BP's extreme climate forecast puts energy giant in a bind | RenewEconomy

BP’s extreme climate forecast puts energy giant in a bind

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BP Energy Outlook calls into question role BP and other international fossil fuel companies are playing in adapting to a carbon-constrained future.

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The Conversation

FILE GERMANY ECONOMY BP
BP’s energy outlook would make it difficult to keep warming below 2C. EPA/BERND THISSEN

 

BP’s annual Energy Outlook report, released in February, details the results from modelling of what it sees as the “most likely” energy scenario out to 2035. In this scenario global fossil use increases by 33%, consistent with a scenario the International Energy Agency (IEA) uses to describe the trajectory towards global warming of 6C – far beyond the accepted “safe” limit of 2C.

In its public presentation of the report, and elsewhere, BP admits that climate change is a problem, and that current carbon emission projections seem unsustainable, so what’s going on?

BP forecasts increasing demand driven mainly by non-OECD Asia. BP

 

 

BP forecasts demand being met by increasing coal, oil and especially gas. BP

 

 

It appears that BP is working to assure shareholders that the company is “storm-proof”. BP’s modelling is based upon some key assumptions about population growth, GDP growth per capita (particularly in non-OECD countries in Asia), and fossil fuel prices.

This results in energy consumption projections that are consistent with continued growth in demand for BP’s products, primarily gas, and hence healthy future share prices and dividends.

This is understandable, and we can hardly blame a company for wanting to keep their shareholders happy, but BP is walking a climate tightrope.

Betting against climate action

BP’s projected increase in energy demand and associated carbon emissions would result in atmospheric CO2 concentrations in excess of 600 parts per million and a resulting warming of at least 2.5C, and possibly as much as 6C, by 2100.

In 2013 Shell released its Oceans and Mountains scenarios that were similarly inconsistent with restricting warming to 2C.

However BP is not unaware of the risks posed by attempts to keen warming within 2C. To manage climate policy uncertainty, a lot of big corporations operate with an assumed moderate carbon price, around US$40 per tonne or higher. This is factored into the firm’s project-ranking and decision-making process. This kind of risk management allows companies to react quickly to changes in rules by government.

In his introduction, BP CEO Bob Dudley also calls for a global price on carbon, given the scale of the challenge faced by negotiators at international climate talks in Paris in December 2015.

Figure from IEA’s Energy Technology Perspectives 2014 report. In the 2C warming scenario (2DS), renewable share of supply increases to around 40% while coal and oil use decline dramatically. IEA

It is arguably in BP’s interest to have a carbon price of around US$40 per tonne. A standard carbon price would increase the profitability of petrol and natural gas against coal. But this only works if the gas price remains low enough.

The 2014 EY Global Oil and Gas Reserves Study shows that BP has amassed significant natural gas reserves compared with other international oil companies, second only to ExxonMobil and far ahead of its main competitors in the international arena.

Carbon prices of US$40 per tonne of CO2 would “likely” limit warming to 2C objective with a probability of more than 66%. However, if global mitigation action were delayed by 10 to 20 years, a carbon price of US$40 tonne would reduce the probability of limiting warming to 2C to only 10–35%.

In this scenario significantly higher carbon prices would be needed, and without significant improvements in energy efficiency, a 50% probability of keeping to the 2C limit may not be achievable.

Renewables get short shrift

There are other problematic assumptions in the report. In particular there is the remarkable decrease in the rate of uptake of renewables in the future. The modelling assumes a decrease from 20% per year currently to just 10% in 2020 and less than 5% by 2035.

Renewables (not including hydro power) in 2035 have a share of only 7% of global primary energy. Why the expansion of wind and solar power drops off is not explained, nor does it explain why new onshore wind today is more expensive than new gas technology.

This doesn’t sit well with BP’s underpinning assumption of continuous technology improvement. It assumes a continuous improvement of fossil fuel extraction technologies, such as unconventional oil and gas recovery techniques, yet it downplays the drastic technology improvements in the renewables arena into the future.

Given that renewables are becoming increasingly competitive with fossil fuels, the switch from fossil fuels to other types of energy is going to happen very suddenly, not gradually as the market responds to price signals.

Falling energy demand

In BP’s modelling, demand for primary energy in OECD countries does not decline but remains steady over the foreseeable future. This is despite the observable decline in emissions in Europe since before 1990 and the US since 2007 and even from Australia’s stationary energy sector.

Improvements in energy efficient technology (LED lights, appliances, buildings), increasing electricity prices, and tightening transport emission targets would all point to lower emissions into the future. It’s also striking that oil remains the dominant transportation fuel until 2035 and electrification of transport is hardly mentioned.

Curiously, the report also hardly mentions either carbon capture and storage or hot-rock geothermal energy. Both of these low-carbon energy technologies should be on the radar of a company like BP as they would make use of its considerable experience and infrastructure.

This omission could be interpreted as an admission that carbon capture is not expected to be a major player before 2035, as was hinted by Spencer Dale, BP’s group chief economist in the Q&A session of the Outlook presentation.

Will there be continued growth in demand for fossil fuels, as forecast by BP? In 2014 demand for coal in China did not increase as in previous years, despite plunging coal prices that have now hit their lowest level since 2007. Whether this is an anomaly or sign of a significant shift is yet to be seen.

The BP Energy Outlook calls into question the kind of role BP and other international fossil fuel companies are playing in adapting to a carbon-constrained future. Oh, to be a fly on the wall at their strategy meetings.

Authors: Roger Dargaville, Annabelle Workman, Changlong Wang, Dimitri Lafleur, Dylan McConnell, Martin Wainstein, and Ryan Alexander.

Source: The Conversation. Reproduced with permission.

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9 Comments
  1. MorinMoss 5 years ago

    At this point, I can say with some confidence that 2C target is blown.
    We’ve moved too slowly and are just not capable of making the necessary changes without incurring disaster.

    • Keith 5 years ago

      MorinMoss,

      I agree that it is easy to be pessimistic, but the rate of adoption of renewables (with China setting the pace) is extraordinary. If the sort of nonsense that fossil fuel companies have promulgated (eg the BP report), then all hope is lost.

      However, if you look at coal, there are very hopeful signs that the decline has begun. http://seekingalpha.com/article/2941746-peabody-energy-remains-confident-in-recovery-in-coal-demand-but-where-from

      • MorinMoss 5 years ago

        I’m reasonably convinced that coal usage will decline but it would need to ramp down FASTER than it grew and that’s highly unlikely.
        We would need coal emissions, CO2 & particulates to drop to ZERO by 2030 globally. What are the chances of that happening?

  2. Raahul Kumar 5 years ago

    My cousin Zach, who works for Exxon Mobil strongly agrees with BP that the future for fossil fuels is rosy. As does Peabody Energy and the International Energy Agency. It seems it is the question as to whether renewables or fossil fuels have a rosy future, since they both can’t be true.

  3. Farmer Dave 5 years ago

    Like most of the incumbent fossil fuel giants, BP is in denial about two issues which threaten their business: climate change and the growth of renewables. The science is extremely clear: if we want to avoid dangerous climate change, we must keep most of our current fossil fuel reserves safely in the ground. This clear message is unacceptable to the incumbents: it threatens their current market capitalizations (based on the assumption that their reserves will be brought to market), and it threatens their long-term existence. Most importantly, it threatens their very souls.

    I used to work for one of the oil majors, so I know their culture. They are very good at what they do: finding oil and gas and exploiting the deposits they find, regardless of the technical difficulties. In some ways, the bigger the engineering challenge, the more they enjoy overcoming it. They take pride in overcoming vast obstacles, spending huge amounts of money, and delivering oil and gas to the market. That is what they live for, and the climate change reality threatens who they are. It is not surprising that they are in total denial to the existential threat climate change represents. They also do not accept that climate change – and their inability to understand what it means to their business – is moving them from heroes to villains. That is the importance of the divestment movement – it is making clear that the incumbents and those who work for them are becoming climate-trashing villains.

    Finally, as so often discussed on this excellent site, renewables are a slow burning threat they could embrace in order to retool their businesses, but I predict that almost all of the companies will not make the transition. They have made it clear that they will continue to extract all the fossil fuels they can until they are stopped. We must stop them, and that is where the phrase “carbon war” comes from.

    • Max Boronovskis 5 years ago

      Well put Dave.

  4. Jens Stubbe 5 years ago

    What a laugh. I will be surprised if there will be sold any fossils in 2035. If the current market trajectory continues there will not be sold any fuel.

    Solar LCOE is down by 45% over the last three years wind LCOE is down 58% in the last five years.

    Neither solar nor wind are approaching any limiting factors for continued LCOE drop.

    Near term drop in the wind sector is expected to be around 30-50% just based upon rationalization of production and added to this you can expect expanded lifetime, increased capacity factor and decreased maintenance cost etc.

    Average 20 year US interior wind PPA contracts were $0,021 per kWh in 2013.

    When you can buy electricity below $0,01 per kWh you can produce Synfuels cheaper than it is possible to produce Diesel and Gasoline with the worlds cheapest source of crude oil from Saudia Arabia at $17 per barrel.

    BP is basically toast but does not have the decency to admit it or inform their stakeholders.

    What is totally bewildering is how BP predict that renewables will stop gaining market shares. Exactly which market mechanism will persuade the market to opt for the most unsteady, costly, polluting and health damaging form of energy supply instead of just getting cheap non polluting energy with no health hazards, no geopolitical hazards, no issues of supply, no climate crisis potential etc.

    IEA is so way off target usually that it more often than not has neared the ridiculous. In 2012 they posted a report based upon nine studies of the development in wind LCOE with baseline 2011 continued to 2030. Today none of those nine studies hold any interest because even the one study that assumed 30% LCOE drop in 2030 already has been exceeded.

    And as everybody knows wind has to keep pace with solar to prevent going into oblivion and as history proves the constant innovation has put wind on a very steady and even accelerated cost decrease trend.

    Renewables are disruptive and despite strong lobbyism there is no way BP cannot be swept away by the tide.

  5. Miles Harding 5 years ago

    Very good, BP.
    I recall that, last year, Steven Kopits indicated another problem for the oil majors: Their profits are being severely eroded by increasing exploration and development costs.
    This fact alone makes BP’s rosy business as usual scenario a fantasy.

  6. Raahul Kumar 5 years ago

    The BP Energy outlook makes a few major errors. In particular, the carbon price

    “However BP is not unaware of the risks posed by attempts to keen warming within 2C. To manage climate policy uncertainty, a lot of big corporations operate with an assumed moderate carbon price, around US$40 per tonne or higher.”

    It is already the case that the price on petrol and diesel is already higher.

    “Finance Minister Arun Jaitley added that India’s current “carbon tax” on petrol and diesel “compared favourably” with other countries.Since October 2014 there has been a levy of $60 per tonne of carbon dioxide on petrol and $42 per tonne for diesel.”

    http://www.rtcc.org/2015/03/03/modi-budget-sends-mixed-messages-on-indias-climate-commitment/

    This projection also ignores the impact of energy efficiency measures such as
    ECBC green building code, which are expected to use 40% to 60% less energy compared to conventional buildings

    India to implement code for energy saving, green buildings construction by 2017

    http://economictimes.indiatimes.com/industry/energy/power/india-to-implement-code-for-energy-saving-green-buildings-construction-by-2017/articleshow/36250913.cms

    This means the demand will be reduced by half as per the BP projection. But what about supply?

    “India will aim to be self-reliant in crude oil production by 2030, Union Petroleum and Natural Gas Minister M Veerappa Moily announced March 25. The government has set a goal to reduce crude oil imports by half by 2020.”

    http://www.pennenergy.com/articles/pennenergy/2013/03/india-aims-to-be-energy-independent-by-2030.html

    “NTPC to bring down coal import bill to nil in 5 years”

    http://economictimes.indiatimes.com/industry/energy/power/ntpc-to-bring-down-coal-import-bill-to-nil-in-5-years/articleshow/46822516.cms

    The situation is not looking so good for Peabody Energy and other fossil fuel companies if their 2nd biggest client is looking to cut back dramatically. But use what instead of oil, gas and coal?

    Zero Carbon Energy

    The competitors to fossil fuels, nuclear and renewables share of the market by 2022 will rise. That’s only 7 years away.

    India’s nuclear capacity to be increased to 17,080 Mw by 2022

    http://www.indiaenvironmentportal.org.in/content/397094/indias-nuclear-capacity-to-be-increased-to-17080-mw-by-2022/

    India to Quadruple Renewable Capacity to 175 Gigawatts by 2022

    http://www.renewableenergyworld.com/rea/news/article/2015/03/india-to-quadruple-renewable-capacity-to-175-gigawatts-by-2022

    110 GW of coal will be built in the same period, but nonetheless. 192 GW of zero carbon power will be on the grid. Even after adjusting for the capacity factor, which reduces both down to:

    71.5 Gw for coal
    58 Gw for zero carbon

    The grid is going to be a 50/50 split between coal and zero carbon sources(nuclear, solar, hydro and other renewables). Any one of these factors is enough to reduce the projected demand by half. But all three of them apply!

    Due to rapid economic expansion, Bharat has one of the world’s fastest growing energy markets and is expected to be the second-largest contributor to the increase in global energy demand by 2035, accounting for 18% of the rise in global energy
    consumption.

    These same points also apply to Zhonghua, the other nation of 1.2 billion. Beijing also plans to slash fossil fuel imports, improve energy efficiency, build nuclear and renewables, impose a carbon tax, etc.

    This leads to the inescapable conclusion that BP, Exxon Mobil, Peabody Energy and other fossil fuel companies are now overvalued, since they will no longer be able to enjoy robust growth of their recent past.

    Indeed, peaking years for their biggest customer, Zhonghua may have already happened. It’s not just peak carbon, it may be far worse, peak profit! Declining profits from 2022 onwards. Investors should reassess their portfolio.

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