Energy transition speeding up

The 2018 edition of the BP Energy Outlook considers the forces shaping the global energy transition out to 2040 and highlights the key uncertainties surrounding the transition. Exploring a number of scenarios, a core theme of this year’s study is the speed of the transition underway and the intensifying competitive pressures within global energy markets.

Presenting the study’s key findings during IP Week 2018 (for more details, see Petroleum Review’s IP Week supplement, to be published in March), Spencer Dale, BP Group Chief Economist focused primarily on the ‘Evolving Transition’ (ET) scenario, which assumes that government policies, technologies and societal preferences evolve in a manner and speed similar to the recent past. Other scenarios focus on particular policies that affect specific fuels or technologies, eg a ban on sales of internal combustion engine (ICE) cars; a greater policy push to renewables energy; or weaker policy support for a switch from coal to gas. Some general alternative transition paths are also considered, which are even faster.

Under the ET scenario, fast growth in developing economies drives up global energy demand a third higher by 2040. The global energy mix is the most diverse the world has ever seen at this point in time, with oil, gas, coal and non-fossil fuels each contributing around a quarter of the world’s energy. Renewables are by far the fastest-growing fuel source, increasing five-fold and providing around 14% of primary energy.

Demand for oil grows over much of the Outlook period under the ET scenario, before plateauing in later years. All the demand growth comes from emerging economies. The growth in supply is driven by US tight oil in the early part of the study, with OPEC taking over from the late 2020s as Middle East producers adopt a strategy of growing market share. The transport sector continues to dominate global oil demand, accounting for more than half of the overall growth. Most of the growth in energy demand from transport, which flattens off towards the end of the Outlook, comes from non-road (largely air, marine, and rail) and trucks, with small increases from cars and motorbikes. After 2030, the main source of growth in the demand for oil is from non-combusted uses, particularly as a feedstock for petrochemicals.

Natural gas demand grows strongly over the period, supported by increasing levels of industrialisation and power demand in fast-growing emerging economies, continued coal-to-gas switching, and the increasing availability of low-cost supplies in North America and the Middle East. It overtakes coal as the second largest source of energy. By 2040, the US accounts for almost one quarter of global gas production, and global LNG supplies will more than double. The sustained growth in LNG supplies greatly increases the availability of gas around the world, with LNG volumes overtaking inter-regional pipeline shipments in the early 2020s.

Oil and gas together account for over half of the world’s energy by 2040.

Global coal consumption flatlines over the study period under the ET scenario, with falls in China and the OECD offset by increasing demand in India and other emerging Asian economies. China remains the largest market for coal, accounting for 40% of global coal demand to 2040.

Power accounts for nearly 70% of the increase in primary energy demand. The mix of fuels used in power generation is set to shift materially, with renewable energy gaining share more quickly than any energy source in history, increasing from 7% today to around a quarter by 2040. Even so, coal remains the largest source of energy in power generation by 2040.

Transport energy demand grows by only 25% despite total demand for transportation more than doubling, reflecting accelerating gains in vehicle efficiency. The transport sector continues to be dominated by oil (around 85% in 2040), despite increasing penetration of alternative fuels – particularly natural gas and electricity.

This year’s Outlook argues that the penetration of electricity in the transport sector is best measured by considering both the number of electric vehicles (EVs) and how intensively each vehicle is used. In the ET scenario, the share of EVs in the global car parc reaches around 15% by 2040 – more than 300mn cars in a car parc of almost 2bn.  However, the share of passenger car kilometres powered by electricity, which also takes account of the intensity with which electric cars are used, is over 30%. The study shows how the interaction of fully-autonomous cars with shared mobility has the potential to substantially boost the intensity with which electric cars are driven.

A key uncertainty in the period to 2040 is the speed with which sales of electric cars increases. To gauge the significance of this uncertainty, the Outlook considers a scenario in which there is a worldwide ban on the sales of cars with internal combustion engines (ICE) from 2040. This scenario reduces liquid fuel demand by around 10mn b/d relative to the ET scenario but, even so, the level of oil demand in 2040 in the ‘ICE ban’ scenario is higher than in 2016.

‘The suggestion that rapid growth in electric cars will cause oil demand to collapse just isn’t supported by the basic numbers – even with really rapid growth,’ explained Dale. ‘Even in the scenario where we see an ICE ban and very high efficiency standards, oil demand is still higher in 2040 than it is today.’

Need for carbon emissions focus
An important takeaway from this year’s Outlook is the need for more downward pressure on carbon emissions. Under the ET scenario, carbon emissions rise by 10% by 2040. While this is far slower than the rates seen in the past 25 years, it remains higher than the sharp decline thought to be necessary to achieve commitments under the Paris Agreement.

As such, the Outlook also explores an Even Faster Transition scenario, which has the same broad decline in carbon emissions as the International Energy Agency’s ‘Sustainable Development Scenario’ where carbon emissions fall by almost 50% by 2040. Most of the additional abatement of emissions in this scenario, relative to the ET scenario, come from the power sector, which is almost entirely decarbonised by 2040 (see Figure 1).

For more information, go to www.bp.com/energyoutlook