The 2014 BP Statistical Review

This past week BP (NYSE: BP) released its Statistical Review of World Energy 2014. For energy wonks, this is the bible of energy statistics. The report contains global and country level statistics on production and consumption for oil, natural gas, coal, nuclear power and renewables. In this week’s Energy Strategist I will look at trends for each of these sectors. In today’s Energy Letter I will provide some observations and note some trends in the world’s oil markets.

Overview

Fossil fuels continue to dominate the world energy supply. In 2013, fossil fuels were responsible for nearly 87 percent of the world’s energy consumption, while nuclear provided another 4.4 percent. Oil was 33 percent of the total energy consumed. Modern renewables (excluding hydropower) were only 2 percent, but the overall contribution of renewables has increased by nearly 70 percent since 2010 (from 165.5 million metric tons of oil equivalent in 2010 to 279.3 million metric tons of oil equivalent in 2013).

Consumption increased in all major energy categories, including nuclear, which had seen two straight years of decline. Carbon dioxide emissions increased by 2 percent to a new record above 35 billion metric tons. Consistent with recent years, carbon dioxide emissions in Asia Pacific led all regions with an increase of 476 million metric tons from 2012 — three quarters of which were contributed by China. After two years of declines, US carbon dioxide emissions increased by 151 million metric tons, while Europe’s carbon dioxide emissions decreased by 117 million metric tons.

Drilling Into the Oil Markets

Global oil production increased by 557,000 barrels per day (bpd) to a new all-time high of 86.8 million barrels per day. Note that BP’s definition of “oil” includes crude oil, tight oil, oil sands and natural gas liquids (NGLs — the liquid content of natural gas where this is recovered separately). Its definition excludes liquid fuels from other sources such as biomass and derivatives of coal and natural gas (e.g., coal-to-liquids, or CTL).

There are two very large caveats that accompany this new global production record. The first one is that the US contribution to the global oil supply was a 1.1 million bpd increase over the previous year. This was the largest year-over-year increase in US history (and eclipses the previous record US gain in 2012). Without this large US increase — driven by the fracking/shale oil and gas boom — global oil production would have actually declined by 554,000 bpd.

The other major caveat is that even though there was a more than half million bpd gain in global oil production, global oil demand increased by 1.4 million bpd.

While much has been made of a slowdown in China, oil demand there still increased by 390,000 bpd (following a 500,000 bpd increase from 2011-2012). Despite the slowdown in the rate of growth from the previous year, this represented a 3.8 percent consumption increase, compared with a global increase of 1.4 percent. US oil demand reversed two years of declines and increased by 397,000 bpd (a 2 percent increase).

Thus, the US and China together were responsible for 56 percent of the global increase in oil demand in 2013. The big difference between the two countries is that US oil production was up far in excess of our increase in consumption, while oil production in China edged up by only 24,000 bpd. This means that while US oil imports declined and finished product exports (e.g., gasoline, diesel, jet fuel) increased, China’s dependence on oil imports continues to increase.

Double-digit percentage increases in oil consumption were recorded by Pakistan, Venezuela, and Azerbaijan from 2012 to 2013, and over the past five years double-digit percentage consumption increases were recorded by the regions of Central and South America (15.2 percent), the Middle East (18.3 percent), Africa (12 percent), Asia Pacific (17.4 percent), and the former Soviet Union (12.8 percent). Oil demand in the developed countries belonging to the Organisation for Economic Co-operation and Development (OECD) decreased 5.3 percent over the past five years, while demand in non-OECD countries increased 20.3 percent.

The US remained the world’s third-largest oil producer at 10 million bpd in 2013, trailing Saudi Arabia’s 11.5 million bpd and Russia’s 10.8 million bpd. Rounding out the top five were China (4.2 million bpd) and Canada (3.9 million bpd).

Over the past five years, global oil production has increased by 3.85 million bpd. During that same time span, US production increased by 3.22 million bpd — 83.6 percent of the total global increase. Had the US shale oil boom never happened and US production continued to decline as it had for nearly 40 years prior to 2008, the global price of oil might easily be at $150 to $200 a barrel by now. Without those additional barrels on the market from (primarily) North Dakota and Texas, the price of crude would have risen until supply and demand were in balance.  

Conclusions

There are two major oil themes that emerge from this year’s BP Statistical Review of World Energy. One is that with respect to increases in oil production, there is the US, and then there is everyone else. US oil production increased by 1.1 million bpd for the largest year over year gain in the world. For perspective, the second-largest national increase in oil production was posted the United Arab Emirates with a gain of 248,000 bpd over 2012, and Canada was the only other country in the world to record an increase of more than 200,000 bpd, at 208,000 bpd over 2012.

The second major theme to emerge from the report is continued demand growth, led once again by developing countries. While China’s demand growth did slow to 390,000 bpd over 2012, the rest of the non-OECD countries increased their demand by nearly a million bpd. I think this theme is often missed by the media, who too often focus on China alone as a proxy for demand growth in developing countries. So when China slows, journalists either assume the rest of the world has done the same or mistake a slower rate of growth in demand for outright decline, and then scratch their heads and wonder why oil prices continue to hover around $100.  

(Follow Robert Rapier on Twitter, LinkedIn, or Facebook.)

Portfolio Updates

Targa a Moving Target   

When we added Targa Resources (NYSE: TRGP) to the Growth Portfolio on Jan. 9, 63 percentage points of total return ago, it was with the idea that the company could fetch a premium in a buyout. Targa’s Gulf Coast fractionation facilities and liquefied petroleum gas export terminal, along with the long-term gathering contracts in some of the fastest growing domestic shale plays, would be difficult to replicate at any price in a reasonable time frame.

That sense, and Targa’s continuing rapid growth, drove the handsome gains in the stock even before last week’s big news of merger talks with Energy Transfer Equity (NYSE: ETE) shifted the rally into overdrive.

The Bloomberg story on the afternoon of June 19 valuing Energy Transfer’s bid at more than $15 billion sent shares zooming 19 percent higher in the last minute before the market close. Later that evening, Targa issued a statement reporting that “high-level preliminary discussions” with Energy Transfer about a merger “have been terminated,” but left the door open to the possibility that they “could resume.”

A Bloomberg update out late Monday blamed the leak for scuttling the talks, reportedly by making Targa’s board worry the offered price wasn’t high enough. But it seems at least as likely that the parties reached an impasse over the buyout price before, hence the leak turning Targa into a very public quarry.

Both sides now have considerable risk if they don’t strike a deal. Targa risks seeing its speculation-aided share price deflate significantly, should ETE definitively back out. In turn, Energy Transfer chief Kelcy Warren has his reputation as a master dealmaker on the line, along with the possibility that Targa might eventually merge with a rival giant.

Targa shareholders, along with unitholders of its subsidiary MLP, Targa Resource Partners (NYSE: NGLS) face downside risks as well should a deal fail to be consummated, yet could miss out on more upside if the merger comes to pass. One way to hedge against either possibility would be to sell some of your holdings. We’re changing our recommendation on TRGP to Sell Half.    

EQT Midstream Another Sell-High Candidate      

EQT Midstream (NYSE: EQM) has been another portfolio jet-setter, one that has returned 121 percent for subscribers who followed our Aug. 14 buy recommendation.

EQT Midstream is still growing fast thanks to strong demand for gas transmission and midstream gathering services in the Marcellus shale, where sponsor EQT (NYSE: EQT) remains one of the most prolific drillers. EQM’s distributions per unit are forecast to increase 29 percent this year and 22 percent in 2015 following additional asset dropdowns by EQT.

But those dropdowns will require heavy additional unit issuance, capping a yield that, at 2 percent, already looks unjustifiably low, notwithstanding the current MLP investor preference for growth. If EQM grows its distributions as fast as it hopes and the unit price does not budge from current levels, in 18 months the MLP would yield 2.8 percent. Could it double from current levels to yield 1.4 percent by then, as Phillips 66 Partners (NYSE: PSXP) does already? That seems unlikely. More probably, higher interest rates and frustration with slowing capital gains are likely to diminish the attractions of a yield below 3 percent by the end of next year.

EQM has also benefited of late from its addition on Friday to the Alerian MLP Infrastructure Index, and consequently to the ALPS Alerian MLP ETF (NYSE: AMLP), the largest MLP-focused exchange-traded fund with more than $9 billion in assets.

Opportunities to sell high are seldom so clear-cut. Sell half of your EQM position. 

— Igor Greenwald