The global push for action on climate change has put the long-term predictions of major energy companies in an oddly contingent light. Investors want to know about their long-term assumptions, but it is difficult for anyone to forecast how the wrangling over international climate policy will pan out; not to mention complex debates over peak oil, future price levels, and their interaction with the wider economy.
Not everyone is happy with how the oil majors are making their forecasts. FairPensions, a UK campaign currently urging investors in BP and Shell to seek clarification on oil sands investments, argues that the companies are not adequately considering the effects of environmental policies, high oil prices, and changes in demand, as their briefing for investors shows. The economic argument has focused on the assumptions that the companies use for their long-term outlook on oil prices, demand, and the likely effect of climate legislation.
A look at a few of the oil majors’ recent remarks does suggest they very much favour a business-as-usual scenario in their own long-term outlooks, rather than one that foresees either a sharp change in oil pricing or strong action on climate change.
Some background: long-term energy demand forecasting is riddled with problems and pitfalls: although energy infrastructure is slow to change, there are fundamental uncertainties around both supply and demand for every energy source. So much so that the major agencies such as the IEA and the EIA now publish multiple scenarios for their 2030 forecasts, rather than a single number.
The IEA in its latest long-term forecasts included both a ‘reference scenario’ in which no action to reduce climate change is taken, and a ’450 scenario’, in which world governments take action to limit CO2e concentrations to the 450ppm safety limit recommended by climate scientists.
The IEA makes clear that its ‘reference scenario’ is no more viable than its ’450 scenario’ is optimistic. But even cynics would accept that some measures to curb emissions growth will be put in place, even if they fall well short of what would be needed to stop atmospheric CO2e concentrations exceeding 450ppm. So the reality will not necessarily be closer to one scenario than the other.
The EIA has five scenarios for 2030 energy forecasts – but the four variations to its ‘reference scenario’ relate to economic growth and oil prices, rather than climate change mitigation. The EIA puts the annual average growth in crude oil consumption in its latest International Energy Outlook forecasts at 1.4 per cent between 2003 and 2030, or, by our calculations, about 1.32 per cent from 2010-2030.
Interestingly, the EIA sees a ‘high oil price scenario‘ as leading to similar rate of demand growth to the IEA’s ’450 scenario’: 0.2 per cent per year to 2030; far lower than its reference scenario. Its ‘low oil price‘ scenario is 1.5 per cent.
(Again, there are some differences in definitions, eg the EIA looks at ‘liquids’ whereas the IEA looks specifically at crude oil; EIA forecasts are 2006-2030 while IEA’s are 2007-2030.)
Three majors and the scenarios – how they compare
Due to the slightly different parameters for the IEA and EIA’s forecasts, and a wide variation in the sorts of long-term outlook figures cited by the three majors we looked at (BP, Shell and Exxon), it’s not possible to make a perfect comparison. But a scout around recent publications and statements by three majors illustrates how they lean towards the ‘reference’ scenarios.
First, BP. The FT reports that, amid renewed pressure from the FairPensions campaign, the oil major expects energy demand to grow by about 40 per cent by 2030, and up to 80 per cent of this to be fulfilled by fossil fuels. The criticism from the FairPensions campaign is:
However, this is based on the “business as usual” forecast put out by the International Energy Agency, the Paris-based watchdog backed by the leading developed economies.
The IEA’s ‘business as usual’ (aka ‘reference scenario’) outlook in its latest figures does foresee a 40 per cent rise in total energy demand by 2030. In fact BP told analysts this month that it expects energy demand growth equivalent to 45 per cent by 2030. But either number is close to a business-as-usual scenario from one of the two agencies; the EIA’s reference case sees 43.5 per cent primary energy consumption increase between 2006 and 2030.
On its price outlook regarding oil sands, BP takes a more conservative view, as one would expect, saying it uses estimates that oil sands are profitable at prices of between $45 and $70 a barrel, citing a study by Wood Mackenzie.
ExxonMobil’s outlook from 2005 to 2030, as stated in their annual analyst briefing this month, sees crude oil demand growing 0.8 per cent per year. (The start date is mentioned in the transcript.)
They do not state a source Exxon tells us this comes from the company’s own long-term energy outlook, and the figure is fairly close to the IEA’s reference scenario of 1 per cent average annual growth from 2008 – 2030 (World Energy Outlook, p. 81), than the agency’s 0.2 per cent forecasts for average crude oil demand growth under the ’450 scenario’ (WEO, p. 212, which in fact covers 2007 – 2030). It is also far away from the the 0.2 per cent forecast in the EIA’s ‘high oil prices’ scenario, which sees crude oil prices as over $150 by 2015 and reaching $200 by 2030.
Shell, meanwhile, is a slightly different story. It has made few references we could find to a long-term demand outlook, and assumes long-term oil price trends of between $50 and $90/barrel, and says all its oil projects are screened within that range. Again, depending on the exact time frame this refers to, it appears to be at the very conservative end of the EIA’s price scenarios.
But again, on wider oil demand, the outlook is in line with business-as-usual forecasts from the major agencies. Peter Voser earlier this month showed analysts the chart on the right, drawn from a similar chart by the IEA (which incidentally, has attracted some controversy), and said:
By 2020, the world will need about 40 million barrels per day of new oil production on stream, from fields that haven’t been developed yet.
These are not new observations. But it is a huge challenge for the industry, and an opportunity for Shell.
Earlier this year, Voser told FT ES that, on unconventionals: “…we look at them as being developed but at a much slower pace. Because we have restructured our portfolio in such a way that we are no longer depending that much on growth in unconventionals…”
Shell of course is moving heavily towards natural gas growth, which it expects will account for the majority of its production from 2012.
Giving up on climate change policy?
This is not to say that the oil majors ignore the possibility of climate change action. BP, despite quitting the US-CAP business alliance that supports cap-and-trade legislation, writes in its information sheet on the oil sands investor resolution that it supports cap-and-trade, and that it requires all its new investments to factor in a carbon price of $40/tonne. Shell remains in US-CAP.
Exxon has at least been consistent; it has always opposed cap-and-trade and maintained a belief in the long-term dominance of fossil fuels.
Notably, all three companies have in the past year underlined their belief in the strong future of natural gas, which of course has lower emissions than most other fossil fuels, and is undergoing something of an unexpected production revolution.