Just a month ago, companies and investors had a financial incentive to continue investing in new oil and gas projects despite the societal and environmentalist backlash against fossil fuels. Not anymore.
In just a couple of weeks, the oil price crash made investments in renewable energy starting to look more attractive. Or at least as attractive as investment in oil and gas.
The oil price collapse and the expected economic depression as a result of the coronavirus pandemic—as analysts are now warning of depression rather than recession in many major economies—could slow down the uptake of electric vehicles (EVs).
Yet, history suggests that investments in renewable energy, especially wind and solar, are not expected to take a major hit during an oil price collapse, analysts say.
Lower oil prices mean lower returns on fossil fuel projects
What is more, the internal rate of return (IRR) on clean energy investment is now comparable to investments in oil and gas projects at $35 Brent Crude price, Dr Valentina Kretzschmar, Vice President, Corporate Research at Wood Mackenzie, wrote in an opinion piece this week.
Average returns for wind and solar are typically in the 5-10 percent range. Oil and gas project returns, at $60 oil, are 20 percent on average.
Related: World’s Largest Oil Trader Says Demand Could Plummet By 20 Million Bpd At $35 oil, however, the average IRR for oil and gas projects slumps to the renewables return range—5 to 10 percent, according to Wood Mackenzie.
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The low oil prices will severely constrain cash flows for Big Oil, which switched back to survival mode just four years after the previous oil price collapse. At $30 oil, the majors may find it hard to fulfil their commitment to be part of the solution, not the problem, in the energy transition.
Renewables Rise Regardless Of Oil Prices
Unfortunate as this is for Big Oil’s just-announced pledges to curb emissions and invest more in alternative energies, fortunate for the renewables sector is the fact that oil majors are not the biggest investors in the world’s solar and wind market.
According to WoodMac’s Kretzschmar, oil and gas firms combined account for less than 2 percent of the world’s installed wind and solar capacity, and “Even if Big Oil stopped investing in renewables altogether, that would have a minor impact on growth.”
Global capacity installations of wind and solar capacity have not been correlated with the price of oil, and even in the previous price crash of 2015-2016, renewable energy installations continued to grow, WoodMac’s estimates show.
In short, the rise of renewables didn’t slow down even when oil prices collapsed from over $100 a barrel in 2013 to below $40 in 2016.
Price Crash May Force Big Oil To Review Emission-Reduction Spending…
Following this month’s price crash, Big Oil’s immediate thoughts will be to preserve dividend payments with negative cash flows at $30 oil. So they are slashing CAPEX and deferring investments in basically every part of their portfolios.
“All discretionary spend will be under review – that includes additional budget allocated for carbon mitigation,” WoodMac’s Kretzschmar said.
According to Wood Mackenzie’s corporate analysis team, the oil majors Exxon, Chevron, Eni, Shell, BP, Total, and Equinor have an average corporate cash flow break-even price of $53 a barrel for 2020. If Big Oil aims to achieve cash flow neutrality at $35 Brent Crude this year, it would need to slash total spending by 41 percent compared to 2019, according to WoodMac’s analysts.
…But It Opens A Window Of Opportunity For Renewables
Big Oil will have to choose which capital allocation to cull in the shortest term to cope with the extreme oil market volatility. But for the players heavily invested in renewable energy, this heightened volatility and increased uncertainty in oil is an opportunity to boost investments in wind and solar power for small, but stable, returns.
“Oil market volatility is unlikely to have a significant impact on renewable energy plans and investments,” Francesco La Camera, Director-General at the International Renewable Energy Agency (IRENA), said in a statement this month, commenting on the oil price collapse and its impact on renewables.
The low oil prices, and by extension, gasoline prices, could slow the EV adoption, but the “oil price volatility may undermine the viability of unconventional oil and gas resources as well long-term contracts, providing a window of opportunity to reduce or redirect fossil fuel subsidies towards clean energy, while minimizing the potential of social disruption,” La Camera said.
The coronavirus pandemic is disrupting all supply chains right now, including renewable energy targets and deadlines for capacity installation. But the second oil price collapse in just five years is a point for the camp of analysts and experts who argue that lower but more stable returns from renewables is the way to go in the energy transition.
Experts at the Atlantic Council Global Energy Center say that the COVID-19-induced global downturn and potentially low-for-longer oil prices could hamper the energy transition in the short term as governments will be focused on protecting their economies and consumers from the recession/depression.
But the pressure for decarbonization will not go away once all this chaos is over – it could even intensify calls for ditching fossil fuels in an increasingly volatile and politically-charged global oil market. This would be an opportunity for increased investment in renewables.
Ragnheiður Elín Árnadóttir, senior fellow, Global Energy Center, Atlantic Council, commented:
“[A]s history demonstrates, innovation will thrive at this time of crisis, and this time may provide an opportunity to explore the use of renewable energy and take the leap into the next generation of technologies.”
By Tsvetana Paraskova for Oilprice.com
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