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?
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?”
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.”