Economic Report 2018

ECONOMIC REPORT 2018

This outlook is also reflected in the investment criteria being applied by major operators. Shell now requires that any investments in upstream projects must break even at less than $40/boe – half the level of some project sanctions prior to 2014 – and BP has set a target of reducing its break-even costs to $40/boe by 2021. There is also a continued global trend towards smaller projects, which are less capital intensive, have lower levels of associated risk and offer a quicker return on investment. 3.3 The Role of Oil and Gas in a Changing Energy Landscape Oil and gas have provided the majority of the world’s primary energy needs since the mid-1960s. Transport has been almost totally reliant on petroleum-based products. Meanwhile, natural gas has gradually increased its market share over coal and biomass for heating. Likewise, technological improvements have increasingly made natural gas an attractive option for electricity generation in view of the efficiency and flexibility offered, coupled with its lower carbon footprint. Oil and gas combined provided 54 per cent of global primary energy in 2016 5 , with worldwide demand for oil continuing to increase and reaching 98 million bpd in 2017. To serve this demand, the oil and gas sector has developed a global presence based on its products' ease of use, high energy density, affordability, accessibility and flexibility of supply. There are comprehensive domestic and international routes to market in place which have been a major contributor to economic growth and higher living standards. Even though new renewable electricity generation and storage technologies are developing rapidly and nuclear power generation will continue to have a role, the reliance of the global energy system on oil and gas will remain close to the current level well into the 21 st century. There are several key drivers behind this: • Continued worldwide population and economic growth will result in an ongoing increase in total energy demand. A large part of this growth is expected to occur in Africa and Asia and will lead to increasing disposable incomes and living standards. Although efficiency improvements are likely to reduce the energy intensity of all economies this will not be enough to offset these economic and demographic trends. As a result, global energy demand is expected to grow by 30 per cent by 2040. • Some of the reduction in carbon intensity of energy will come from switching from coal to gas. Approximately one-third of total annual global carbon emissions still come from the combustion of coal in power generation. Switching to natural gas will lead to both significant reductions in carbon and particulates such as nitrous and sulphur oxides (NOx and SOx), as well as improvements in overall air quality. • There are many sources of energy demand where emerging technologies and methods of supply do not yet provide an effective alternative to the use of oil or gas. For example, the requirements for heavy freight delivery and marine transport cannot at present be met from renewable or electricity-based technologies. Despite the rapid development of these methods, there is an ongoing gap between what society requires for continued economic development and the capacity of these technologies. This, however, does not mean the oil and gas sector can continue to operate in isolation from the ongoing fundamental changes that are taking place. As with any industry, businesses need to respond to shifting economic and societal demands and the consequent changes in energy needs and usage. More recently, and as a result of the Paris agreement, the challenge of climate change and the imperative of moving to a low-carbon economy have been added to the traditional objectives of affordable and secure sources of energy. These criteria are the basis for the Energy Transition. Increasingly, investors, consumers and policymakers are looking to energy businesses to reflect these criteria as the basis of their ongoing licence to operate. Oil & Gas UK is working closely with its member companies in this regard.

5 IEA World Energy Outlook 2017

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