BP ENERGY PRESENTATION IN ABU DHABI

UNCLAS ABU DHABI 000815

SIPDIS

C O R R E C T E D C O P Y (FOR TEXT)

E.O. 12958: N/A
TAGS: ENGR ECON AE
SUBJECT: BP ENERGY PRESENTATION IN ABU DHABI


1. Summary: on July 10, 2008, Mark Finley, Head of Energy Analysis
for BP P.L.C. in London, delivered a presentation on BP's annual
statistical review of world energy. In attendance were
representatives from ADNOC, Taqa, the British Embassy, Canadian
Embassy, and the media. BP expressed the view that high and volatile
energy prices are a reflection of tighter supply and demand
fundamentals at work in the marketplace. End summary.


2. BP, in assessing the data garnered for 2007, concludes that
speculation is not driving energy price increases. Rather,
speculation is a symptom of the problems born of high and volatile
prices and may be adding momentum to a trend that is already in
place. Changing expectations of the fundamentals of supply and
demand, namely concerns over future instability in fuel inventories
and production, are at work.


3. Primary energy consumption growth is linked to a global upturn in
real GDP growth. Sustained economic growth in the 2000s, as was seen
in the 1970s, is driving demand which is in turn contributing to
higher prices. Rapid price increases have led to a slowdown in
global consumption growth. World energy consumption grew by 2.4 per
cent in 2007, marking a slower rate than the previous year. BP
explains that this sustained upward growth trend, present even in
light of higher prices, is reflective of above average real economic
growth, particularly in non-OECD countries, which accounted for 2/3
of global energy consumption growth. Emerging economies have and
will continue to account for a larger share of consumption growth
(partially attributable to the large role of government backed fuel
subsidies, which shield consumers from price hikes, and the
prevalence of energy intensive industries).


4. Inventories fell in the second half of 2007 following OPEC
production cuts. (Note: IEA cites OPEC production over the past 9
months as ahead of the same period in 2007.) Inventories are
currently at or slightly below the historical average. However, the
demand function has shifted as customers are willing to pay more to
hold on to oil for the future. BP highlighted the direct correlation
between the future and today as inventories explaining that there is
not a lot of new supply coming onto the market.


5. Increased contributions from the U.S., Canada, Angola and Iraq
offset OPEC production cuts and lower output in Norway and Mexico.
Incentives for investment in onshore production in the U.S. were
made available but the volume of increase in U.S. fuel production
remained relatively quite small. Russia's output declined, but BP
suggested that if the Russian investment regime was changed, Russia
could support higher production levels. Non-OPEC production growth
levels continued to be disappointing due to massive product delays,
but there remains a tremendous scope for efficiency improvements
going forward.


6. In 2007 global refining margins hit an all time high and refining
capacity is rising more quickly than production levels.



7. Oil: BP forecasts a continued slowdown in global oil consumption
growth (Note: OPEC, in its 2008 World Economic Outlook, also
forecasts declining consumption rates. OPEC posits that demand for
its oil could fall to 31mb/d in 2012 as supply outpaces demand. The
International Economic Agency also forecast that demand in advanced
economies appears to be losing strength. The IEA agrees that demand
in emerging economies will continue to rise.). Non-OECD countries
that subsidized imports boasted rising consumption rates. However,
with current price levels the ability to maintain these subsidies is
questionable. China recorded the weakest growth in oil consumption
growth since 2002, 7.7 per cent, but still accounted for half of the
aggregate growth figure. North American consumption recorded a
growth rate of 1.6 per cent which was a substantial increase over
weaker figures in 2006. Eu energy consumption declined by 2.2 per
cent with German consumption showing the largest decline.


8. Natural gas: Consumption increased at a rate above the 10 year
average, 3.1 per cent, but this growth was constrained to North
America, Africa, and Asia Pacific. The U.S. alone accounted for 50
per cent of this growth, reflective of a cold winter and demand for
power generation. However, most fuel switching, which contributed to
the rise in natural gas consumption growth, is now complete and will
not be a major factor in 2008. Europe, which weathered a relatively
warm 2007 winter season, saw consumption decline by 1.6 per cent.
Production rose by 2.4 per cent with the U.S. claiming the largest
role, as it increased output by 4.3 per cent. EU production growth
declined by 6.4 per cent- the UK's production dropped by 9.5 per
cent and there was a small dip in Russian output. Prices of natural
gas increased substantially worldwide, except for in Europe and
growth in international trade was weak at 2.3 per cent. After the
earthquake in Japan, importers of LNG turned to the Middle East and
Atlantic basin to meet growing demand.


9. Coal: for the 5th year in a row, coal consumption growth, 4.5 per
cent was the fastest among the fossil fuels and was widespread.
China recorded the lowest growth in coal consumption since 2002
(still representative of 2/3 of the total growth figure). Both India
and the OECD countries posted above average growth rates. The
majority of most coal produced is still consumed in its host
country. Coal reserves are sufficient, at current production levels,
to last for 130 years.


10. Nuclear energy: Due in part to extended maintenance of
facilities in Germany and an earthquake in Japan leading to the
closure of the largest nuclear power plant in the world, nuclear
power production declined by 2.2 per cent, the largest drop
registered to date. BP views the largest challenge for nuclear
energy as maintaining its market share which currently sits at 6 per
cent.


11. Other fuels: Production capacity is largely limited by
geographical constraints, but it increased slightly while renewable
energy witnessed rapid growth rates throughout the year. Biofuels,
representative of 7 per cent of market share, recorded 30 per cent
consumption growth. However, their challenge remains finding a
feedstock that does not compete with the food supply.


12. Conclusion: The BP presentation concluded that reserves are not
running out and there is no looming resource constraint. The role
that political instability and unrest play in the market was the
focus of ADNOC's questions during and after the presentation.
Audience discussion centered on the civil unrest in Nigeria,
potential strike on Iran, and unrest in Venezuela.
Quinn














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