The World of Oil According to BP - 2010 In Review

BP has once again released this year's version of its Statistical Review of World Energy.  This publication is widely used by energy industry analysts and employees and is considered by many to be the energy industry standard.  Let's take a brief look at how 2010 looked for the world of energy according to "Beyond Petroleum".

BP notes that global energy consumption rose by 5.6 percent on a year-over-year basis, the largest annual growth since 1973.  This is an interesting statistic considering that average oil prices for the year were the second highest on record.  Coal prices were high in Europe but weak in both North America and Japan and natural gas prices were strong in the United Kingdom and weak in the United States where unconventional gas drilling (shale gas and other tight gas lithologies) flooded the market with natural gas.

Many recent projections of longer term global energy use propose that the so-called developed nations of the OECD will see their energy consumption drop over time as their economies become more energy efficient and that the bulk of the growth in future energy use will come from the non-OECD nations of Asia.  This was not entirely the case in 2010.  OECD consumption grew by 3.5 percent, the highest growth rate since 1984 and is now roughly at the same level as it was in 2000.  Non-OECD energy consumption grew by 7.5 percent year-over-year and is now up a rather astounding 63 percent since 2000.  China is now the world's largest energy consumer, using 20.3 percent of the world's total, up 11.2 percent year-over year.

Now let's take a look at the year that saw oil prices rise to levels that have only been seen once before, just prior to the Great Recession of 2008.  Let's look at the demand side of the equation first, followed by supply and then price.

On the demand side, globally, oil is the world's most used fuel, commanding 33.6 percent of the world's total energy consumption.  During the two previous reports for 2008 and 2009, BP noted that oil consumption declined on a year-over-year basis.  Not so in 2010.  Oil consumption reached a record 87.4 million barrels, up 2.7 million BOPD or 3.1 percent.  Interestingly enough, while this growth is rather robust, it is actually the weakest growth among all fossil fuels.  OECD oil consumption grew by 480,000 BOPD and non-OECD consumption grew by a record 2.2 million BOPD or 5.5 percent with China's consumption alone rising by 10.4 percent or 860,000 BOPD. Growth in net imports from China (growing at 14.6 percent) and Japan (growing at 7.1 percent) led the world.

On the supply side, global oil production rose by 1.8 million BOPD or 2.2 percent.  Looking back one paragraph, you'll note that production growth fell short of the growth in consumption.  In 2010, OPEC nations produced 41.8 percent of the world's oil.  Production by OPEC nations rose by 960,000 BOPD or 2.5 percent with production growth from Nigeria and Qatar leading the pack.  Production by non-OPEC nations rose by 860,000 BOPD or 1.8 percent, the largest increase since 2002.  Production growth was led by China, Russia and the United States.  Production decreases were most notable in Norway and the United Kingdom.

Now that we've looked at supply and demand, let's look at something that concerns all of us that consume oil (which is all of us) - the price of the commodity.  Brent crude (Europe's benchmark crude) averaged $79.50 per barrel over the year, still nearly $18 per barrel below the highs hit in 2008 but up 29 percent from its level in 2009.  In large part, production allocations by OPEC led to supply constraints and helped Brent reach a peak of $94 per barrel on the year.  For your information, Brent reached a high of just over $125 per barrel back in April 2011 and is trading in the $115 per barrel range now.  By comparison, West Texas Intermediate, North America's benchmark crude, was trading at just over $90 per barrel at the end of 2010 and reached a high of $114 per barrel in May 2011.

As a geoscientist, I am prone to flip to the reserves-to-production (R/P ratio) page because I find that it tells me the macro picture of the world's oil industry.  According to BP, the world's proven oil reserves reached 1383.2 thousand million barrels and were sufficient to meet the world's oil demand for 46.2 years.  This is down from the previous year, largely because the world's oil consumption rose rather dramatically (as noted above) and its proven reserves rose only slightly.  One note of interest is the change in Venezuela's official reserve estimates.  This revision drove the country's R/P ratio to 93.9 years from its previous 40 year life.  Venezuela now has the world's longest reserve-to-production life, surpassing that of the Middle East as shown in this graph:

Venezuela claims that they now have 15.3 percent of the world's proven oil reserves just behind Saudi Arabia at 19.1 percent and well ahead of third place finisher Iran with 9.9 percent.  To compare, the United States has only 2.2 percent of the world's oil reserves and Canada has 2.3 percent.  

Let's take a brief look at what the International Energy Agency (IEA) had to say in their monthly Oil Market Report released on June 16th, 2011.  The IEA predicts that global demand will reach 89.3 million BOPD by the end of 2011.  Global oil supply rose to 87.7 million BOPD in May after dippling to  87.4 million BOPD in April 2011 with OPEC supply rising by 210,000 BOPD to 29.18 million BOPD.  This is still 1.25 million BOPD below the level prior to the Libyan crisis.  China's oil consumption is expected to reach 9.9 million BOPD by the fourth quarter of 2011 and is expected to average 9.7 million BOPD over the entire year compared to 9.1 million BOPD in 2010 and 8.1 million BOPD in 2009.  That works out to a 19.75 percent increase in demand over a two year period.  Non-OECD nations will see their demand rise from 41.8 million BOPD in 2010 to 43.3 million BOPD in 2011.  Both demand numbers are up from 39.5 million BOPD in 2009.  With these statistics in mind, it is apparent that unless China's economy implodes, they will be the country that drives future oil demand and price.

As I have stated in other postings, I feel that the reserve-to-production (R/P) number or reserve life index is the key to the future of oil production and consumption.  As shown in the graph above, this number has remained static since the late 1980s despite ultra deepwater drilling, drilling in increasingly hostile environments, the growing exploitation of oil sourced from tar sands and the massive upgrade to the volume of recoverable oil in Venezuela.

In my estimation, the reserve life index number is telling us that peak oil is on our doorstep….or behind us.  Only time will tell.

In a future posting, I’ll examine the world’s natural gas situation, particularly in light of the massive shale and tight lithology exploration and exploitation that has taken place in many of the world’s sedimentary basins.  It is most interesting to think that natural gas may be the fossil fuel that bails the world out of a very sticky energy situation.