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Opinion

COVID aftershocks promise further oil market turmoil

Global energy road map deserves calmer rethink in 2021

| East Asia
A wind turbine under construction in Yichang, China, pictured on May 10: COVID accelerated ongoing trends that may have been better served by gradual evolution.   © VCG/Getty Images

Vandana Hari is founder of Singapore-based Vanda Insights, which tracks energy markets.

The arrival of coronavirus vaccines has made us eager to put the scourge of this year's pandemic in the rearview mirror. Like the rest of commerce, the world's energy sector is looking forward to a more certain business environment.

But as we step into 2021 with optimism, it would be a mistake to regard knee-jerk reactions to an unprecedented shock in energy markets as the new normal and move on. Crises are said to provide the best learning opportunities, but the fight-or-flight response they trigger cannot be a bedrock for long-term strategic decisions.

A raging virus and sweeping lockdowns caused a crash in global oil consumption and prices. A slow recovery, which could drag on for up to two years, has triggered tectonic shifts in the structure and outlook of the oil industry.

A plunge in environmental pollution amid a near-complete halt in economic activity offered a rare yet tangible glimpse of an alternate reality, stoking visions of cleaner, greener societies with vastly different ways of organizing work and play. While COVID was not the fountainhead for radical business decisions in fossil fuels, it certainly accelerated ongoing trends that may have been better served by gradual evolution.

The pandemic heaped severe financial strain on oil and gas companies already with their backs to the wall thanks to declining profitability and rising pressure from environmental groups.

The world's largest listed oil and gas companies collectively wrote off an estimated $90 billion from the value of their assets this year, and despite massive layoffs, capital expenditure cutbacks and a host of other belt-tightening measures, many suffered credit rating downgrades that will make raising debt harder and costlier.

COVID precipitated an identity crisis among global oil majors, who felt a sudden urgency to recast themselves as new energy companies by cobbling together portfolios spanning power generation, renewables, biofuels, hydrogen, battery storage, fuel-and-convenience retail, smart city solutions and nature-based solutions. Still, questions on how these corporate behemoths will generate the funds to invest in so many new projects as they choke off their oil and gas revenues have no easy answers.

Meanwhile, a dramatic drop in oil and gas exploration and development points to acute shortages and price shocks before greener energy alternatives become widely available. A staggering divergence between perceptions of the world's energy future does not help, either. While BP said in September that the world may have passed peak oil demand, the International Energy Agency and OPEC suggest that demand will keep rising until 2040.

Even BP's scenarios range from a jaw-dropping 70% fall in global oil consumption by 2050 on the most climate-friendly path to a mere 7% decline if the world maintains a business-as-usual course. The unpredictability of moving to a low-emissions economy is the greatest over middle-income and poorer countries where future energy consumption will be strongest.

Renewable power is growing fast but from a very small base. Global air, land and sea transport still relies on oil and gas. A switch to electric cars may remove tailpipe emissions, but shift pollution to plants burning coal to produce the electricity. Biofuels have occupied a niche by displacing some oil use in recent years but have reached commercial, technological and resource limits in making a bigger leap.

Hydrogen became the next big thing this year but it is not always a zero-emission fuel. If using coal or natural gas as feedstock, hydrogen projects may only be hiding emissions from plain sight. COVID drove a bigger wedge between energy pragmatism and environmental idealism. More companies and countries hopped on to the net-zero bandwagon, but have been silent on how they will go about it.

A worker pulls the nozzle closer to a fuel cell vehicle at a hydrogen station in Tokyo: hydrogen is not always a zero-emission fuel. (Photo by Shinya Sawai)

This year's oil supply glut pushed geopolitical tensions in the Gulf to the sidelines, but Saudi-Iran tensions continued to fester, particularly in Yemen where Iran-backed Houthi rebels kept up their strikes against Saudi facilities. Meanwhile, the decade-old production boom in the U.S. shale sector, which was helping Asian importers diversify their oil and gas supply sources, has come to a screeching halt.

There is some hope that President-elect Joe Biden will end the Trump administration's punitive sanctions against Iranian and Venezuelan oil, which locked at least 3% of the world's supply out of the market, but any changes there promise to be long-winded and cumbersome.

As the world embarks on a path to normalcy in 2021, the return of energy consumption to pre-COVID levels is a given. So is the dependency on oil and gas to satisfy the bulk of those needs at prices that help rather than hinder economic rehabilitation. Some COVID-induced changes may become permanent, such as more work-from-home arrangements and less international travel, impacting energy demand for years to come. But to what extent and with what certainty, we cannot yet say.

The desire to regain economic momentum with less damage to the environment may continue to burn strongly, long after the virus has faded from the scene. But long-range climate targets need to be realistic and not incompatible with energy supply security.

It behooves all stakeholders in the oil and gas industry to calmly reexamine assumptions and decisions made under this year's stressful conditions. We do not want to lurch from a virus catastrophe that was beyond our control to an energy crisis of our own making.

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