyer.

  • Repetition, rather than innovation, is the way to cutting the costs of nuclear plants, argues Jonathan Ford.

  • Google has committed to switching its operations to carbon-free power within the next 10 years, report Leslie Hook and Richard Waters.

  • The US is looking to reboot its rare earths industry as geopolitical tensions fuel a desire to curb Chinese dominance, reports Jamie Smyth.

  • The US government needs to triple funding for research and development in the energy sector to $25bn if the country is to have any hope of achieving decarbonisation targets, according to a paper from Columbia University’s Center on Global Energy Policy.

Endnote

The International Energy Agency, the US Energy Information Administration and Opec all released their latest monthly oil-market assessments over the past few days. Here is what matters and what changed:

Demand 2020Revision vs previous monthChange vs 2019Non-Opec supply 2020*Revision vs previous monthChange vs 2019
IEA91.7-0.3-8.468.20.2-2.9
Opec90.2-0.4-9.567.60.3-2.8
EIA93.1-0.1-8.368.80.4-2.6

(Figures in million barrels a day)
*Includes Opec natural gas liquids

Energy Source is a twice-weekly energy newsletter from the Financial Times. Its editors are Derek Brower and Myles McCormick, with contributions from David Sheppard, Anjli Raval, Leslie Hook and Nathalie Thomas in London, and Gregory Meyer in New York.

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