BP and the next 20 Years of Energy

BP (BP 1.58%) recently released its annual "Energy Outlook" report, a lengthy document filled with expert predictions for the energy industry in the next 20 years or so.

In this week's episode of Industry Focus: Energy, Motley Fool analysts Sean O'Reilly and Taylor Muckerman talk about the most exciting highlights they found in the massive document. Find out how renewables are expected to fare, how a rise in GDP might have more of an effect than a rising population on energy consumption, what takeaways investors will want to focus on, and more. Also, the hosts talk about the ever-increasing production in the Permian basin.

A full transcript follows the video.

This podcast was recorded on Feb. 10, 2017.

Sean O'Reilly: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. Today is Thursday, Feb. 16, 2017, so we're talking about energy, materials, and industrials. I am your host, Sean O'Reilly, and joining me in studio is the man, the myth, the legend, Mr. Taylor Muckerman. How's it going, man?

Taylor Muckerman: I'm becoming less mythical one day at a time, one show at a time.

O'Reilly: Do you think it's because more people are believing in you? How does that work?

Muckerman: I think we're getting more listeners.

O'Reilly: Then you become less mythical, got it. So we actually have a confession to all of our listeners. We are, in fact, not recording this on Thursday, Feb. 16; we are recording it six days early. This is a pre-record. So, if the world blows up --

Muckerman: Or anything major happens, oil spill --

O'Reilly: If oil goes up 50% or something.

Muckerman: If Exxon[Mobil] (XOM 1.15%) goes bankrupt ... who knows.

O'Reilly: If something like that happened, I would actually probably just redo the show.

Muckerman: You'd phone in and redo it? Fair enough. That's dedication.

O'Reilly: It's a big deal. I care about our listeners, and I care about you.

Muckerman: Thanks.

O'Reilly: So today, we are talking about the doozy of an "Energy Outlook" report, 104 pages long put out by BP. I'll actually be reading about 30 pages, so everybody get comfortable -- I'm kidding. BP does this once a year. Taylor?

Muckerman: Yeah, it's out to 2035. So, a decent amount, 18 years' worth of an outlook. They have some stuff about beyond 2035, but the bulk of it is --

O'Reilly: It's all speculative, but that stuff is particularly speculative. [laughs] They basically project out where they see the energy industry going over the next 20 or 25 years. That's not just oil; they talk about electricity in there, wind, solar, all kinds of good stuff.

Muckerman: Natural gas, coal, renewables, the works, yeah.

O'Reilly: Before we get into that report, though, we have to talk about the increasing oil production in the Permian Basin, mostly because it's a day that's ending in "Y." I guess things are getting a little crowded down there, Taylor?

Muckerman: Yeah. We've talked about the Permian quite a bit. Barclays came out recently and said that they think it's the only basin in the U.S. that's going to increase production this year.

O'Reilly: Everybody is talking about how OPEC cut, so shale is going to come back. I thought there was going to be a little bit more up there. I'm surprised.

Muckerman: Yeah. You kook at about 30% increase in the rigs in the Permian. You'll see rigs being increased on other sites as well, like the Bakken and the Eagle Ford. But they're not so sure that overall production is going to increase anywhere else other than the Permian.

O'Reilly: Interesting. I'm an investor; give me a 10-second takeaway that I can use with this thing.

Muckerman: I mean, it's the hottest play. If you listen to all the news, you have ExxonMobil spending a couple billion dollars there --

O'Reilly: I think it was $6.5 billion. It was a lot. [laughs] 

Muckerman: I think they bought 250,000, somewhere around there, acres in the Permian.

O'Reilly: Yeah, and they bought that from the Bass family. I'm pretty sure about the $6.5 billion.

Muckerman: It sounds right.

O'Reilly: Because both of our jaws dropped.

Muckerman: Right. The Bass family is doing all right. Then, you have Noble Energy, also bought some pretty significant acreage in the Permian. These aren't small players. Exxon, obviously, the biggest publicly traded energy company in the world, although Saudi Aramco wants that title, maybe in the next couple years. But because they're going to be producing more, and because we lifted the oil export ban -- for those of you who might not know that, back in late 2015, there was some takeaway and storage capacity issues. So maybe if you want to play the Permian Basin, producers aren't the only way. You have some midstream companies grappling to try and build pipelines in storage tanks.

O'Reilly: That article you sent me mentioned Magellan [Midstream Partners].

Muckerman: Yeah, and then you have Enterprise Products Partners as well. They're just lacking in the storage and transportation area. A lot of this oil is going to get exported; at least that's what they believe. So you have some companies that need to build out capacity, and that could lead to great revenues and maybe a higher dividend for some of these companies.

O'Reilly: Cool. So BP's energy report. As I said, this is a doozy. CTRL+F was my friend when I went through this. A few basic assumptions that BP makes in its projections that I wanted to share with our listeners include, they think global GDP will almost double by the year 2035, driven by fast-growing emerging economies. This will also lift 2 billion people out of poverty.

Muckerman: They think population will have a smaller impact on GDP growth.

O'Reilly: Yeah, we're all going to get more productive.

Muckerman: More efficient, more productive, yeah. I wonder if that has anything to do with robots and automation.

O'Reilly: You think? I just watched Ex Machina; do not talk to me about robots right now.

Muckerman: OK, fine.

O'Reilly: Did you see that?

Muckerman: No, I haven't, but if it means they're evil, Elon Musk is on the task of making sure AI does not become --

O'Reilly: It's not about good or evil; they are amoral. It's just, are humans getting in the way of efficiency? Dun-dun-dun! Anyway, back to energy. Increasing productivity is actually going to be the cause of about three-quarters of the total GDP growth. Prosperity naturally leads to global energy demand increases. This might get balanced out, they think, by rapid gains and energy efficiency. Again, they're doing the best that they can, but you never know when innovation is going to pop up.

Muckerman: 2035, that's what we're talking about here.

O'Reilly: Demand increasing only by about 30%, they think. The fuel mix continues to adjust, although oil and gas, together with coal, remain the dominant sources of energy. I'm actually super interested to get your thoughts on that in a few minutes.

Muckerman: Yeah, sure.

O'Reilly: Renewables with nuclear and hydroelectric power provide half of the additional energy required all the way out to 2035. So, largest growth increase there. LNG is going to be a big deal, oil demand growing through the outlook. We're going to save that until the end, because that's one of my favorite statistics, when they think oil is going to peak.

Muckerman: Cliffhanger.

O'Reilly: Stay tuned, folks! And increasing penetration of electric cars in the broader mobility revolution will have an important bearing on future oil demand. That is, they practically admit that it's just, we don't know what's going to happen. 

Muckerman: It's a crap shoot.

O'Reilly: Yeah. So, what were your favorite things in the report? What did you learn? 

Muckerman: I think the LNG demand really sunk in for me, because Europe is going to be losing production of natural gas --

O'Reilly: And already super dependent on Russia.

Muckerman: Yeah, exactly. So they're going to try and rely more on LNG imports rather than pipeline imports of natural gas. And that could be huge for America, because we've seen a handful of companies pour a lot of money into LNG export facilities with one of them online now, two trains.

O'Reilly: Who owns that?

Muckerman: Cheniere Energy. That's down in their Sabine Pass facility. They also have their Corpus Christi plant that's been approved, construction has started on that.

O'Reilly: Ironically enough, Cheniere Energy --

Muckerman: Ticker LNG.

O'Reilly: I was about to say, the funny thing about them is their ticker is LNG, like, ha-ha, see what they did there?

Muckerman: And their former CEO and founder, Charif Souki --

O'Reilly: Named his daughter Natural Gas. [laughs] 

Muckerman: That's funny, I didn't know that. Probably the first of its kind. When you have celebrities naming their kids random things, you might as well name them LNG. But he started his own new company after he got ousted as the CEO of the company that he founded. So it just went public this week or last week -- I'm getting my weeks mixed up because this is pre-recorded. But sometime in 2017, he had a new company go public that's trying to export LNG as well. Same guy, same idea, just a different company. Dominion [Resources] (D 2.62%) has a Cove Point facility coming out of Maryland, supposedly online in the back half of 2017. All told, you're looking at maybe around 15 billion cubic feet per day of LNG import demand from Europe. In the U.S., we have about 10.5 billion cubic feet per day of approved facilities that are under construction.

O'Reilly: Wow! That 15 number for Europe, is that in 2035 or now?

Muckerman: That's in 2035. It's growing to that number in 2035. But they already rely somewhat on imports. But that is a growing need for them, and it looks like the U.S. is pretty well set up to supply that demand.

O'Reilly: I'm feeling good. Yay, America.

Muckerman: So there are a few companies out there. You have Cameron [LNG], Dominion, and Cheniere, and then the pipeline and storage companies that are providing these companies -- I think Kinder Morgan is providing some natural gas via pipeline to Cheniere's export facility.

O'Reilly: There seemed to be in the report lots of uncertainty regarding energy efficiency in the coming decades. They simply don't know what will happen. There's countless machines and buildings that need to be replaced, and we might have a new technology replace the old buildings, so all of a sudden --

Muckerman: 3D printing buildings with solar windows. Hey, this is 18 years we're talking about! They 3D-printed pizza a couple years ago; they can probably 3D print a house in a few years.

O'Reilly: Eighteen years ago would have been 1999, what were you doing in 1999?

Muckerman: I was not even 21 yet.

O'Reilly: So you were being responsible.

Muckerman: I was probably being very irresponsible as a child. I think I might have been 14, so yeah, I was getting into some trouble, I'm sure. Spending a lot of time outside.

O'Reilly: What was the most surprising thing you saw in this report?

Muckerman: Possibly that non-Middle East OPEC production and supply is going to decrease over this time period.

O'Reilly: They're talking about Venezuela, Nigeria --

Muckerman: Yeah, the higher-cost producers of OPEC. I could see that causing a geopolitical rift down the line. They're not going to give that up easily.

O'Reilly: OK, I'm going to spoil the whole oil demand thing -- they think that oil demand is going to continue to grow until the mid-2040s. One, that is extraordinarily surprising to me. Two, you're talking, based upon their charts, well over 100 million barrels per day that the world is going to want by then. I would think we would need Nigeria's oil to get there; that's what I'm saying.

Muckerman: Well, you see Brazil, the deepwater there is expected to finally come online.

O'Reilly: That's been a story for ...

Muckerman: Yeah, as long as I've been covering energy, Brazil is supposed to be producing deepwater oil.

O'Reilly: Somehow they'll lose all of it due to corruption charges.

Muckerman: But in relation to other offshore oil, it's not that expensive. So that could be a point that we turn to. Venezuela relies very heavily on offshore oil production. So it could just be too expensive for them.

O'Reilly: I was really surprised by that. You have the electric-car bulls and all that --

Muckerman: Yeah. Transportation takes a back seat to non-combustible demand sources. Basically, the petrochemical industry is going to take over the mantle of demand from transportation.

O'Reilly: And that, of course, just means that there's going to be 1.5 billion more people, we're going to get slightly richer, and everybody likes plastic stuff.

Muckerman: Not just plastic. Rubber, clothes. People probably don't realize how much oil they're wearing.

O'Reilly: Are you wearing oil right now?

Muckerman: I'm sure. I don't know what it is, but the soles of my shoes, probably. You have recyclable materials going into shoes now, but that's a small fraction of global apparel. And home goods and car parts, you name it.

O'Reilly: Yeah. I'm looking at their chart, it's page 88 of the report, 2035, they think about 105 million barrels per day being demanded. What are we at -- 96? So that's not a crazy jump.

Muckerman: Yeah, I think I saw somewhere that the U.S. might jump up to about 15 million barrels per day of that, at some point. And then, the tail end of this, looks like our share kind of starts to decline.

O'Reilly: What did you think of that? I've also seen these reports that talk about how everybody's talking about the shale boom in the United States. And I saw that shale production in the U.S. might peak out at about 2020, and I was like, what's going on there?

Muckerman: Yeah. U.S. share in the first half of the outlook grows, but then it gradually declines. But if you look at natural gas from shale in the U.S., that's going to grow by double, probably, that's what they say.

O'Reilly: We have lots of gas.

Muckerman: Yeah. And then that feeds into the LNG discussion that we had at the top of the segment. We have the gas to liquefy, to export. Europe just so happens to be a very close trading partner with us, directly across the Atlantic Ocean. So far, the export facilities that we have online or soon to come online are in the Gulf Coast and the Eastern seaboard. So, easy access to Europe.

O'Reilly: Good to go. So the other cool thing that I thought was interesting was Africa is going to be half the increase in global population, but 10% of the GDP increase, the effect. And they actually said in their report that if they were to just meet what India has done in the last 10 years in terms of productivity and GDP growth per capita, it could get very interesting in Africa.

Muckerman: Yeah. I didn't end up getting to it, but in the 90s, page-wise, they talk about Africa beyond 2035. That's when the demand is really going to start to kick in, they think, for energy in Africa. A lot of people there don't have access to convenient or reliable energy sources yet.

O'Reilly: And I have to assume, given what's going on with solar today ...

Muckerman: Yeah. Small regional solar, utility-size plants, are going up in Africa, more so than in other parts of the world, I think, because you don't have the continentwide distribution networks, so you need these localized power supplies, and solar is able to provide that for a decent part that continent. It's not yet, but the solar availability for Africa is pretty high in comparison to northern Russia or Canada or anything like that.

O'Reilly: Right. The sun shines there.

Muckerman: Yes, it does.

O'Reilly: I stepped away from this kind of optimistic about the future.

Muckerman: Me, too. Look at dirty fossil fuels being replaced by cleaner fossil fuels or renewables. Look at renewable energy sources supposed to quadruple by 2035. So you're looking at renewables, nuclear, and hydro, 50% of the increase by 2035. As an overall share of energy production, oil and coal decline. Demand rises slightly for both. But renewables and natural gas catch up and take over some of the market share. They're still not going to be the leaders, but natural gas does surpass coal in the last few years of the projection. It's already surpassed coal here in the United States very recently, but globally, it's supposed to surpass coal in terms of energy market share in the latter half, maybe 2025 or 2030.

O'Reilly: Before we head out here, what were your investment takeaways?

Muckerman: We talked about the LNG thing.

O'Reilly: I want to go buy some natural gas shares now, you know what I mean?

Muckerman: I don't know if you want to buy their commodity natural gas --

O'Reilly: I mean the companies. Natural gas shares.

Muckerman: Oh, sure. You have the transport companies and the exporters. We mentioned quite a few of them on the show.

O'Reilly: Do you ever look at the guys who own the ships, Golar LNG?

Muckerman: Not closely enough to really talk about it intelligently. Another takeaway that we haven't mentioned, but I'll let people go ahead and look at it on their own is, because the U.S. is supposedly going to reduce its reliance on finished product, finished petroleum products, refineries in the U.S., you could see a lot of them being closed over the next 18 to 20 years.

O'Reilly: That would be funny.

Muckerman: I don't know if it would be funny. [laughs] 

O'Reilly: But it would be there.

Muckerman: It would be a drastic change.

O'Reilly: Well, good. Anything to say to your future self in 2035? I'll be 49. That's going to be interesting.

Muckerman: Wear less oil.

O'Reilly: Wear less oil.

Muckerman: Yeah, that's what I'll tell myself.

O'Reilly: My shoes have rubber soles; that's definitely oil.

Muckerman: What about you? What are you telling your future self? Not just your next-week self when you're actually hearing this on iTunes, but your 2035 self?

O'Reilly: Future Sean, do not get into a car with a flux capacitor installed. Dire consequences will happen. [laughs] 

Muckerman: You might get rich.

O'Reilly: All right. That is it for us, folks. Be sure and tune in tomorrow for the Technology show. If you're a loyal listener and have questions or comments, we would love to hear from you. Just email us at [email protected]. As always, people on this program may have interests in the stocks that they talk about, and The Motley Fool may have formal recommendations for or against those stocks, so don't buy or sell anything based solely on what you hear on this program. For Taylor Muckerman, I am Sean O'Reilly. Thanks for listening, and Fool on!