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BP plc, Royal Dutch Shell: A Major Shift in Energy Industry on its Way

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By Gas By Staff WriterJun 13, 2016 at 11:34 am EST

As awareness about the hazardous effects of fossil fuels is increasing, and governments and environmentalist groups are encouraging the use of renewable energy sources, it seems as if a major change in global energy sector is on its way. Over the past few years, the global energy arena has witnessed a number of changes, as coal has lost its dominant position in the industry, while consumption of renewable energy sources has increased in power generation.

The recent changes in the industry are signaling that clean, environmental-friendly energy sources are soon going to take over fossil fuels as the world’s primary energy sources. According to BP CEO Bob Dudley, the changes in the energy sector are not new as “the world of energy is again going through a period of profound change.” In the prevailing and future circumstances, he opines that the industry as a whole should stand firm and resilient in the near-term, while ensuring to meet energy needs for the future.

We discuss how international energy market dynamics are changing and how oil and gas companies are trying to cope with the shift. Moreover, despite recent updates in the global market, the industry is likely to take some time to completely shift towards renewable energy sources. We make a case for that.

Coal

According to the 65th edition of the BP Statistical Review of World Energy, coal was the only fossil fuel that lost its share of the market in 2015. Coal demand witnessed the “largest fall” last year, as global consumption dropped by almost 1.8%. Compared to this, coal consumption had annual growth rate of around 2.1% between 1995 and 2014. Even though Indonesia and India posted modest increases in coal demand in 2015, a massive decline internationally, especially in the US and China has significantly offset the increase.

According to the environmentalist group, Greenpeace International, coal is the “single greatest threat to our climate.” The energy source emits the highest amount of carbon dioxide (CO2) into the atmosphere, which is not only causing pollution and harming the natural environment but is also adversely impacting the ozone layer.

In Paris last year, global energy producers agreed to reduce carbon emissions to keep global temperature well below 20 C pre-industrial levels. The COP21 agreement is leading the shift in the industry as can be seen by the changes in the market share of global primary energy sources.

Coal’s share in the international energy consumption dropped to 29.2% in 2015, marking the commodity’s lowest global market share in the past ten years. Oil, which is cleaner than coal, took the dominant position in the international energy market last year.

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Amid low coal demand and the worst global commodity downturn, coal prices dropped drastically last year. In Asian markets, coal prices averaged $63.52 per ton last year, down from $77.89 in 2014. Meanwhile, the US Central Appalachian coal averaged $53.59 per ton in 2015, down 22.33% year-over-year (YoY).

Low coal prices adversely impacted the financial position of the coal-focused energy companies in 2015. Weak prices have even forced big coal companies to go bankrupt. Peabody Energy Corporation (OTCMKTS:BTUUQ), the world’s leading coal miner, filed for Chapter 11 bankruptcy in April as it failed to service $10.1 billion worth of debts. Peabody Energy is not the only coal company to file for bankruptcy protection. It has joined Arch Coal, Alpha Natural, and Walter Energy.

Crude Oil

As the gap between global oil supply and demand continued to surge last year, global crude oil prices dropped by almost 50%. Global crude benchmark, Brent averaged $52.39 per barrel in 2015, down by $46.56 per barrel in 2014. This is the lowest global crude price average since 2004.

Despite low oil prices, crude’s share of global energy consumption increased last year. Crude oil, with a market share of 32.9%, became the leading fossil fuel in 2015. This is the first time that oil has experienced an increase in its market share in the past 17 years.

Global crude oil production increased by 1.9 million barrels per day (bpd) or 1.9% last year, compared to growth of 1.1 million in the preceding year. High demand was driven by the Organization for Economic Co-operation and Development (OECD), EU, and the US. The growth in global demand did not positively affect crude oil prices, as it was offset by oversupply. Iraq increased its production by almost 22.9%, while production in the US grew by 8.5%.

Renewable Energy Sources

Although crude oil took over coal last year as the leading player in the energy industry, it seems as if the situation is going to change in the long-run. Fossil fuels, including coal and oil, are the biggest sources of world’s air pollution — adversely impacting our natural environment and increasing the global temperature.

According to the IEA, to curb global warming, energy industry should focus on three alternatives; more energy efficiency, optimized energy mix, and more renewables. In the past few years, there has been a significant rise in demand for solar and wind energy. In 2015, global renewable energy sources consumption increased to 2.8%, in contrast to 0.8% a decade ago.

The increasing demand of solar energy for power generation triggered high international consumption. Renewable energy used for electricity generation increased by almost 15.2% last year, and occupied around 6.7% in total global power generation.

Shell, Total, BP: Plan Going Forward

Amid a depressed crude environment and recent changes in the energy market dynamic, more oil and gas companies are now looking for ways to strengthen their foothold in the renewable energy market. The change in the global fuel mix has reduced carbon emission worldwide. In 2015, CO2 emission increased by about 0.1% — the lowest growth rate in the past 24 years.

Big energy companies, including BP, Shell, and Total, are expanding their asset portfolio to include low-carbon assets. French oil giant, Total SA (ADR) (NYSE:TOT) plans to spend around $500 million annually on renewable energy segment for the next 19 years. The company aims to increase the share of solar and wind energy in its asset portfolio to 20% by the end of 2035. In 2006, the renewable sector had a 6% share in its asset portfolio.

London-based BP plc (ADR) (NYSE:BP), which was responsible for one of the worst oil spills in the US history, is also investing billions of dollars in environmental-friendly energy sources. The company has spent around $3 billion in biofuels research and development (R&D) and has around 19 wind farms operational worldwide. The company is committed to meet energy demand, along with reducing greenhouse gas emissions in the future.

In its Capital Markets Day 2016, Royal Dutch Shell plc (ADR) (NYSE:RDS.A) classified renewable energy under “future opportunities.” The Anglo-Dutch company said that although it does not have a strong presence in the segment, it sees “significant growth priorities” in the renewable sector for the company beyond 2020.

The energy giant said that it is reshaping its asset portfolio to include solar, wind, and low-carbon biofuels. Shell CEO Ben van Beurden said: “In new energies, there is potential for Shell to achieve material scale and profitability.”

Is the Path to Renewable Easy?

Although many energy companies are increasing their foothold in the renewable energy segment, we should not expect a radical change in the industry any time soon. Shell said: “We expect to see robust demand for oil and gas for decades to come.” The company only sees transition to low-carbon fuels in the long-run.

As low crude oil and gas prices have already dented the financial position of international companies, they currently don’t have cash reserves to invest in the renewable energy projects. Investment in clean energy sources would require billions of dollars and could force energy companies to compromise their capital spending and dividend payment. In the current market situation, shareholders’ dividend payments are companies’ top priority as investor confidence in the energy market is continuously eroding.

Thus, although a shift to renewable energy sources seems imminent, energy companies are still likely to take some time to adapt to the changing market conditions. Even if companies start to invest huge sums in solar and wind energy, oil and gas would continue to stay with us for a long period of time.

Editing by Omair Siddiqui; Graphics by Waqas Khan

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