These are challenging times for the oil industry, not least on the UK Continental Shelf (UKCS). The latest official statistics show UK oil production down 11% on last year and gas down 18%.
The trend is undoubtedly in the wrong direction, although the current high level of capital investment on new fields West of Shetland and elsewhere may result in short term recovery. However, after 2017 the declines will almost certainly resume.
One of my favourite publications is the annual BP Statistical Review of World Energy and the 2013 edition was published recently. It shows some surprising trends in energy consumption and production.
The world’s primary energy consumption increased by an annual average of 3% over the decade 2002-12. It fell in 2009, because of the financial crises and economic recessions in various countries, and growth since then has been below the long-term average.
However, oil consumption only increased by an annual average of 1.4%, which was less than half the primary energy average, so the oil industry’s market share fell significantly.
I think there were two main reasons for that: high oil prices and environmental policies.
Oil prices have risen much more than other energy prices so many consumers have decided to switch to other fuels.
The best example is the electricity sector where very little oil is used now except in the Middle East. CO2 reduction and related environmental policies have also had negative impacts on oil demand.
The industry appears to have accepted these changes and is planning for relatively low growth. Opec’s latest World Oil Outlook, for example, forecasts average annual growth in primary energy consumption of 2.2% in the period to 2035 but only 0.5% in oil consumption. I believe that both those forecasts are on the low side but would not argue about the difference between them.
Most of the growth in energy demand will come from the Asia-Pacific region, notably China and India, and to a lesser extent in other developing regions such as Africa.
The BP Statistical Review shows that world consumption increased by 1.8%, but it was a massive 4.7% in Asia-Pacific, including 7.4% in China and +5.1% in India.
In contrast, energy consumption fell 1.1% in the European Union (EU). Some of that decline is attributable to the ongoing economic problems in countries such as Greece and Italy, but there has been a long-term downward trend since about 2005 because of energy efficiency measures and the impact of relatively high prices.
The biggest increases in energy production in 2012 came from the hydro-power sector (4.3%) and other renewables, notably wind (15.2%).
However, they still account for small proportions of total output… down 7% and 2% respectively, compared with 33% for oil and 24% for gas.
There has also been a surprising revival in the coal industry, particularly in the Russian Federation and Asia, despite the wide range of environmental measures intended to reduce coal consumption.
The reason for that is clearly low coal prices, particularly for electricity generation. Nuclear production fell 6.9% in 2012, mainly because of the Fukushima disaster in Japan.
How will the oil industry react to a long period of low growth in demand? Basic economic principles suggest that prices should fall in real terms but I doubt that will happen, at least in the short run.
Continuing declines in production in the UK, Norway and other mature provinces will obviously help the OPEC producers. There also seems to be a never ending series of problems in countries such as Egypt, Syria and Iraq which have helped to keep prices above $100 per barrel. There is substantial spare capacity in Saudi Arabia and the country therefore has the ability to adjust output to help achieve OPEC’s price and income goals.
Road transport accounts for over 40% of world oil demand. That will surely increase as car ownership grows in countries such as China and India.
There may be long-term threats from the likes of electric vehicles and biofuels but I believe that the oil industry will be more than content with low growth over the next few years.
Tony Mackay is MD of economists Mackay Consultants