As oil prices and fuel demand fall at an unprecedented rate, the unfolding commodity crisis will test the commitment of both industry and government to renewable energy agendas
As oil firms tighten their purse strings amid the deepening price crisis, questions are being asked about how spending cuts might affect renewable energy investment and low-carbon agendas. Will these businesses double down on their core operations, or instead see an opportunity to accelerate their diversification strategies? And what role will government stimulus measures play in shaping the industry’s response? NS Energy takes a closer look.
The steep decline in oil prices over the past few weeks – Brent crude lost more than half its value in March – has sent shockwaves through global commodity markets, shaking investor confidence in Big Oil and forcing these energy giants to leverage all the cost-saving mechanisms at their disposal to protect their balance sheets.
Oil majors have in recent days announced deep cuts to their capital spending plans as they seek to insulate themselves from the worst effects of the turmoil, which has seen billions of dollars wiped from share prices – in many cases their market value has halved since January – as investors jump ship amid growing pessimism about the industry’s near-term prospects.
And while this will inevitably mean a reduction in new oil exploration activity or tightening of recruitment budgets, the spending cuts also present an acid test for the commitment of these companies, and the governments which regulate them, to clean energy plans.
The executive director of the International Energy Agency (IEA), Dr Fatih Birol, recently touched on this idea, warning that “the combination of the coronavirus and volatile market conditions will distract the attention of policymakers, business leaders and investors away from clean energy transitions”.
“Observers will quickly notice if their emphasis on clean energy transitions fades when market conditions become more challenging,” he adds.
Oil majors were committing to renewable energy investment plans before the oil crisis escalated
The low-carbon energy transition was gathering pace before the onset of the coronavirus pandemic that triggered the unfolding market crisis, with public, investor and regulatory pressure building for oil and gas firms to diversify their portfolios with a greater emphasis on renewable energy projects.
And many were in the process of doing so.
BP had become the latest to announce a set of decarbonisation targets, joining the likes of Repsol, Equinor and Royal Dutch Shell in aligning their agendas with the goals of the Paris Agreement.
But with capital spending cuts now becoming the de facto response of these energy majors to weakening demand, falling prices and a Russia-Saudi stand-off promising a production binge in the coming months, their commitment to the clean energy transition will come under scrutiny.
Will they double down on their core business and focus on what they have traditionally done best, or could the severity of this latest oil crisis be enough to galvanise their efforts to diversify?
For IEEFA financial analyst Kathy Hipple, the current economic crisis will lead to an inevitable downturn in capital-intensive investments across all markets, including renewable energy – but that does not necessarily mean the clean energy plans of oil firms will be abandoned.
She says: “Low oil prices by themselves are unlikely to slow investments in renewables. In a volatile market they send a message to consumers – nations, enterprises, and individuals – that energy can, and should, be inexpensive.
“This will boost the market share for lower-priced and more stable alternatives – such as wind, solar, and storage – if oil prices rebound, which is far from certain.
“But even if oil prices do not rebound, the volatility of oil and gas prices make the stability of renewable energy attractive.
“And the consistent royalties, whether they are tax revenues or in the form of pilot programmes, from renewable energy will be appealing to local governments that will be strained in any economic downturn.”
IEA urges policymakers to integrate energy transition into crisis response
Dr Birol is more cautious about the potential impact of cheap fossil fuels flooding global inventories, warning a deluge could “reduce the impetus for energy efficiency policies”.
He says: “Without measures by governments, cheaper energy always leads consumers to use it less efficiently. It reduces the appeal of buying more efficient cars or retrofitting homes and offices to save energy.
“This would be very bad news, since improvements in energy efficiency, a vital element for reaching international climate goals, have already been weakening in recent years.”
With this in mind, he urges policymakers around the world to “keep clean energy transitions front of mind as they respond to this fast-evolving crisis”.
“Rather than compounding the tragedy by allowing it to hinder clean energy transitions, we need to seize the opportunity to help accelerate them,” he adds.
Government measures will be crucial in shaping industry response
The IEA estimates more than 70% of energy investments are driven by governments, either directly or indirectly.
So as these policymakers draw up various economic stimulus plans in response to the unfolding health and financial crises, they have an “historic opportunity” to incentivise the oil industry to continue its plans for renewables.
Helen Mountford, vice president of climate and economics at the World Resources Institute, says: “During previous economic crises, a number of countries turned quickly to stimulus packages that included investments in ‘shovel-ready’ infrastructure projects.
“In many cases, this included building more coal or other fossil fuel power plants, upgrading roads, investing in heavy industries such as automobile manufacturing and more.
“Following that old playbook to respond to the pandemic would be a terrible mistake.
“As countries look to give their economies a much-needed jolt in the wake of the Covid-19 outbreak, governments and companies considering stimulus packages essentially have two choices: They can lock in decades of polluting, inefficient, high-carbon and unsustainable development, or they can use this as an opportunity to accelerate the inevitable shift to low-carbon and increasingly affordable energy and transport systems that will bring long-term economic benefits.
“Sustainable, low-carbon infrastructure must be central to any government-led stimulus in response to the Covid-19 outbreak. Governments have a critical role to play in setting out robust, well-articulated and sustainable investment strategies.”
From a financial standpoint, IEEFA’s Hipple cautions against rolling out economic bailouts for an oil and gas industry that has been “mature and declining for more than a decade”.
She adds: “The ongoing troubles for the oil and gas industry pre-dated the virus, the economic downturn, and the oil price war.
“Cash flows among [US] shale producers have been negative for each and every year since 2010. The number of bankruptcies in that sector doubled in 2019, compared to 2018. And that was with much higher oil prices than we’re likely to see in 2020.
“Given this horrible economic performance for a decade, offering economic stimulus to this failing sector would be throwing good money after bad.”