The Fuse

BP Joins Peak Demand Crowd

by Nick Cunningham | September 14, 2020

BP became the first oil major to openly state that it believes that the world has likely surpassed peak oil demand already, with a long plateau and gradual erosion of consumption set to unfold over the next few decades.

To be sure, there is no consensus over this outlook. A growing number of analysts have highlighted the risk of peak demand, with the Covid-19 pandemic magnifying existing trends and accelerating the industry’s decline. However, many other analysts see demand returning to growth in the years ahead before entering a plateau at some later date. But the inclusion of an integrated oil major into the “peak demand” crowd lends weight to the notion that the industry’s days are numbered.

BP’s negative outlook
Gasoline demand has recovered, but has not returned to pre-pandemic levels. Oil used in aviation is still down sharply, and could easily take years before returning to pre-pandemic levels. Global oil demand is expected to average 91.9 million barrels per day (Mbd) in 2020, down 8.1 Mbd from last year, according to the International Energy Agency.

At the company level, the industry is in a financial calamity.

At the company level, the industry is in a financial calamity. Roughly half of a sample of 50 oil companies from around surveyed by Wood Mackenzie are cash flow negative with Brent at $40 per barrel. Retrenching, the industry is on track to spend $310 billion on upstream operations this year, down 60 percent from a 2014 peak of $730 billion.

WoodMac notes that severe cutbacks today could tighten up the market and lead to higher prices down the road if demand recovers to 100 Mb/d. But not everyone sees that recovery as a given.

BP unveiled its latest Energy Outlook on September 14, laying out three possible future scenarios for oil demand. Even the most optimistic scenario was bad news for the industry. In the most bullish scenario, oil demand is already near an all-time high and ultimately reaches a peak by 2025 before entering a long gradual decline. The two other scenarios are much more dire for oil producers, with demand already having hit a peak, and declining rapidly over the next 20 years. The middle scenario envisions oil demand falling by 50 percent by 2050, while the “net zero” scenario sees oil demand down by 80 percent by then. In other words, even under the rosiest outlook, the oil industry’s growth story is more or less over, according to the British oil giant.

BP is aiming to pivot with the times.

BP is aiming to pivot with the times. Earlier this year, BP announced a substantial overhaul of its business, with the goal of aiming for net-zero emissions by 2050. In August, the company cut its dividend and said that it would reduce oil and gas production by 40 percent over the next decade. In September, the company announced that it was taking a $1.1 billion stake in an offshore wind project in the U.S.

“Our new purpose and ambition are underpinned by four fundamental judgements about the future. ‎That the world is on an unsustainable path and its carbon budget is running out. That energy markets ‎will undergo lasting change, shifting towards renewable and other forms of zero- or low-carbon ‎energy. That demand for oil and gas will be increasingly challenged,” BP said in its report.

BP distances itself from its peers
The British oil company’s outlook is becoming increasingly mainstream, even if opinions range. Royal Dutch Shell has also suggested that demand may have already passed a high point, stopping short of declaring it so. “Demand will take a long time to recover if it recovers at all,” Shell’s CEO Ben van Beurden told reporters after its second quarter earnings report.

The oil major still plans on producing oil and gas for years to come. But its new strategy is substantially different from its competitors. In particular, the American oil majors are stubbornly sticking to something resembling business as usual, betting that maintain a growth strategy will pay off when demand rebounds. But that strategy has backfired for ExxonMobil. Exxon spent $261 billion between 2009 and 2019. Over that timeframe, Exxon’s return on capital employed fell from 16 percent to 4 percent, and debt rose by $45 billion, according to the Wall Street Journal.

Both BP and ExxonMobil have seen their share prices collapse, a reflection that capital markets have turned against the oil industry. But even as investors have turned against the entire sector, there is evidence that markets are favoring those that planning for a transition, at least compared to those doubling down on their old growth models.

In an August report, Carbon Tracker noted that Danish energy company Ørsted saw its share price rise more than 200 percent since dumping its oil and gas business in 2017. BP’s stock is down more than 40 percent over the same time frame. But when BP announced that it would cut oil and gas production by 40 percent, its stock rose by 7 percent on the day of the announcement. “The results show that executives can rest easy,” Carbon Tracker said. “With this debate out of the way, which other companies will embrace the new world and follow suit?”