The insurance industry is aware of the risks that climate change represents to its business in form of floods, storms and wildfires and is reducing its exposure to fossil fuels both in underwriting as well as investments. The pressure on oil and gas companies to transition to a more sustainable and climate friendly energy sector has increased substantially in recent years.The Covid-19 pandemic might provide the final push.
The Paris Agreement sets out a global framework to avoid dangerous climate change by limiting global warming to well below 2°C and pursuing efforts to limit it to 1.5°C through a set of actions that reduces global greenhouse gas emissions. Energy is the main manmade driver of greenhouse gas emissions.
The COVID-19 impact on oil & gas
US oil prices plunged into negative territory in April 2020 for the first time in history as the COVID-19 lockdown abruptly hit demand for oil and storage capacity became scarce.
Because of global lockdown measures due to the COVID-19 crisis, mobility, which represents 57% of global oil demand, declined at an unprecedented scale in early 2020. Road transport in regions with lockdowns in place dropped between 50% and 75%, with global average road transport activity almost falling to 50% of the 2019 level by the end of March, according to International Energy Agency (IEA) data (opens a new window).
While the oil price has recovered since, this event has sent ripples across the oil and gas sector that are likely to have lasting effects and speed up the transformation of the industry.
California Resources Corp (CRC), the state’s biggest oil and gas producer, has filed for bankruptcy (opens a new window) due to the crash in crude prices triggered by the coronavirus pandemic. Other casualties include shale-fracking pioneer Chesapeake Energy, Whiting Petroleum and Extraction Oil and Gas, along with a range of smaller producers.
Following the coronavirus outbreak, UK-based oil giant BP has revised downwards (opens a new window) its long-term price assumptions for oil and gas. The company now “sees the prospect of the pandemic having an enduring impact on the global economy, with the potential for weaker demand for energy for a sustained period,” according to a June 15 press release.
The plans of oil & gas firms
Already in February BP had set out a plan to become a net zero carbon emission company by 2050 or sooner. The goal has been developed prior to the coronavirus outbreak and in accordance with the Paris Agreement that introduces binding rules to reduce greenhouse-gas-emissions. Over time, BP aims to increase the proportion of investment it makes into non-oil and gas businesses.
Shell’s plans may be less ambitious but follow a similar path. The British-Dutch company aims to reduce (opens a new window) the net carbon footprint of the energy products it sells by around 50% by 2050, and 20% by 2035 compared to its 2016 levels. The company wants to achieve these goals by transforming its product mix, reducing the products that come with higher levels of greenhouse gas emissions such as oil or coal, and expanding products with lower-or-no emissions such as electricity produced using wind turbines or solar panels, low-carbon biofuels and hydrogen.
Carbon emissions should also fall in the production, manufacturing and distribution of the sold energy products. Measures include improving the efficiency of its own operations and maturing investments in renewable power generation, and developing carbon sinks.
But the oil giants may have to adapt even faster. BP's management has already expressed the expectation that the aftermath of the pandemic will accelerate the pace of transition to a lower carbon economy and energy system, as countries seek to 'build back better' so that their economies will be more resilient in the future.
During the pandemic, many businesses have discovered that their staff can work from home and are likely to relax their working from home policy going forward. Such changes are set to keep fuel demand low beyond the pandemic.
Further, many governments are seeing the COVID-19 disruption as an opportunity to reshape the economy by spurring development towards a greener and more sustainable path.
The European Commission (EC), for example, has put forward a proposal (opens a new window) for a sustainable post-Covid-19 recovery plan. It includes a proposal to strengthen the Just Transition Fund up to €40 billion to assist member states in accelerating the transition towards climate neutrality.
Also, a new Recovery and Resilience Facility of €560 billion is set to offer financial support for investments and reforms, including in relation to the green and digital transitions and the resilience of national economies.
A new Strategic Investment Facility is built into "InvestEU" to generate investments of up to €150 billion to boost the resilience of strategic sectors, notably those linked to the green and digital transition.
Further, a €15 billion reinforcement for the European Agricultural Fund for Rural Development is set to support rural areas in making the structural changes necessary in line with the European Green Deal and achieving the targets in line with the new biodiversity and "Farm to Fork" strategies.
The oil and gas sector has an opportunity to be part of the solution, which is likely to involve electricity as it provides long-term growth opportunities, according to the IEA (opens a new window).
But in order to bring down emissions from core oil and gas operations, it is vital for companies to step up investment in low-carbon hydrogen, biomethane and advanced biofuels, the IEA has noted (opens a new window).
The COVID-19 effect on renewable energy
The social rules and lockdown measures implemented to limit the spread of COVID-19 have also impacted the renewable energy sector by triggering supply chain disruption and delays in project construction. This has had a direct impact (opens a new window) on the commissioning of renewable electricity projects, biofuel facilities and renewable heat investments.
However, with the fall in energy demand during the pandemic, renewable sources (mainly wind and solar) saw their share in electricity substantially increase at record levels in many countries, according to data compiled by Nelson Mojarro (opens a new window), Advisory Board Member of Partnering for Sustainable Energy Innovation at the World Economic Forum. In less than 10 weeks, the US increased its renewable energy consumption by nearly 40% and India by 45%. Italy, Germany, and Spain set new records for variable renewable energy integration to the grid.
Drivers for the ongoing increase in renewable energy into the grid result from a mixture of past policies, regulations, incentives and innovations embedded in the power sectors of many forward-thinking countries, Mojarro notes.
Renewables have been supported by favourable policies. In many countries, renewables receive priority through market regulation. The priority for the first batch of energy to the network is given to the less expensive source, favouring cheaper and cleaner sources.
Renewable energy has become a relatively cheap source of energy through continuous innovation. International Renewable Energy Agency (IRENA) recently reported that the cost of solar had fallen by 82% over the last 10 years, while BNEF states that renewable energy is now the cheapest energy source in two-thirds of the world.
Renewable energy has become investors' preferred choice for new power plants. For nearly two decades, renewable energy capacity has grown steadily, and currently 72% of all new power capacity is a renewable plant.
A recent report by the IRENA shows that in 2020, for the first time ever, global investment in renewables is outstripping investment in oil and gas.
Despite the US’ withdrawal from the Paris Climate Accord, the agreement remains in place with its goal of curbing climate-warming emissions enough to keep the rise in temperatures “well below” 2°C, requiring governments to continue supporting clean energy projects.