The road to energy transition could see a fight for survival between US-led liquefied natural gas suppliers and Russian pipeline gas exporters, according to analysis contained in BP’s Statistical Review of World Energy for 2020.

The 2021 edition of the UK company's traditional report highlighted the almost unprecedented collapse in oil and gas demand that occurred when the Covid-19 pandemic wiped out demand last year, but also looked ahead to the dynamics emerging among suppliers of oil and gas in a world of diminishing demand.

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BP's report showed that a 4.5% drop in global demand was driven mostly by a 9.3% retreat in oil consumption.

Over the year as a whole, global oil production was estimated to have fallen by 6.6 million barrels per day, dwarfing any downturn seen since the second world war.

The report showed that gas demand and prices also fell to multi-year lows, but noted that the share of gas in the primary energy mix climbed to a record 24.7%.

Last year also saw a 6.3% fall in carbon emissions but this was not due entirely to overall demand declines.

BP said wind and solar installed capacity increased by a "colossal" 238 gigawatts in the year, despite the economic headwinds.

The growth in renewables came largely at the expense of coal-fired generation, which declined 4.4%.

"The trends we're seeing here are exactly the trends we'd want to see as the world transitions to net zero - strong growth in renewables. Crowding out coal is exactly what the world needs to see," said BP chief economist Spencer Dale.

However, Dale acknowledged that coal generation in 2020 was only back to levels seen in 2015.

The report warned that the world is still far short of a "decisive shift" towards meeting United Nations-backed climate goals.

Demand dynamics

The most interesting sections of BP’s statistical review were those where supply and demand for oil and gas were scrutinised against the backdrop of energy transition.

Noting the Opec+ group’s response to the supply glut was to cut oil production by 9.7 million bpd — extended to July so far — the BP report recalled that North American production also fell by about 4 million bpd.

By the end of 2020, around half of the excess stocks accumulated during the first part of the year had been unwound and prices had recovered to around $50 per barrel of Brent, the report noted.

However, looking further ahead, Dale suggested that the ability — and incentive — for Opec to offset a sustained and growing fall in oil demand as the world transitions to net zero is unclear.

“In this case, there may be a greater incentive for individual Opec members to worry more about protecting and growing their market shares and less about stabilising markets,” he said.

Power play

Similarly, in the gas sector, the BP report saw a power struggle for the European market being played out by Russia pipeline suppliers and LNG suppliers from the US and elsewhere.

“As LNG imports have increased in recent years it has raised the question of the extent to which Russia and other pipeline gas exporters will compete against LNG to maintain their market share or instead forgo some of that share to avoid driving prices too low,” the BP report stated.

“This issue could become more acute in a transition in which Europe moves away from natural gas and competition between different gas supplies intensifies.”

Pipeline imports from Russia as a share of European gas demand fell from 35% in 2019 to 31% in 2020, the BP report noted.

In contrast, LNG imports were up year-on-year in the first half of 2020 and their share of European demand was broadly unchanged at 21% over the year.

“In response to a fall in demand that is expected to be relatively short-lived, it may be entirely rational for pipeline exporters to use their flexibility to reduce supply temporarily to help stabilise the market and support prices. But the possible response to a sustained and growing contraction in gas imports as Europe transitions away from fossil fuels could be very different, with a stronger incentive for Russian pipeline exporters to compete to be the last producer standing,” the BP report pondered.

Spencer noted that when forward prices for European LNG fell below operating costs last year, pipeline exporters got a glimpse of what a shut-in of US LNG exports would look like.

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