Aerial view of the Noor 3 solar power station
which is nearing completion, near Ouarzazate, southern Morocco in 2017.
Will the coronavirus kill the oil industry and
help save the climate?
Oil
Analysts say the coronavirus and a savage price war
means the oil and gas sector will never be the same again
Damian
Carrington, Jillian Ambrose and Matthew Taylor
Wed 1 Apr
2020 07.00 BSTLast modified on Wed 1 Apr 2020 13.58 BST
The
plunging demand for oil wrought by the coronavirus pandemic combined with a
savage price war has left the fossil fuel industry broken and in survival mode,
according to analysts. It faces the gravest challenge in its 100-year history,
they say, one that will permanently alter the industry. With some calling the
scene a “hellscape”, the least lurid description is “unprecedented”.
A key
question is whether this will permanently alter the course of the climate
crisis. Many experts think it might well do so, pulling forward the date at which
demand for oil and gas peaks, never to recover, and allowing the atmosphere to
gradually heal.
The boldest
say peak fossil fuel demand may have been dragged into the here and now, and
that 2019 will go down in history as the peak year for carbon emissions. But
some take an opposing view: the fossil fuel industry will bounce back as it
always has, and bargain basement oil prices will slow the much-needed
transition to green energy.
Who is
right depends on a heady mix of geopolitics, profit, investor sentiment,
government bailouts and net zero emissions targets, campaigner pressures and,
not least, consumer behaviour – is virtual working, for instance, the new
normal?
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What is
beyond doubt is the carnage in the sector. The lowest oil prices for almost two
decades, with worse potentially on the way. Some oil major stock market
valuations halved since January. At least two-thirds of annual investment –
$130bn – dumped and tens of thousands of job losses. In a few markets prices
have gone negative – sellers will pay you to take the oil, as global storage
capacity fills.
“The price
war and Covid-19 have really thrown the oil and gas sector into turmoil, and
now we have companies really in survival mode,” said Valentina Kretzschmar,
director of corporate research at analysts Wood Mackenzie.
Oil wells
responsible for almost 1m barrels a day may have already been shut down because
the price of oil is now lower than the cost of shipping it, according to US
banking giant Goldman Sachs, with the number of wells growing “by the hour”.
This is likely to “permanently alter the energy industry and its geopolitics”
and “shift the debate around climate change”, said Jeffrey Currie, head of
commodities at the bank.
Demand for
oil has plummeted as the coronavirus locks down people in their homes and
airplanes on runways. “The virus will bring forward peak demand for fossil
fuels,” said Kingsmill Bond, at analysts Carbon Tracker. This latest cyclical
oil shock is hitting an industry already heading towards a structural peak
created by nations committing to net zero future emissions, he said.
“As for the
impact of the virus on the timing [of peak demand], it depends of course on the
severity,” he said. In 2018, Carbon Tracker estimated peak demand would come in
2023 but Bond said it was possible that the crisis has advanced this by three
years. “That means that peak emissions was almost certainly 2019, and perhaps
peak fossil fuels as well,” he said. “It will be touch and go if there can be
another mini-peak in 2022, before the inexorable decline begins.”
While the
oil companies themselves have long argued peak demand is too far off to put a
number on, most observers thought it would happen this decade. Mark Lewis, head
of climate change investment research at BNP Paribas, agreed the crises could
bring it closer.
“When the
dust settles, the peak demand narrative will be there stronger than ever,” he
said. “This is particularly true if long-haul aviation fails to recover. This
has been a very strong source of oil demand growth in recent years but the
longer we are at home – remote working, using video conferencing – the more
people will wonder: do we really need to get on a plane?”
End of an
era?
The oil
price plunge has also demolished the lucrative returns on exploration projects
to which investors have become accustomed. This threatens what Lewis calls the
“golden dividend era” of the last two decades, which has made oil stocks
mainstays of portfolios.
Wood
Mackenzie last week analysed the impact of an oil price of $35 on companies’
previous investment plans for 2020. “It’s a very, very ugly picture,” said
Kretzschmar. “At $35 per barrel, 75% of projects don’t even cover the cost of
capital.”
Most
strikingly, the fat rates of return projected for the oil and gas projects have
slumped from about 20% down to 6%, she said. “They’re very much in line now
with what you can get from solar and wind projects.”
“The oil
and gas sector is already a very much unloved sector by investors and in this
kind of oil price environment, it becomes low return, high risk and high
carbon,” Kretzschmar said. “It is not a very attractive proposition.” With oil
prices predicted by some to collapse even further, Kretzschmar is blunt: “At
$20 [the industry] will be decimated.”
The oil
industry was already under pressure from investors concerned about the climate
crisis and increasing regulation from governments to cut emissions. Colin
Melvin, at Arkadiko Partners, a consultancy advising some of the world’s
biggest investment management and pension funds, said that after the crisis he
expects investment to flow increasingly towards companies perceived to offer
wider social benefits.
“The
purpose of the investment of capital in business is to create wellbeing, to
create wealth in the true sense, and I think that is going to become more and
more relevant to investors,” he said.
Adam
Matthews, director of ethics and engagement at the Church of England pensions
board, said the implications for the oil and gas sector could be significant.
“[Demand reduction] could be the catalyst for rapid change and I think
investors are going to look at long term systemic challenges very closely and
want to see much greater resilience.”
As well as
climate concerns, the wild instability of the oil markets provoked by the
crises may also deter investors, according to analysis from the University of
Oxford’s Institute for Energy Studies: “This is a market that is being tested
to its limits.”
However,
not all experts think the oil industry’s loss is necessarily a gain for green
energy and the climate. “If anything it may hold up the share of oil for
longer, because it’s cheaper. It could be bad news from a climate point of
view,” said Dieter Helm, professor of energy policy at the University of
Oxford.
He said
securing a green economic recovery from the coronavirus crisis will require
deliberate policy measures from governments: “This is where the carbon tax
comes in. Now is the moment.”
‘Historic
opportunity’
Governments
are deploying stupendous sums to stimulate the coronavirus-wracked global
economy - $5 trillion from the G20 nations alone - but how it is disbursed
remains uncertain. European Union leaders have promised to make their emergency
measures align with their Green Deal programme and Fatih Birol, executive
director at the International Energy Agency, has said there is an “historic
opportunity” to pour investment into energy technologies that cut greenhouse
gas emissions.
But the
$2tn US coronavirus relief package is doling out $60bn to struggling airlines
and offering low-interest loans that are available to fossil fuel companies,
without requiring any action to stem the climate emergency. The Canadian
government has said it will give loans to its oil companies, who say they are
on “life support”.
After the
2008 global financial crisis, there were high hopes that the trillions of
dollars delivered at that time would green the economy, but fossil fuels and
their emissions powered on, ever upwards. Bond said: “The big difference to
2008 is that the cost of renewables is now below that of fossil fuels. There is
no point trying to sustain the unsustainable high-cost fossil assets in any
event. It would be deeply ironic for [neoliberal] advocates of Ayn Rand to ask
for a government bailout.”
Adrienne
Buller, an economist at the Common Wealth thinktank, said governments in
countries like the UK, US and Canada should now consider nationalising major
oil corporations.
“Fossil
fuel companies won’t be allowed to fail en masse.
Any bailout
should at a bare minimum come with equivalent public stakes in the companies,
and strong conditions for environmental and climate protections and a
transition away from fossil fuel production.
“However,
given the intent of acquiring this stake should be to wind down production as
rapidly as feasible while ensuring a just transition for workers and security
of energy supply, nationalisation may be more appropriate and pragmatic.”
The global
industry trade body, the International Association of Oil and Gas Producers,
insists its members have a vital role after the pandemic. “Oil and gas play a
significant role in the global energy mix and will do so in the future,” said a
spokesman. “It is too early to predict what the midterm impact will be. But the
oil and gas industry has a history of successfully responding to difficult
situations and we anticipate that it will adapt as it has before.”
“Furthermore,
the industry has been a key engine of prosperity and a driver of innovation for
many decades,” he said. “It has the experience, skills, knowledge and resources
needed to realise a low-emissions energy future - a transition that would be
more difficult and more expensive without it.”
‘Saudi
Arabia is desparate to cash out’
Adding fuel
to the fire of the pandemic is the price war being waged by Saudi Arabia and
Russia, who increased production just as the pandemic slashed demand, sending
prices towards the floor. The moves are seen as an attempt to grab market share
by killing the higher cost producers behind the US shale boom.
Prof
Bernard Haykel, at Princeton University, US, said it also reflects a more
fundamental strategic shift led by Saudi Arabia’s crown prince, Mohammed bin
Salman: “With a global clean-energy transition inevitable, he is desperate to
cash out while the Kingdom still can.”
The lasting
impact of the price war depends on how long Saudi Arabia and Russia can keep
pumping cheap oil. While their production costs are very low, they depend on
high revenues to balance their national budgets.
Michael
Liebreich, at Bloomberg New Energy Finance, said the fiscal break-even for
Saudi Arabia is around $80 per barrel, meaning its foreign exchange reserves
might sustain rock-bottom oil prices for only two or three years. “Russia, with
a $40 a barrel fiscal break-even and much more diversified economy, can survive
low oil prices for a decade,” he said.
Whatever
happens, the industry will never be the same again after the double whammy of
the pandemic and price war. “The companies that emerge from the crisis will not
be the ones that went into it,” said Carbon Tracker’s Bond. “We will see
write-downs, restructuring and radical change.”
Experts,
including Currie at Goldman Sachs, say the climate change debate will almost
certainly take a difference course after the crisis. But exactly what that
looks like remains to be seen. “The question is how long this is all going to
last, and no one really knows,” said Kretzschmar.
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