COVID-19: A pivot point for the energy transition

The COVID-19 pandemic has been an eventful time during which many steps were taken by governments, political organisations, the EU, and oil companies to plan a faster, more efficient, and more impactful energy transition. Here we look at a sequence of events working in favour of the transition to greener energy during the coronavirus pandemic.

The pandemic of the coronavirus, more precisely COVID-19, has been “the talk of the town” since the end of last year. A rapid spread across all continents and all that it has affected has been the headline of almost every media outlet in the world.

The main story behind COVID-19, if we exclude the number of infected people and lives lost during the pandemic, is certainly its effect on the global economy.

Each country has attempted to deal with both the pandemic and the heavyweight boxer-type blow to its economy in its own specific way. From a near-complete shutdown of both people and companies like in some western European countries to the rather relaxed approach popular in Scandinavia.

Larger economies were able to implement a number of measures to alleviate the pressure on businesses hit by coronavirus lockdowns and other measures. Smaller and more troubled ones were not able to do so due to a variety of reasons, a list of which is too long to get into. Those economies are still shaky, a full 7 months after the start of the pandemic and no one knows when they will begin bouncing back.

But one could say that, with the hope of not cheapening the devastating effect of the pandemic, every cloud has a silver lining – even in this tumultuous time.

For one, we learned that the global system we have developed and the way of life we treasure is so, so fragile. An event such as the pandemic poked holes in different types of systems we thought were bedrock solid.

The other is that many used it to create a starting point for major energy transition goals and a move away from oil and gas, on paper at least.

From the start of the pandemic until now many things happened supporting either net-zero, reducing emissions, use of alternative energy sources or fuels, or the energy transition from oil and gas to greener energy.

So much so, that it is even difficult to find an obvious starting point but it is maybe smart to first look at some statements and decisions made by politicians, governments, and other organizations regarding these issues.

A good starting point for the COVID-19 vs polluting industries discussion would be a small look back at the Petersberg Climate Dialogue which was held at the end of March.

In video call meeting, due to the pandemic-related restrictions, important political figures like UN Secretary-General António Guterres and German Chancellor Angela Merkel made their positions known as they affirmed their opinions that climate change and green energy were the way to go.

At the Dialogue, Guterres said: “Where taxpayers’ money is used to rescue businesses [due to the coronavirus impact], it must be creating green jobs and sustainable and inclusive growth. It must not be bailing out outdated, polluting, carbon-intensive industries.

“Fossil fuel subsidies must end, and carbon must have a price so polluters will pay for their pollution”.

Guterres also called for developing countries to receive $100 billion a year, a longstanding goal under the global climate negotiations, to help them curb emissions and cope with the impacts of climate breakdown.

“We cannot allow the heavy and rising debt burden of developing countries to serve as a barrier to their ambition [on the climate]”, he added.

Even though Germany bailed out its fossil fuel industry like no other EU member state during the coronavirus pandemic – and did not present its national climate plan by the 31 December 2019 deadline, Angela Merkel supported Guterres’ claims.

“The coronavirus shows us that international cooperation is crucial and that the wellbeing of one nation always depends on the wellbeing of others.

“There will be a difficult debate about the allocation of funds. But recovery programmes must always keep an eye on the climate. We must not sideline climate but invest in climate technologies”, Merkel said.

At the Dialogue, she confirmed German support within the EU for a target of cutting emissions by 50-55 per cent by 2030 compared with 1990 levels.

European Commission President Ursula von der Leyen was also one of the more prominent political personas who pushed for the European Green Deal to be at the centre of the EU’s recovery plan.

“As we now plan to slowly go back to work and to invest billions of euros to restart our economy, we should avoid falling back in old, polluting habits. Instead, we should bounce back better from this pandemic”, von der Leyen said.

Van der Leyen was one of the people who presented the Commission’s proposals for a “recovery fund” in late May to restart the European economy after the pandemic.

Namely, the proposal consists of a Next Generation EU fund of €750 billion as well as targeted reinforcements to the long-term EU budget for 2021-2027 will bring the total financial firepower of the EU budget to €1.85 trillion.

But it does come with green strings attached. Next Generation EU will be focused on things such as renewable energy projects – especially wind, solar, and kick-starting a clean hydrogen economy in Europe.

Also, it will support cleaner transport and logistics, including the installation of one million charging points for electric vehicles and a boost for rail travel and clean mobility in cities as well as strengthening the Just Transition Fund to support re-skilling and helping businesses create new economic opportunities.

After the UK’s foreign secretary Dominic Raab did not speak of any environmental measures to be made by his country during the Petersburg Dialogue, the UK did eventually get on with revealing its plans for the future.

The Scottish government set up a $78 million fund to help the energy sector recover from the economic impacts of COVID-19 and the oil and gas price crash with net-zero opportunity in mind.

The Energy Transition Fund will support businesses in the oil, gas, and energy sectors over the next five years to rebound but also to help Scotland meet its ambitious targets on climate change.

Scotland’s Economy Secretary Fiona Hyslop said: “Now is an opportune time to re-imagine Scotland around us and to begin building a greener, fairer, and more equal society and economy focused on wellbeing”.

Only days later, industry trade association Oil & Gas UK (OGUK) revealed plans for halving emissions from production and exploration by 2030, with the country’s basin becoming net-zero by the year 2050.

Noteworthy – the oil and gas sector is one of the first in the UK to commit to industry-wide targets and provide details on how they will be achieved. The UK’s Oil and Gas Authority (OGA) welcomed the industry’s commitment to decrease emissions and ultimately become net-zero. OGA stated at the time it would be the one to “track and monitor performance and progress”.

Since the start of the COVID-19 crisis, the industry has been on quite a ride with a lot of things going on. Energy transition-related and not.

In a quite amazing occurrence, US oil hit negative prices for the first time in history with West Texas Intermediate crude oil sliding to a negative $37.63 per barrel on April 20.

The negative WTI price, along with a general worldwide oil price slump was caused with a mixture of reasons – most prominent of which was the COVID-19 pandemic and the Saudi Arabia-Russia oil price war which ended in a historic OPEC+ deal in mid-April.

The OPEC+ output cuts, and the subsequent extension, somewhat repaired oil prices but it left a rather big scar on the industry.

Most oil and gas players slashed capital expenditures, postponed projects, developments, and drilling operations which often caused job cuts in the thousands.

On top of this, in interviews for different media outlets BP and Shell bosses openly stated that it was unclear if oil demand would ever return to pre-COVID levels.

BP chief executive Bernard Looney said in an interview for the Financial Times: “It’s gotten more likely to have oil be less in demand. […] I think people are more aware of the fragility, the frailty of the ecosystem that we’re living in — that things can change overnight.

“People are looking up at the skies and seeing clean skies and things are quieter on their roads — people will emerge from this potentially more conscious of the quality of air and the environment”.

As for Shell CEO Ben van Beurden, he told Bloomberg in an interview that oil demand may never recover fully.

While all this negative impact on the industry was happening, oil firms like BP, Shell, Total, Neptune, and Equinor announced net-zero strategies with three of them announcing the $685 million large-scale carbon capture and storage (CCS) project known as Northern Lights.

BP also decided to reduce its global workforce by 10,000 this year as part of its plans to make the organization smaller and fit for the energy transition. As stated by the company, these plans were accelerated due to the coronavirus crisis.

The British firm also sold its global petrochemicals business to INEOS. It was the next strategic step in BP’s energy transition.

Also, gas distribution companies in the UK, Germany, and the Netherlands announced plans for zero-carbon gas grids.

But that is not all. Total joined a project to explore the potential of powering offshore oil and gas platforms with floating wind and wave energy.

Namely, the O/G Decarb innovation project will examine the possibility of using a combined wind and wave technology on a floating foundation to store energy that can convert electricity into hydrogen via electrolysis and power offshore platforms.

Sticking with hydrogen, in a DNV GL report from May, it was revealed that the gas surged up the priority list of many oil and gas organizations, taking a primary position in the sector’s decarbonisation efforts. According to the report, a fifth of senior oil and gas industry professionals claimed their organization was already actively entering the hydrogen market.

Another oil company, Aker BP, announced in mid-June that it was exploring the opportunity of using offshore wind energy at the Krafla, Fulla, and North of Alvheim (NOAKA) oil and gas developments offshore Norway.

An offshore driller also joined the fun as Maersk Drilling teamed up with an Ineos-Wintershall Dea consortium to mature one of the most progressed carbon capture and storage projects under Danish jurisdiction.

It targets the development of CO2 storage capacity offshore Denmark based on reusing discontinued offshore oil and gas fields for permanent CO2 storage.

From everything listed above, one could deduce that oil and gas companies are ready and that everything is ready for a smooth energy transition. But is it?

Every coin has two sides. So, as it may appear from the abovementioned – oil majors are doing the energy transition well.

But now we flip the coin and look at the major downsides which hit the industry. It was briefly mentioned before and they come in several forms. Job cuts, capital expenditure decrease, project delays, and many more.

But one of the probably most important downsides to mention is capex since it generates more work around the entire supply chain.

All of the companies we mentioned before have slashed their capex considerably and every other company you can think of did too – Cairn Energy, Petrobras, TechnipFMC, CNOOC, Wood, Premier Oil, ConocoPhillips, Chevron, just to name a few – and the list goes on and on.

Rystad Energy said in its article that capex for exploration and production firms is expected to drop by up to $100 billion this year, about 17 per cent versus 2019 levels. The energy intelligence firm stated that the 2020’s capex volumes will drop to an estimated $450 billion, the lowest in 13 years.

But another report by Rystad noted something quite telling for the energy transition and indicators of it.

Namely, capex of offshore wind is expected to surpass upstream oil and gas spending in Europe in 2022. The oil market collapse caused by the COVID-19 pandemic is set to delay several oil and gas developments in Europe, putting capital expenditure in the offshore sector on a continued downwards trajectory through 2022.

In light of the postponement of FIDs on projects and lower investments in offshore oil and gas, coupled with increasing activity in the offshore wind sector will lead to industry parity as soon as next year. European offshore wind capex is expected to hit more than $22 billion in 2022.

As we have seen, COVID-19 has initiated a large series of events which support energy transition.

Although, it must be said that this is not a “coordinated attack” on the oil and gas industry – or any other polluting industry for that matter – but rather a time when everything converged properly to start making greener choices.

Oil and gas is here to stay for decades more but what the COVID-19 pandemic showed was that the industry ecosystem is fragile and that people were quickly getting used to the idea of clean air and less pollution.

This means that green is inevitable for major oil and gas firms. They are becoming more involved in such projects like reducing carbon emissions by powering platforms from shore but going further is needed.

One thing also worth mentioning is Greta Thunberg’s speech at the Davos World Economic Forum in January. Maybe a small snowball started rolling and COVID-19 pushed it into an unstoppable global movement. But maybe it is all a coincidence.

Either way, one thing is certain: greener energy industries are inevitable. It is just a question of how fast will everyone catch on and how long will some resist (like China or the US).

For the sake of Mother Earth, let’s hope we all hop on the bandwagon as fast as possible.