Energy transition

BP Report Tries To Explain What Really Happened to Energy Markets in 2020

As a global pandemic continues, the London-based company's annual lookback has found that last year's pain was not shared evenly across the energy spectrum.

Source: BP.

Everyone in the oil and gas industry knows 2020 was a historic year for the business. Just how historic was the focus of a new report from BP that offers a context for last year's market turmoil and thoughts on what it means going forward.

"For energy, 2020 was a year like no other," Spencer Dale, BP's chief economist, said in the company's annual energy review released on 8 July. All told, BP estimates that global energy demand fell by 4.5% in 2020, marking the largest drop since the end of World War II nearly 75 years ago.

Regarding crude, global production fell by 6.6 million B/D over the course of the year while demand fell by 9.1 million B/D, or an unprecedented 9.3%. Maximum pain was felt in April 2020 when “oil consumption literally collapsed” by more than 20 million B/D, said Dale, adding that the figure was “off the charts relative to anything seen in history."

Natural gas markets fared much better, suffering a 2.3% annual decline in consumption while managing to increase its share of global primary energy usage to a new high of 24.7%. Demonstrating the most resiliency was the renewable energy sector which increased output by 9.7% over the year.

One objective of BP’s statistical review was to identify anything about the black swan scenario that was surprising. Broadly speaking, Dale said the biggest surprise was simply how big the drain on demand truly was. The model BP has used reliably for more than 20 years to explain macro demand trends predicted a 2.5% decline in energy consumption vs. the 4.5% that BP concluded was the true figure.

The difference between the prediction and the real number came down to what happened to oil demand. Unlike the typical economic downturn, this one was defined by government-imposed lockdowns that heavily restricted ground mobility and air traffic across much of the world. Accordingly, year-over-year demand for jet fuel and kerosene dropped by 40% while gasoline demand dipped by 13%.

More Key Findings From 2020

Oil and Gas Share Different Experiences

  • Dale said the biggest takeaway regarding crude markets last year is that OPEC+ was ultimately successful in delivering price stability. This is despite two of its chief members, Russia and Saudi Arabia, launching a price war during the pandemic’s onset that exasperated the commodity crash.
  • The exporting alliance has proven capable of mitigating a short-term crisis, but Dale challenged its “ability and incentive” to counteract the effects of falling demand over the long term as a result of net-zero goals. “In this case,” he explained, “there may be a greater incentive for individual OPEC members to worry more about protecting and growing their market shares and less about stabilizing markets.”
  • Natural gas markets demonstrated “relative immunity” in part because gas became a lot cheaper, which spurred gas-to-power generation across the US and in the European Union.
  • Another major factor is that while people in lockdown zones were restricted on where they could go, they merely transferred their electricity use from commercial buildings to homes. BP estimates global electricity demand only fell by 0.9% in 2020.
  • The reduction in natural gas demand was buoyed largely by China which bucked the global trend by recording a nearly 7% increase in consumption.

Renewables Soar, Emissions Plummet  

  • One of the most important leading indicators in BP’s review may prove to be the increase of 238 GW in energy output from solar and wind systems in 2020. Dale pointed out that the “colossal” gain was 50% larger than previous year-over-year increases. Again, the biggest contributor to this figure was China, which represents nearly half of the wind and solar capacity added last year.
  • BP found that wind and solar capacity has more than doubled since 2015. This puts the renewable energy sector on a growth path that is broadly in line with BP’s “rapid” decarbonization and net-zero scenarios as outlined in its 2020 energy outlook.
  • Costs for onshore wind units and solar power have dropped nearly 40% and 55%, respectively, since 2016; figures that BP acknowledges it failed to predict in the past. Dale said that growth in the renewable sector was “materially underestimated over the past 5 years” and has defied the forecasters by achieving massive efficiencies across the supply chain. “Our analysis shows that the biggest factor accounting for the larger-than-expected falls in renewables costs is ‘faster learning,’ which explains around three-quarters of the error on wind costs and two-thirds for solar costs,” he added.
  • While renewable installations soar, Dale noted that they will not be enough to meet the world’s climate goals. He said similar advances are needed in electrification, the development of hydrogen, and carbon capture, use, and storage projects.
  • As a result of the pandemic-driven energy downturn, the world recorded a 2.1- gigaton drop in CO2 emissions, representing a 6.3% drop in emissions from energy use. This is the lowest level of CO2 emissions since 2011.
  • The reduction in emissions was enough to place the globe on track to meet the climate goals of the Paris meeting, but only momentarily. BP notes a “significant risk” in emissions returning to pre-pandemic levels and cited figures from the International Energy Agency which estimated this threshold was crossed at least 6 months ago.

Download the full report here.