Boom time for scenarios

Author Ben Winkley

The scenarios business is a growth industry. These documents are essentially for internal planning and outline how a company is thinking about the future, yet they can still make front-page news.

Any oil-related news must strain to be heard above the tumult of IP Week. It is a distracting few days of networking, back-slapping and conspicuous entertainment.

BP’s Energy Outlook rose above the hubbub. Its headline — global demand for liquid fuels will plateau within 15 years — ensured a place on the front pages. Liquids consumption in the transport sector is replaced as the main source of demand growth after 2030 by non-combusted uses, as uptake of electric vehicles (EV) gains momentum.

This is of course not a forecast, but a scenario. Essentially an internal planning document, the Energy Outlook outlines how BP is thinking about the future. “We don’t pretend the Outlook provides all the answers, but it does give us insight into the direction of travel,” BP chief executive Bob Dudley said yesterday.

The scenarios business is a growth industry. BP’s evolving transition scenario, which provided the front-page fodder, “is doing the same work as the new policies scenario does for the IEA”, the firm’s chief economist Spencer Dale said. IEA executive director Fatih Birol was at IP Week today, reminding the crowd of that scenario — fuel efficiency policies and declining crude processing for passenger car fuel will slow the rate of oil demand growth after 2025.

Ratings agency Fitch has a scenario, too. In a recent research note on battery technology it said EV adoption is an increasing threat to oil demand — one scenario posited by Fitch results in oil demand peaking in 2029.

Everywhere you turn, there’s an EV scenario. Want another? Bank of America Merrill Lynch sees global oil consumption slowing quickly in 2021-23 “as the effect of EVs start to bite”.

On the other side of the EV chain sits mining and trading behemoth Glencore. It is giddy with excitement at the prospect of a new demand channel for the metals it mines and moves. Globally, automaker investment in electric vehicles is now more than $90bn, Glencore said. That’s a market BP and its peers need to be in on.

Fitch, as is its business, points out that the oil and gas sector accounted for just over $2 trillion of corporate bonds outstanding, with roughly 15pc of this maturing in 15 years or more. After much was made of Big Oil’s return to dividend payouts, this sort of thing is a big red flag for the sector.

None of these scenarios is apocalyptic for oil demand. All say that as much, if not more, oil is sold at the back end of their chosen timeframe as is now — even under the extreme (read: extremely unlikely) scenario of a total ban on internal combustion engines.

But here’s Fitch: “An oil market which has gone ex-growth poses problems… more time or a more dramatic downward movement in prices would be needed to deal with any future glut if demand was not so robust – potentially leading to a more volatile, and on average lower oil price.”