Could the coronavirus crisis be the beginning of
the end for the oil industry?
Wall Street analysts say the Covid-19 pandemic will
permanently alter the energy industry and shift the debate around climate
change. Ben Chapman finds out why
@b_c_chapman
3 days ago
US oil
production is being decimated by low prices as planes remain grounded and
people stay at home
On the open
plains of Wyoming, in the shadow of the Rocky Mountains, something strange
began happening last month. Coronavirus itself had barely touched this sparsely
populated American state. But the impact of Covid-19 could already be seen.
As
thousands of aircraft were grounded and billions of citizens ordered to stay
home, global demand for oil, the key lubricant of world commerce, had crashed
so far and so fast that producers in Wyoming were willing to pay someone 19
cents a barrel to take it off their hands. It was worse than worthless, it had
become a burden.
A thousand
miles northwest, in Alberta, Canada, home to perhaps the world’s single largest
deposit of hydrocarbons, a similar story was playing out.
By
Mid-March, if you so desired, you could have purchased one of Canada’s
estimated 1.7 trillion barrels of oil, for just $5. In other words, 159 litres
of the world’s most vital commodity would set you back less than a pint of
beer.
Black
Monday: Why cheap oil sent world’s stock markets into a tailspin
A month
later, what may have seemed like mere trivia from obscure corners of the global
oil market has rippled across the US, as the price of America's key benchmark,
West Texas Intermediate, plunged as low as minus $40 on Monday - the first time
ever it had ben below zero.
As supply
outstripped demand and storage space filled up at the fastest pace on record,
no one wanted to be on the hook for taking delivery of any oil in May. There
would be nowhere to put it and no one to buy it off you.
Negative
prices were to some extent a technical blip caused by the way oil is traded on
futures contracts, but experts think the phenomenon is likely to recur next
month as the world economy continues to shrink.
How the
situation develops over the coming months could have lasting impacts on what
will soon return to being the most important battle facing humanity – the
climate crisis.
US and
Canadian oil production, which is relatively high-cost compared to production
other nations such as Saudi Arabis, looks set to be decimated by the
catastrophic slump in oil prices and some experts think it will have a hard
time bouncing back. Thousands of jobs will go and many oil wells will cease
production. This in turn, the argument goes, will aid the shift towards a lower
carbon world.
There are
other aspects to the crisis that could be good for the climate; potential
changes in our behaviour could stick with us, meaning people work from home
more often, travel less and shop locally, for example. Companies that currently
fly supplies from all around the world or rely on migrant labour may conclude
that building things closer to home is less risky.
While these
may sound like the rosy predictions of green campaigners seeking a silver
lining, they are in fact those of Jeff Currie, global head of commodities
research at Goldman Sachs. The Wall Street investment bank is not known for
environmental utopianism, its analysis is hewn from mountains of data and cold,
hard facts.
Currie and
his team believe that plummeting demand caused by the current crisis could,
paradoxically, lead to a massive spike in oil prices next year when the economy
comes out of hibernation. They predict that the oil industry won’t be able to
keep up, leaving a gap for renewables such as wind and solar to fill.
In an
eye-catching report, Currie said coronavirus would “permanently alter the
energy industry and its geopolitics, restrict demand as economic activity
normalises and shift the debate around climate change”.
A key
reason for this is that the energy source to which the industrialised world has
been addicted for more than a century has some major physical constraints. It
can’t simply be turned off and on like a tap, Currie tells The Independent.
It’s going to require a lot of money to be spent to
fix the industry
Jeff Currie, Goldman Sachs
“Oil wells
are very different from other industrial processes. They’re organic deposits
that require pressure to extract them. When you shut them down you typically do
damage to the well,” says Currie.
No one has
ever attempted to turn off the oil supply so quickly as in the last few weeks.
Global demand has cratered by as much as 30 per cent, or 30 million barrels a
day, far in excess of anything seen in any previous downturn. Meanwhile, Russia
and Saudi Arabia have kept production levels high as they engage in a battle
for market share.
“Because
oil, and energy more broadly, must be contained within infrastructure like
pipelines tankers and refineries, you can’t run a surplus indefinitely,“ says
Currie. “You can’t just pour the oil outside of the well, it has to go into the
system.”
Key parts
of that system are already full, which means that many producers, particularly
those based inland that are reliant on pipelines rather than ships to transport
their oil, will have no choice but to shut down, or “shut in”, in industry
parlance.
Shutting in
and then opening up again can be prohibitively expensive, which is why
producers in Alberta, Wyoming and beyond are willing to sell oil at a loss
rather than halt production altogether.
Oil is
often described as being found in “reservoirs” or “pools”, giving the
misleading impression that it sits in cavernous holes underground which simply
have to be located and tapped. It’s easy to imagine sticking something akin to
a huge straw in the ground and sucking out the oil.
In truth
oil deposits are often found saturated in tiny holes of porous rocks. Pressure
must be applied constantly to force the oil out of the well. This is easy at
the start when pressure can be naturally high, resulting in the kind of gusher
often depicted by Hollywood.
But, as a
well matures, it becomes increasingly tricky – and therefore expensive – to
apply the required pressure and extract oil. Starting up the process again, or
drilling new wells, adds further cost.
“It’s going
to require a lot of money to be spent to fix the industry,” says Currie.
That money
is no longer forthcoming in the quantities that many oil companies have grown
used to, meaning only the largest and most efficient companies are likely to
survive.
If the
world is addicted to oil, the oil industry itself is addicted to cash,
requiring huge injections of capital to fund exploration and production. But
appetite for investing in fossil fuels, particularly in uncertain times, is
drying up. With tens of billions of dollars likely to be wiped out as the
majority of small, heavily indebted, US oil producers go to the wall, that
appetite is likely to reduce even further.
Capital
markets are more cagey about handing money to oil producers after years of
below-par returns. Meanwhile, banks are beginning to cut back financing for oil
and gas, and large funds, including Norway’s $1 trillion sovereign wealth fund,
have reduced their investment in the sector. The Bank of England is also
looking into climate stress testing that could force lenders to get rid of
assets at risk as the world shifts to net zero carbon.
At the same
time, renewables are rapidly becoming a more attractive investment. A wind farm
requires a lot less capital than an oil field, and while the returns are less
spectacular they are more solid and reliable.
Paul Flood,
portfolio manager at Newton Investment Management, says companies that produce
renewable energy are unique in that they remain stable even through turbulent
economic times. That makes them an ideal place for governments to focus what
will likely be huge stimulus programmes in the wake of the Covid-19 crisis. “It
fits very nicely. You’re killing two birds with one stone by providing new
sources of renewable energy to decarbonise power, and also providing pension
funds with stable revenues.
“I think if
governments are going to do fiscal spending they’re going to have more
credibility directing it towards renewables and climate change initiatives than
towards oil and gas.”
Despite
this apparently gloomy outlook for fossil fuels, not everyone is convinced
Covid-19 will be a good thing for the climate. Legal & General Investment
Management invests more than £1 trillion of other people’s money, mostly for
the very long term.
Nick
Stansbury, LGIM’s head of commodity research, believes the current slump in oil
prices must be seen on balance as bad for the environment. “From a climate
perspective, this is really disappointing,“ he says, “it’s not what we wanted
to happen. We did not want oil prices to crash, just as we were beginning to
see real momentum behind clean technology and its competitiveness. This has set
that back in a very disappointing way.”
As
consumers, we react pretty quickly to cheaper oil. LGIM’s research shows that
after the last significant oil price fall back in 2014-15, Americans started
buying less efficient cars within a month. Those decisions have implications
for emissions for many years until people trade in their SUVs again.
However,
Stansbury says American drivers have already gone pretty much “all-in” on gas
guzzlers, so the current low prices may not cause them to trade up and get even
more inefficient vehicles.
There is a
broader and more important point to all this: if oil stays around $20 a barrel
– the current cost of Brent Crude – that clearly underestimates the actual
environmental cost of combusting fossil fuels, says Stansbury. He doesn’t see
the kind of drastic shortfall in oil supplies that Jeff Currie at Goldman is
predicting and believes American producers can shut down and then ramp up
supply again when needed.
“There is a
higher probability of oil shortages in the next decade as a consequence of this
but I think it’s far from certain that that’s what we will get.” US onshore
producers already know about huge reserves of oil, it’s just a case of having
access to capital so they can go and drill it.
What about
those much-heralded changes to our behaviour after the pandemic? Martijn Rats,
oil strategist at giant US bank Morgan Stanley, also foresees a long-term shift
away from fossil fuels.
He
highlights three driving forces of this change. First, the current low oil
price gives governments a chance to unwind $300bn of subsidies handed out to
the fossil fuel industry each year. Second, economic stimulus programmes
required to resuscitate activity after the crisis will likely be used to boost
investment in clean energy. And, third, we may work from home more and take
less flights.
“This does
not bode well for oil demand in the long term, especially relative to previous
long-term expectations,” Rats wrote in a recent note to clients.
A report by
the AA predicts Covid-19 will cause a permanent reduction in travel in the UK
because we’ve quickly adapted to use remote working technology and realised
it’s quite effective. The AA even said that a planned £27bn investment in
Britain’s roads might not be needed, and perhaps some of the money might be
better aimed at improving our broadband internet speeds.
Reports of
the death of commuting may be greatly exaggerated however, at least for the
time being. Nick Stansbury at LGIM thinks it’s too early to tell whether there
will be a behavioural shift significant enough to have a real impact on
emissions.
“Anecdotally,
and from my own experience, I know that [working from home] works a lot better
than anybody expected it was going to. It’s more viable in the long term to do
my job 100 per cent from home. Before this I would never have imagined I could
do that.
“Will a lot
of us end up working from home a bit more often, gaining a few more hours in
our days? We probably will.”
But that’s
about as much as we can say. Any emissions prevented by fewer journeys to work
are likely to be swamped by surging demand for air travel in emerging markets,
he says.
Jeff Currie
at Goldman Sachs believes that higher oil prices after the crisis will hold
back demand for flights and make people commute less often.
However,
given that the world has experienced only a few weeks of coronavirus lockdown
conditions, he is sceptical about predictions that the experience will drive
long-term changes to our behaviour.
“Wait and
see,” he says. “We have no idea.”
Sem comentários:
Enviar um comentário