Legislature(2017 - 2018)SENATE FINANCE 532
04/04/2018 09:00 AM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| World Energy Outlook | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
JOINT MEETING
SENATE RESOURCES STANDING COMMITTEE
SENATE FINANCE COMMITTEE
JUNEAU, ALASKA
April 4, 2018
9:03 a.m.
MEMBERS PRESENT
SENATE RESOURCES
Senator Cathy Giessel, Chair
Senator John Coghill, Vice Chair
Senator Natasha von Imhof
Senator Bert Stedman
Senator Kevin Meyer
Senator Click Bishop
SENATE FINANCE
Senator Lyman Hoffman, Co-Chair
Senator Anna MacKinnon, Co-Chair
Senator Click Bishop, Vice Chair
Senator Peter Micciche
Senator Natasha von Imhof
Senator Gary Stevens
MEMBERS ABSENT
SENATE RESOURCES
Senator Bill Wielechowski
SENATE FINANCE
Senator Donald Olson
COMMITTEE CALENDAR
PRESENTATION: BP WORLD ENERGY OUTLOOK
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
MARK FINLEY, General Manager
Global Energy Markets and U.S. Economics
BP America
POSITION STATEMENT: Provided BP's world energy outlook.
ACTION NARRATIVE
9:03:10 AM
CO-CHAIR ANNA MACKINNON called the joint meeting of the Senate
Resources Standing Committee and the Senate Finance Committee to
order at 8:36 a.m. She announced members present from the Senate
Finance Committee were Senators Bishop, Micciche, Von Imhof,
Stevens, and Co-Chairs Hoffman and MacKinnon. Senator Olson was
excused.
CHAIR GIESSEL announced members present from the Senate
Resources Committee were Senators Meyer, Coghill, Stedman,
Bishop, Von Imhoff, and Chair Giessel.
^WORLD ENERGY OUTLOOK
WORLD ENERGY OUTLOOK
CO-CHAIR MACKINNON announced that the World Energy Outlook
presentation was the only item on today's agenda and invited Mr.
Finley to the table to present "BP Energy Outlook 2018 Edition."
9:03:57 AM
MARK FINLEY, General Manager, Global Energy Markets and U.S.
Economics, BP America, said he is an energy economist by
training and profession and has spent 35 years in both the
public and private sectors studying the intersection of energy,
economics, and geopolitics.
He said the long-term outlook that formed the background for the
presentation is something that BP uses to inform its own
strategic thinking about the future, its portfolio, and
investments across the energy space. Why share this outlook
externally? The answer is two-fold: first, they feel it's
important to be part of the conversation in the world of energy
and the energy transition that the world is in. They think and
hope their perspectives can add to that conversation.
9:06:29 AM
As a member of the team that produces the outlook, Mr. Finley
said he has another reason, which is to avoid group think. They
want to expose their ideas to as many different brains as
possible around the world because these are hard, complicated
issues and no one has a crystal ball. The more constructive
conversation and criticism they can get for their work, the
better off everyone is. Mr. Finley welcomed members' feedback
and challenges as he goes through the presentation.
MR. FINLEY said they approach the outlook process with a spirit
of humility. In this case, they are looking out to 2040, a long
time, and can't be too conclusive about it. This is not about
predicting the future but about understanding the uncertainty
that the world's energy system faces: what dimensions people
have some confidence in and what dimensions are massively
uncertain and could put the world in very different outcomes
depending on how key variables break out.
9:08:03 AM
Slide 2
Their approach is to use a range of scenarios that illustrate
key uncertainties around the world's energy system. He used tons
of oil equivalent (TOE) in energy demand and supply profiles to
compare energy sources like solar energy and coal. For the
purposes of telling a story, he built much of the presentation
around the scenario labelled "Evolving Transition" (ET) that is
consistent with the continued evolution of the energy system
over the last 20-25 years.
9:09:35 AM
Slide 3
MR. FINLEY said he used a variety of lenses for looking at the
challenges. He repeated the same picture three times but sliced
different ways for perspective. An energy demand profile from
1970 to 2040 was sliced into sectors of the economy with the
center panel slicing it by location in the world; another panel
sliced demand by fuel. He said these lenses provide insights
into the progress and changes in the energy system.
He explained that much of the analysis is driven by the first
panel, the sectoral profile, because at the end of the day,
people don't consume gas or oil. They consume space heating or
mobility, and a lot of the underlying economic drivers come from
this kind of energy consumption.
Slide 4
MR. FINLEY showed the breakdown of energy demand for regions of
the world. The U.S. is in the group of countries called the
Organization for Economic Cooperation and Development (OECD),
basically the club of mature market economies in North America,
Western Europe, and Japan. There is no growth of energy demand
in the U.S. and other mature developed economies of the world in
this scenario. One of the key drivers is a greater focus on the
more efficient use of energy, a common theme around the world in
this scenario. In fact, this scenario projects that the growth
of energy demand will slow significantly over time and that all
of the net growth will be in the emerging economies, in
particular, India and China.
9:12:14 AM
SENATOR MICCICHE said it's interesting that the population
escalator for 40 years seems unrealistically flat considering
the variation in OECD countries.
MR. FINLEY responded that is a fair challenge and at the end of
the day they need to humbly acknowledge this is just one
scenario and there are lots of different possible outcomes.
Recent historical data shows relatively flat consumption of
energy since about the year 2000 for the green coutnries
including the United States. That includes the Great Recession,
but it also includes periods of economic growth before and after
it. Some evidence is emerging that the historical relationship
between growing economies and growing energy demand, especially
in these more mature economies, is changing. Partly because of
efficiencies and partly because of the growing concentration of
services and less-heavy industry. However, there are places of
upside risk for the demand profile.
9:13:50 AM
SENATOR BISHOP asked if he was factoring in population growth,
because the United States' population is starting to go the
other way.
MR. FINLEY indicated yes. He explained that population growth is
a factor, but that is happening mostly in the emerging
economies. The good news is that the working age population in
2040 has been born already, but the per capita income and the
degree of urbanization/sophistication in those populations is a
big behind-the-scenes issue. He pointed to another document
called the "Main Outlook Document" that explores different
prospects for African energy demand that is driven by different
assumptions around the rates of industrialization and the
urbanization of the population, because the profile for energy
consumption is very different in a city than in the country.
9:15:38 AM
MR. FINLEY said the right-hand side of the panel shows annual
average growth rates broken out into 10-year periods. In this
narrative scenario, the growth of energy demand slows
significantly from where Chinese energy consumption over the
last 20 years, which has been the big driver of the world's
energy demand as it has embarked on a very rapid period of
economic growth and industrialization. But that is already
changing; while economic growth in China remains robust it is
slowing. Also, the mode of development is changing away from
heavy industry towards domestic consumption of goods and
services. China has air pollution problems and there is a big
push to use energy more efficiently and to shift the profile of
energy consumed.
Taking all those factors into account, India replaces China as
the biggest source of growing energy demand in the later years
of the outlook, he said. But overall, global energy demand grows
much more slowly than has been the case historically even with
continued economic growth.
9:17:12 AM
In the interests of time, Mr. Finley skipped to slide 6 that
graphed energy demand by form of energy (fuel) noting that
renewable forms of energy today are a very small share of the
world's energy mix, but by far the fastest growing group of
fuels. This is primarily due to wind and solar in power
generation, but also bio-fuels in transportation, smaller
quantities of geo-thermal energy, and other renewable forms of
energy. By far the fastest growing group of fuels that rises to
almost 15 percent of the world's energy by 2040 in this scenario
is renewables, which accounts for about 40 percent of the growth
of total energy consumption in the world.
MR. FINLEY said the other growth story is natural gas, which in
this scenario is the fossil energy type that gains global market
share. Global consumption of coal in absolute terms is roughly
flat with big declines in the U.S., Europe, and China that are
offset by increases in India and other emerging economies. But
in terms of market share, coal drops significantly. This
represents the biggest change in the outlook relative to the
experience of the last 20 years.
9:18:53 AM
Slide 7
MR. FINLEY said one of the interesting observations he drew from
this chart if history is extended and all the non-fossil forms
of energy are combined into a single category, is of the long-
term evolution of the different forms of energy the world
economy uses. First, in this scenario, the world ceases to have
a single dominant source of energy, which has never been the
case before. Moreover, the world's mix of fuels becomes much
more diverse than has ever been the case. This highlights that
the world is trending in the direction of becoming much more
competitive in the energy space. And as already seen, the
projected growth of energy demand is likely to slow so the pie
isn't getting as big as quickly as it used to. Secondly, a much
more diverse fuel mix results in more opportunities to compete
against each other. Finally, there are growing prospects for
competition between different suppliers to meet this demand. The
key takeaway is that they believe the world of energy will
become even more competitive over time.
9:20:36 AM
SENATOR VON IMHOF noted the still big demand for coal and oil on
slide 6 and said she didn't want people to get the idea that
renewable and hydro were going to overtake it.
MR. FINLEY said that was an accurate observation. While they do
believe that renewable energy is likely to gain significant
market share, the world still continues to consume significant
quantities of fossil fuels, but its share will decline.
9:22:05 AM
Slides 8&9
MR. FINLEY said these slides focus on five key questions:
1. What has been learned about electric cars and the
transformation of the transportation sector, which is uncertain,
because by itself, electrification is unlikely to be the game
changer. However, combining electrification with other factors
in the mobility revolution, particularly in autonomy and ride
sharing, acts as a force multiplier that can result in much
bigger implications for oil demand.
"How many electric cars do you have in your forecast?" is almost
a "parlor game" in the energy circles, he said, and the answer
is there will be 300 million electric cars by 2040 in a global
car fleet of 2 billion cars. But that is the wrong measure. It's
not how many cars; it's how they get driven that matters.
Electric cars in this narrative scenario will total 30 percent
of miles driven.
He explained that roughly speaking, the global car fleet doubles
to about 1 billion and that grows to 2 billion cars with most of
that growth in the rapidly growing emerging economies. And they
believe that electric cars will be driven more miles; the
rationale being its autonomy and the fact they believe that
autonomous cars are likely to become commercially available at
scale in the mid-2020s and will grow rapidly after that. At
first, electric cars will likely be relatively expensive to buy
but not expensive to operate.
MR. FINLEY informed them that many ride sharing services are
really big on autonomous cars, because it turns out that the
driver is 40-50 percent of the cost of operating the vehicle.
So, if you're going to pay more up front for a car that's
autonomous, the economics work if it is operated more miles. The
logic is that at least at first as autonomous cars ramp up, they
will be primarily used in the ride sharing and fleet services.
That same logic also applies to electric cars, and they believe
that electric cars will form the majority of those autonomous
cars as they work their way into the fleet. The result is that
while only 15 percent of the cars are electric, they drive 30
percent of the miles driven, because they are primarily used in
these autonomous fleet applications.
9:26:38 AM
SENATOR GIESSEL asked him to update them on how autonomous cars
work. How do they detect the road and determine speed?
MR. FINLEY said that expertise is beyond him and noted that BP
just published a companion piece of work called "The Technology
Outlook" that reviews in much more detail BP's internal research
and its understanding of the underpinning technological issues
around not only autonomy but a wide spectrum of applications
within the energy space.
CO-CHAIR MACKINNON reminded Senator Stedman, that as
Transportation Chairman, he should research that and remarked
that Alaska's conditions are very different than other areas,
especially in snow and ice. She gave the example of her car that
has all the standardized bells and whistles with an alarm if she
crosses a line or if someone is in the car's perimeter. But
sometimes it pushes the brakes automatically in ice road
conditions when she is trying to maintain a steady speed or
doesn't recognize the difference between a white line and snow.
So, it becomes dangerous specifically in icy conditions.
SENATOR GIESSEL added that Alaska also has a lot of dirt and
unpaved roads and she is interested in how this technology is
actually applied in those situations.
MR. FINLEY said those are fair questions and in the spirit of
being humble and acknowledging the uncertainty, one of the
things BP observed is as they think about risks in the outlook,
that talking about the number of electric cars is only one
scenario among many. Everyone says no matter what number one
uses that people say it's not big enough, and that's exactly
what you would expect a big oil company to say. But autonomy
introduces a dimension of risk that can go either way. He is
saying that autonomous cars are beginning to come into the fleet
by the mid-2020s, but it could easily be 10 years later if the
issues they flagged rightly can't be adequately addressed. But
it's unlikely that it will be 10 years earlier, because that's
today. The framework he is using allows them to bring in risks
on both sides of the outlook to bring some balance to the
conversation.
9:30:11 AM
Slide 11
MR. FINLEY said this chart tries to show the implications of
this scenario for oil demand by cars. It shows that about 19
million barrels per day are being consumed by cars and that
about 20 percent of all the oil consumed in the world is
consumed in cars in the form of gasoline and diesel fuel. If the
number of cars on the road doubles and nothing else changes, one
would expect the amount of oil consumed by cars to double, also,
but things are changing, and in this scenario the main thing
that changes is the fuel efficiency standards. He emphasized
that this is a global scenario and fuel efficiency standards are
tightened aggressively in China, India, and Europe. In this
scenario, the significant improvement in the average fuel
efficiency of a car completely offsets the doubling of the car
fleet. If they add in an additional reduction of oil demand
because electric cars are being used in fleet services and
driven more intensively, they come out with a view that oil
demand by cars in 2040 is exactly what it is today even though
the number of cars on the road doubles.
MR. FINLEY noted that electric vehicles appear twice on this
chart due to a combination of factors that auto companies can
use to meet their corporate average fuel efficiency standards.
He explained that regulations as written today do not say that
every car has to get more efficient, but that the average of the
fleet of cars that a maker sells has to get more efficient. That
threshold can be met by making all the cars more efficient or by
selling a higher number of smaller cars, or they can meet it by
selling electric cars.
The key point is that the number of electric cars is irrelevant
for oil demand. The regulation defines the size of that box: if
you sell more electric cars it creates space for the automaker
to sell more bigger cars instead while still meeting their
average target.
9:33:11 AM
To fight the next challenge of a scenario where people say. "Of
course, an oil company would say that electric cars aren't
having that big of an impact," they developed a different
scenario that says let's go ahead and ban the sale of the
internal combustion engine (ICE) in cars by 2040 worldwide and
make it even more rigorous by not allowing plug-in hybrids that
would offer a combination of ICE and a battery. In this
scenario, only electric cars can be sold by 2040 and those sales
have to ramp up very early in the process. The result is that by
2040, instead of one-third of the miles being driven are powered
by electric cars, two-thirds of the miles driven are powered by
battery cars. But why not 100 percent if the internal combustion
car sales are being banned? The answer is legacy internal
combustion engine cars will still be on the road that will
account for the remaining one-third of miles, because who buys a
car every year? So, overall, oil demand is growing, and even
with banning the sale of the internal combustion engine, oil
demand in 2040 is higher than it is today. Cars account for only
20 percent of the world's oil demand, but there is still growing
demand for trucking, aviation, maritime, and for industrial
applications.
SENATOR VON IMHOF referenced slide 23 and asked if he could
touch upon the economic assumptions used for the renewable
energy sources, because politics influences economic growth as
well as creates secondary effects such as the need for copper,
lithium, and zinc for the batteries amid growing anti-
mines/development, environmental obstructionists, and not in my
back yard (NIMBY) attitudes. There is a desire by Americans to
see renewable resources, but they don't like the discomfort that
goes along with it. She asked if his team had analyzed the
push/pull that will certainly happen in the next 30 years
regarding development of renewables.
9:37:25 AM
MR. FINLEY replied that as economists, they translate everything
into cost, and public opposition and permitting delays were
accounted for in the narrative scenario. But they haven't
explicitly modeled an alternative scenario that digs more deeply
into those assumptions.
Slide 13
The right-hand panel graphed the implications of banning the ICE
for global CO emissions using the CO emissions from energy in
22
the narrative scenario and a scenario consistent with global
commitments to the Paris Climate Accord. The impact of banning
the ICE can hardly be seen, and the reason is simple, because
you're only attacking one piece of one fuel. This highlights a
theme he will come back to which is the degree to which you are
concerned about a global problem, like climate change, a
comprehensive solution is needed. Policy options that just push
a single lever, like banning the ICE, won't move the needle on a
global scale due to the size and complexity of the energy
system.
9:40:10 AM
Slide 15
The next question is, "When is global oil demand going to peak?"
For most of the history of the world's oil industry, people have
been worrying about running out of supply, but through
innovations like shale and simple economics, BP believes the
world is more likely to see an emerging age of abundance for oil
and gas. The more likely drivers will be transformation of the
transportation system, climate policy, and other changes.
Slide 16
The narrative scenario shows a profile for global oil demand
that grows but slows over time. The profile indicates very
strong growth in global oil demand due to a combination of a
strong synchronized global economic recovery and consumers
reacting to the recent price collapse. Going through time, one
can see that the growth of oil demand slows significantly until
it ceases to grow in 2035-2040. The net declines slightly after
2035, but it is a very small number. They refer to this as a
"plateau" rather than a "peak."
Non-combustive uses remains a positive contributor and consists
largely of petrochemical feedstocks. This is important, because
it means that that portion of oil demand can continue to grow
but because it doesn't get burned it doesn't add CO emissions to
2
the atmosphere.
He said that petrochemicals is the basic building block of
modern economies and if the world's economy is to keep growing,
the petrochemicals need to keep growing, too. There aren't many
substitutes available and the scope of efficiency is relatively
limited. However, a provision was made for policies around the
world that seek to reduce the use of single-use plastics like
water bottles through recycling, which reduces oil demand by
about 2 million barrels a day.
9:43:43 AM
Slide 17
MR. FINLEY said that is just one view of future oil demand and
there are lots of different potential cases. He showed a range
of different outcomes on this slide. He said there are upside
risks to the outlook; for example, if fuel efficiency doesn't
gain as quickly as projected and oil demand goes higher. The key
question is, even in a scenario that is consistent with meeting
the Paris Accord, the world will be consuming 85 million barrels
a day of oil in 2040 compared to about 95-100 million barrels
today.
9:45:02 AM
Slide 18
MR. FINLEY said this slide had been "profoundly impactful" in
informing BP's thinking and basically illustrates what happens
if investment in new production doesn't happen. He explained
that an individual well declines over time by about 3 percent
and so they just applied a 3 percent annual decline (even though
his operators would say that is a very conservative number). But
a higher decline rate is not needed to make his point, which is
under any imaginable future scenario for oil demand the world
will need to continue to invest significant amounts in producing
new supply to meet it due to the phenomenon of the underlying
decline of the existing production, what he calls "mine the
gap." There will be a lot of competition to meet that supply, so
within BP, executives talk about continuing to invest in oil
that is competitive, because there is a need to continue doing
that.
Slide 19
Where does supply come from to meet this demand profile? Half
comes from the United States (due to growing shale production
especially in the early years of the forecast) and half comes
from the Organization of the Petroleum Exporting Countries
(OPEC). But as with everything, there are uncertainties. For
U.S. shale, what if the resource doesn't change but the pace at
which it is developed accelerates or what if the resource is
even bigger than thought? Slide 21 graphs the outcomes of both
scenarios is graphed on this slide.
9:48:27 AM
SENATOR MEYER asked how he defines "advantaged oil," a term he
used earlier.
MR. FINLEY answered that it simply means is the oil competitive?
For much of the industry history, people thought this was a
scarce resource and they would run out. So, they had to access
it where it was. But that is not the right framework for
thinking about the future world in which they think the resource
is abundant. (A companion piece of work tracks the BP annual
statistical review of world energy (proved reserves of oil and
gas.) Since 1980, when BP began to track proved reserves, the
world has cumulatively produced more oil than it had, and it has
not run out of oil. In fact, the proved reserves today are
double what they were in 1980. The resource is not constrained
and therefore the obligation to their shareholders is not to
access a resource at any cost but rather to invest in projects
that are competitive and can earn a competitive rate of return.
SENATOR MEYER asked if Alaska is considered advantaged oil.
MR. FINLEY replied that he is not an expert on Alaska, although
it is a world class province. Based on official data, oil
production in the state has increased for the last two years and
according to the U.S. Energy Department's data, that hasn't
happened since 1987/88. So, the answer is, it depends on how the
people in this room are able to work with industry to deliver
projects that can compete in a global supply curve. He merely
wanted to note that in a global context, that's the way a
company like BP would think about it.
9:51:18 AM
SENATOR MEYER said from a state legislator's perspective and
since oil is so important to Alaska's economy, it's important to
have advantaged oil. That concerns him in light of shale oil
production in the Lower 48.
MR. FINLEY replied that is a fair observation and pointed out
that BP believes that the combination of supply and demand
factors playing out in the oil market are changing the strategic
calculus of a number of key oil producers around the world.
Many key Middle East oil producers, for example, have embarked
on programs of very aggressive reforms to their economies to
reduce their dependence on oil revenues and are positioning
themselves to compete in a much more competitive oil and energy
space going down the road. So, holders of large natural
resources are similarly wrestling with trying to position
themselves to be competitive in that new reality.
9:53:17 AM
Slide 21
MR. FINLEY said he talked about the scenario of U.S. shale
getting delivered more aggressively, but on the other hand, if
the resource turns out to be bigger than currently appreciated,
the U.S. by itself could meet all of the projected growth in
global oil demand over this outlook with obvious significant
ramifications for the rest of the market place. So, if the U.S.
increases production rapidly, the question is, "Is that because
the resource is bigger or simply because the resource is being
exploited more quickly and likely to decline?" The answer by
looking beneath the surface to understand the drivers, because
the longer-term ramifications of those two different pathways
are profoundly impactful for the oil market outlook.
9:54:39 AM
MR. FINLEY said the next question is just how fast renewable
energy will grow, and their renewables outlook has been revised
higher every year, especially for India and China and not the
world as a whole. If it was simply the case that renewables were
more competitive for everyone, he would expect the forecast to
be higher for everyone. The fact that revisions are concentrated
in India and China suggest something else in play. And their
outlook has been built around the assumption that government
support for renewables will be reduced over time, because as
renewables scale up they become more competitive. They believe
the level of government support for renewables in India and
China are more aggressive than previously expected.
Slide 23
He said this slide showed the base underlying data in the
narrative scenario; the left-hand side showed the regional
contributions to the growth of renewables in power generation,
and historically the Organization for Economic Co-operation and
Development (OECD) countries dominated, but now China has passed
the U.S. to become the largest producer of renewable energy in
the world. Part of that is because China has become richer, part
of that is because renewables have become more competitive, and
part of that is because China is trying to diversify its fuel
mix. He observed that in the latter years of the outlook (2030-
40) significant contributions are seen from other emerging
economies.
9:57:31 AM
MR. FINLEY noted that he began the presentation by showing that
renewables gained market share very rapidly in the world energy
mix, but the point of the right-hand chart is to show that in
this scenario the pace at which renewables penetrate the global
system is "without precedent" in the historical record of the
world's energy system. The closest analogue is nuclear energy in
the 1970/80s.
Slides 24/25/26
However, they could be wrong, so they examined a scenario that
says what if we keep today's aggressive support for renewables
throughout the forecast interval. The left-hand panel scenario
shows more aggressive government support; so, instead of getting
50 percent of the growth of power generation, renewables get 100
percent.
9:58:38 AM
MR. FINLEY said in the evolving transition case, the carbon
content of the world's power generation falls by about one-
third. In the far-right scenario, consistent with meeting the
Paris Accord, one sees a total decarbonization of the power
sector. In the "push scenario" (now) he observed diminishing
returns: as one pushes harder to get renewables into the power
mix, it becomes more expensive to manage the grid's
intermittency and storage needs.
Again, he reiterated, if policy makers only push one lever it's
hard to move the whole needle. Other scenarios include scope for
gas to push coal out of power generation, more efficient use of
energy, and carbon capture and underground storage illustrating
that systemic-wide policy options have better opportunities to
find low cost solutions for society and to really move the
needle at a system level.
9:59:58 AM
Slide 26
MR. FINLEY said natural gas is the only fossil fuel that gains
market share in the global mix and BP and many other energy
companies are investing to grow the role of natural gas in their
portfolios. So, how could they be wrong on that one?
Slide 27
This slide has the base data for the outlook of gas consumption.
The left-hand panel shows that the growth in natural gas
consumption is broadly based around the world. On a sectoral
basis, however, this is really a two-horse race: a story of the
growing use of gas used for power generation and industrial
applications. A bit more is used in transportation, but that is
not a global gas driver.
Slide 28
Mr. Finley said this slide has a rough estimate of how much gas
is growing just because everything is growing and how much is
because gas is winning market share from other forms of energy
(particularly from coal in power generation and potentially from
oil in transportation). The answer is another question is, what
is driving much of that switching that accounts for half of the
growth of natural gas in this scenario. Some of it is economic:
in the U.S., cheap shale gas is pushing coal out of power
generation, but in China and Europe much of it is driven by
policy. So, BP asked themselves what if policy, largely
environmental policy in this case, is not as aggressive as their
narrative scenario assumes.
Slide 29
He answered that it turns out that eliminating that policy-
driven switching would reduce the growth rate of natural gas
demand by about half, which may not look like much, but it is
the difference between gas gaining market share around the world
and losing market share. So, from a strategic perspective, it is
a significant change. But the future of natural gas demand could
fail to materialize in scenarios with both more aggressive
environmental policy where it would lose to renewables, or in
scenarios with less aggressive environmental policy, in which
case, gas fails to gain market share from coal. So, one can see
that the gas outlook is highly sensitive to gas policy
assumptions.
10:03:08 AM
Slide 30 Prospects for liquefied natural gas (LNG) exports and
imports.
MR. FINLEY said on the LNG export side, the U.S., especially
driven by the rapid growth of Lower 48 supply, is a big driver
of that growth. On the demand side, its Asia. The reason they
think this rapid growth (doubling) of global trade in LNG is
important is because it provides the opportunity to more closely
link regional gas markets through trade.
He observed that this more flexible LNG trading system,
especially for the Lower 48, is well situated to compete, but
being on the margin has both risks as well as opportunities. If,
for example, China and other Asian consumers don't push as hard
to open up their economies to gas, or on the supply side, if the
Emirate of Qatar decides to do what OPEC producers are doing on
the oil side, which is grow their market share and be more
competitive, both of those things could squeeze the supplier who
is at the margin. They think the Lower 48 will be in that
position.
10:04:45 AM
Slide 32: Energy transition and the move to a lower carbon
future.
MR. FINLEY said while CO emissions will grow less rapidly in the
2
future, they will still grow by a little over 10 percent in the
narrative scenario, and to be on a sustainable trajectory
consistent with the Paris commitments the transition should
happen faster.
10:06:28 AM
Slide 33: Impact of faster transition on global energy system.
MR. FINLEY said a serious conversation about CO should begin and
2
end with the power sector, because over half of the world's
energy is consumed just to generate electricity. It is also the
sector where all the fuels compete with each other. So, the
opportunity for finding the low-cost solutions are most apparent
in the power sector.
The graphs on slide 33 illustrate what the world's energy demand
profile would like in some different scenarios. He said in any
scenario including those that are consistent with meeting the
Paris climate objectives, world-wide energy demand grows. In the
Paris objectives, all of the growth - labeled as even faster
transition (EFT) - comes from renewable energy. But even there,
oil and gas consumption in 2040 is about what it is today. So,
while this is a much more aggressive scenario for the uptake of
renewable energy, there is also significant space for continued
investment in oil and gas.
10:07:22 AM
Slide 34: Conclusion.
MR. FINLEY said BP doesn't do this outlook to predict the
future; they do it to understand the risks they are facing and
identify what dimensions of the energy system they have some
confidence in and key uncertainties. So, one can be "reasonably
comfortable" that if the world continues to grow its economy and
continue to lift people out of poverty and improve their quality
of lives, that the world is going to need more energy in the
future. That growth may slow due to a greater focus on
efficiency, but at the same time on the supply side, they see an
emerging age of abundance in terms of a much more competitive
dynamic in the oil and gas space and for the world's energy
system. Renewables play a growing role, but even under
sustainable climate trajectories, there is still a significant
role for investment in oil and gas.
Some of the key uncertainties are around electrification and the
interplay of electrification with other factors like autonomy
and ride sharing services. They have seen very clearly from the
data that the future pathways for natural gas and renewable
energy are highly dependent on underlying assumptions made for
policy and technology.
While they see significant progress in using energy more
efficiently and reducing the carbon intensity of energy
activity, a much more decisive break from past trends is needed
if the world is to get on a more sustainable trajectory.
MR. FINLEY thanked them for the opportunity to speak.
10:09:50 AM
SENATOR GIESSEL commented that one of the upsides for Alaska is
"our significant wealth in minerals, which the renewables will
need."
SENATOR MEYER asked if the recently announced trade tariffs with
the United States and China and other countries played a role in
their forecast.
MR. FINLEY replied that all the scenarios he presented today are
built around a starting point of success in the sense of
continuing to grow the world's economy, lifting 2.5 billion
people out of poverty, and improving peoples' quality of life.
Trade frictions and both international and domestic policies
could put potential future economic growth at risk. At the end
of the day, energy is consumed to fuel economic activity, and
one can imagine scenarios with higher or weaker economic growth
that results from these policy developments that would go
straight to the bottom line of world oil demand.
SENATOR STEVENS remarked that China is often underestimated and
asked if China has energy sources that people haven't considered
like hydro, renewables, nuclear, and shale, because BP assumes
the U.S. will keep producing and China will keep buying.
10:12:24 AM
MR. FINLEY answered yes; that is a highly uncertain issue. Both
the future trajectory of economic growth and therefore energy
demand in China are uncertain. In the last 20 years, the Chinese
economy grew by 9 or 10 percent per year on average. The outlook
projects growth that is more like 4 or 5 percent. So, based on
history there was even faster growth in the economy and
therefore energy demand. The narrative scenario has China very
rapidly growing nuclear energy, essentially building one new
nuclear reactor every three months for the next 20 years. Not so
much on hydro, because the large-scale conventional hydro
applications are already developed. China has the biggest growth
of renewable energy of any country in the world in this scenario
and yet still has room for growth of natural gas: partly because
it's still growing and partly because of their effort to
displace coal.
He said another chart shows that about 30 percent of the world's
energy is consumed in the form of coal. In China, it's more like
two-thirds and they are trying to reduce that share
significantly to diversify their energy mix, but also to clean
up local air pollution.
China is also looking at buying natural gas from Russia and via
pipeline from central Asia republics like Turkmenistan and
Kazakhstan. Other potential competitors of supply come from LNG.
The Emirate of Qatar for a long time had a moratorium on
developing new gas projects, but they are sitting on the largest
gas field in the world. And they recently lifted the moratorium.
So, it's important to keep an eye on the internal dynamics for
China, but also the other eye on the potential for competition
from elsewhere in the world.
SENATOR MICCICHE reminded members this is one company's view and
others' risk assessment on the future of energy could look quite
different. The ICE ban is a fascinating concept, but he wasn't
sure how realistic it is. The weight of electrification and ride
sharing is stronger than probable along with the environmental
hypocrisy of the reality of renewables and what that would
require as they oppose every option for providing the materials
of those renewable technologies. He understands the reasons for
BP's outlook, but he wouldn't put a lot of weight on one
particular study.
10:16:26 AM
SENATOR BISHOP said he thoroughly enjoyed the presentation and
asked how BP has diversified its portfolio into renewables.
MR. FINLEY answered that BP acknowledges the dual challenge of
how to provide the energy the world needs today and work toward
a more sustainable energy system at the same time. To straddle
that, BP's strategy is aimed at making sure their operations are
as efficient and safe as possible so that they are up and
running all the time, because that is good business and
continued investment in "advantaged" oil. They have been growing
the role of natural gas in their portfolio and renewables. BP
has significant investments in wind energy in the Lower 48; they
are a significant distributor of bio-fuels worldwide through
blending into their fuels in their distribution network; they
also invest in the production of biofuels in sugar cane ethanol
in Brazil; they have a joint venture in with one of the leading
chemical firms to work on next generation biofuels; and they
also have invested significant venture capital into a lot of
different potential start-up new technologies in the renewable
and the more broadly energy space environments, including
digital innovation. They sprinkle the money around to kind of
watch and learn where the landscape is.
MR. FINLEY added that when he joined BP 17 years ago, it was the
largest producer of solar panels in the world. However, they
learned that just because something is growing rapidly doesn't
mean you can make money at it. It has to play to corporate
strengths, and the particulars of manufacturing solar cells
didn't do that. Now, more recently, BP has invested in a company
in the UK that builds and distributes solar systems but doesn't
actually build the solar cells.
Relevant to the conversation, although it's not renewable
energy, he also observed that BP not only has to play to its
strengths but has to change themselves to keep up with the
changing world. An illustration of that is what BP has done in
the Lower 48 with its on-shore production unit. Having realized
that this is a game that is fast-moving and driven by world-
class operators, they legally separated their Lower 48
production business and hired a CEO from an independent company
and asked him to try to remake that company into a more-nimble
company and more like an independent to enable them to compete.
The results are good so far.
10:20:46 AM
SENATOR BISHOP remarked that it appears to be a buyers' market
going forward.
MR. FINLEY agreed with him but added that big challenges need to
be addressed. But within that, they believe this is a much more
competitive space, but it is a good news story in the sense that
they conclude across all of the scenarios that the world can
have the energy it needs, and Alaska has the energy it needs to
continue to grow its economy.
10:22:46 AM
CO-CHAIR MACKINNON finding no further questions, thanked Mr.
Finley for joining them today and adjourned the Joint Senate
Resources and Finance Committee meeting at 10:22 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 040418 BP Energy Outlook Presentation (4 March).pdf |
SFIN 4/4/2018 9:00:00 AM |
OIl and Gas |