Thursday, February 26, 2015

Good trends for Alaska; Annual BP Energy Outlook 2035 sees a global shift in trade patterns for energy

Alaska Contract Staffing
Eric Lidji
For Petroleum News

With oil prices at six-year lows, it can be difficult to see much optimism for Alaska.

But three trends bode well for the oil and gas sector in Alaska over the next 20 years, according to the most recent edition of the BP Energy Outlook 2035, released Feb. 17.

First, the global energy system is changing directions. Second, global oil market should return to their normal balance. Third, liquefied natural gas should become dominant.

With Alaska sitting at the edge of the Asia-Pacific market and working toward expanding LNG exports while finding a market for existing oil supplies, those trends could help.

The annual outlook is a projection of current energy trends and policies rather than a prediction of what will happen, according to BP Group Chief Economist Spencer Dale.

Rising in the west

As always, trade patterns come down to supply and demand.

The growth of unconventional oil supplies in North America, the growth in oil demand in developing economies like China and India and the flattening of demand in developing economies such as North America, are currently shifting how energy moves around the world. Simply put, oil is moving from west to east after decades of moving east to west.

Specifically, imports to Asia are expected to account for 80 percent of trade among regions by 2035, up from 60 percent today, while exports from the Middle East are expected to fall from 55 percent in 2013 to slightly less than 50 percent by 2035.

At the same time, North America should soon become a net exporter of oil. While the United States imported some 12 million barrels of oil per day in 2005 - or 60 percent of its total demand - the country is on pace to become self-sufficient by the 2030s. By 2035, China should surpass the United States as the leading consumer of liquid fuels.

While unconventional oil production in North America is expected to flatten in the coming decades, the United States and Canada are expected to remain at the forefront of the boom currently under way, even though similar resources exist in other countries.

The current “weakness” in oil markets, as BP phrased it, is largely seen as the result of unconventional oil from North America backing out imports and glutting the market.

Seeing as how these resources drove the two largest single-year increase in domestic oil production in 2013 and 2014, the glut should take several years to “work through,” according to the outlook. Eventually, the high decline rate of unconventional wells and the limited available oil resource should lead domestic tight oil production to flatten.

As it does, global demand is expected to increase. The outlook expects the demand for oil to grow by 19 million barrels per day by 2035, which is the equivalent of adding another United States to global demand. The increase will come largely from China and India.

While tight oil supplies from North America will accommodate much of the demand in the short term, the Organization of Petroleum Exporting Companies is expected to meet the rising demand toward the end of the forecast period, which could rebalance the global market to the position it held long before North American tight oil.

Of the three fossil fuels, natural gas is expected to grow the most by 2035.

While coal has been the fastest growing fossil fuel in recent years, it is expected to become the slowest over the next 20 years as Chinese demand moderates, more policies aim to reduce carbon dioxide emissions and plentiful gas supplies ease conversion.

The outlook expects demand for gas to increase 1.9 percent each year through 2035 with about half being met by increased production from Russia, the Middle East and shale gas.

What is more relevant for Alaska is an expected change in the way natural gas moves.

As part of the changing movement of global energy supplies, the Asia-Pacific is expected to overtake Europe as the leading region for natural gas imports by the early 2020s and growing shale gas production will turn North American from an importer to an exporter.

The “overwhelming majority” of this increasing trade will come in the form of LNG, according to the outlook, which expects 8 percent growth per year through 2020. More tellingly, the outlook expects LNG to overtake pipelines by 2035 - a first in history.

Such a shift would impact gas pricing, as well as the geography of supply and demand.

Of that growth, about half should come over the next five years, as projects currently in the works come into operation. The rest should come between 2025 and 2035.

Given that LNG tankers are more mobile than pipelines, and therefore able to respond to price signals more quickly, an increase in LNG supplies would have the effect of integrating the global natural gas market, which is currently constrained by region.

While LNG is unlikely to create a “global gas price,” according to the outlook, it could cause gas prices around the world to move up and down in unison, with the differences between regions reflecting transportation costs rather than regional issues of supply and demand.

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