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The Oil & Gas Sector Could Already Be In Terminal Decline

The fossil fuel industry has faced serious headwinds for several years, but the rise of renewables combined with the fall in consumption as a consequence of the global corona crisis is pushing it over the edge and into “terminal decline”. Although global coal consumption continues to grow slowly, its use has peaked in developed regions. According to the 2019 BP Statistical Review of World Energy, U.S. coal consumption fell by more than 40% in the past decade, while in the EU it has seen a nearly 27% drop.

The primary culprits behind coal’s decline are competition from cheap natural gas brought on by the shale gas boom in the U.S., as well as a surge of renewable capacity aided by legislation aimed at curbing carbon dioxide emissions.

Victims of Their Own Success

But the natural gas and subsequent oil boom were victims of their own success. Even though demand growth for both of these commodities has been robust over the past decade, prices have plunged. So while it’s unsurprising that the coal industry has suffered immense financial stress over the past decade, the same is true of the oil and gas industry. Despite strong demand growth for its products, the prices of oil and natural gas have fallen by more than 50% in recent years. 

The fossil fuel industry has faced an oversupply problem, as well as a public relations problem. Even before the COVID-19 pandemic, the industry was already seen by many as one on its way out, and therefore it struggled to attract investors. Nevertheless, it seemed likely that the industry would enjoy at least another decade of dominance before renewables and electric vehicles combined to put the industry into permanent decline.

COVID-19 Rapidly Changed the Outlook

But COVID-19 has caused a significant change in the industry outlook. In the early stages of the pandemic, China’s economy slowed as the country grappled to contain the virus. This slowdown had a negative impact on fossil fuel demand. As oil demand began to soften, OPEC tried to work with Russia to reduce production. Talks failed, a subsequent price war broke out between Saudi Arabia and Russia, and oil prices collapsed.   Related: India Looks To Double Oil Refining Capacity By 2030

As COVID-19 spread to other countries and quarantines were implemented, oil prices ultimately fell into negative territory, which had never happened before with a major benchmark. Power demand fell as businesses closed and people stopped travelling or commuting. This created a perfect storm that obliterated fossil fuel demand in April. Global oil demand fell by as much as 30 million BPD, followed by gas and coal demand. Even demand for liquefied natural gas (LNG), which has seen strong growth in recent years, plummeted, and cargos destined for Asia had to be rerouted to Europe, adding to a supply glut there. 

Meanwhile, renewables may see a small negative impact from the pandemic in the short term – but the move toward green energy may gain momentum as the COVID-19 threat fades. Underlying demand for clean energy is rising.  Further, the investment climate for fossil fuels will continue to worsen over time, so the industry may find itself struggling to attract new capital even after the crisis.

A Place for Nuclear Power

However, existing infrastructure of fossil fuels will create some headwinds for renewables, as well as nuclear power, the world’s largest source of low-carbon energy. The industry will hardly give up its primacy without a fight.

What this looks like can be observed in Lithuania, which had placed its chips on a new LNG terminal in 2014 to reduce the country’s dependence on Russian gas. However, the Klaip?da terminal was never profitable, and to this day operates at only a fraction of its capacity while incurring costly maintenance fees shouldered by gas consumers. To curb its losses, Klaip?da now receives LNG cargoes from Russia too.

Part of the problem is that the LNG market price was already depressed before the COVID crisis. In 2015, when the terminal went online, the price was lower than the price Lithuania paid to Statoil, which forced the state to levy high terminal fees to cover for the losses from selling gas. Now, with the pandemic having further collapsed fossil fuel prices, the fees are going up accordingly, with no contribution to energy security. Related: Oil Markets May Not Fully Recover Until 2022

The decision to bank on LNG under these circumstances is seen as one of the factors leading Lithuania to campaign against a nuclear power plant in Astravets in neighbouring Belarus. Besides constantly questioning the plant’s safety – contrary to international assessments – Lithuania has passed laws prohibiting the purchase of energy from Belarus after the power plant begins operations later this and next year. Furthermore, Lithuania is aggressively lobbying Brussels and other capitals in the region for a full boycott of electricity imports from Belarus. If implemented, this could lead to millions of additional CO2 emissions in the region.

The New Energy Order?

The fact remains that the world could find itself with an energy shortfall if the crisis is long-lasting and fossil fuels disappear faster than originally expected. That could hit the power sector because of falling coal and natural gas production, at a time that global demand for electric vehicles is growing. 

Nuclear power can be part  of a low-carbon sustainable future along with renewable energy. Indeed, the International Energy Agency estimates that in order to meet the world’s sustainability targets the current rate of nuclear capacity additions, which is about 10-12 gigawatts of electricity (GWe) per annum, must be at least be doubled. With the current crisis impacting the fossil fuel sector, capital budgets are being slashed. That implies a decline in output, which could be larger than the capacity of variable renewables to absorb. The current glut of energy supply may turn into a series of severe intermittent shortages when sun doesn’t shine, and wind doesn’t blow.

Although it would be premature to suggest that the current pandemic marks the end of fossil fuels, it might not be a stretch to call this the beginning of the end. It’s important to focus on the overall system performance and ensure that the transition to a low carbon future is sustainable itself.

By Robert Rapier for Oilprice.com

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  • Mamdouh Salameh on June 17 2020 said:
    You are free to delude yourself but don’t try to delude your readers with so many inaccuracies.

    If anything, the COVID-19 pandemic with its destructive power of both the global economy and the global oil market has proven irrevocably how inseparable oil and the global economy are by demonstrating that destroying one automatically destroys the other and vice versa. The global economy runs on oil and gas and will continue to do so throughout the 21st century and probably far beyond.

    The first inaccuracy is your assertion that the rise of renewables combined with the fall in consumption as a consequence of the pandemic is pushing the fossil industry into terminal decline. Nothing is further from the truth. Despite an expenditure of $3 trillion on renewables in the last decade, what they are showing for it is a loss of 1% market share for coal. Coal is headed towards its demise because of its high level of pollution, the availability of better and cleaner alternatives for electricity generation and abundance of natural gas in addition to a contribution from renewables. This isn’t the case for oil and gas. Oil will continue to dominate the global transport system and the petrochemical industry throughout the 21st century and far beyond whilst gas will continue to be the pivot for global energy transition well into the future. So don’t delude yourself about peak oil demand and the illusion of an imminent global energy transition.

    There was no ambiguity whatsoever when the CEOs of ExxonMobil and Shell the world’s two biggest supermajors recently made their positions on peak oil demand very clear. Darren Woods the chief executive of ExxonMobil declared that “the long-term fundamentals that drive our business have not changed." This was echoed by Shell’s CEO Ben Van Beurden who said that it is entirely legitimate to invest in oil and gas because the world demands it". "We have no choice." There you have it.

    The second inaccuracy is your claim that the oil and gas industry will suffer the same financial stress that coal has suffered. As I pointed out, coal was already in decline on environmental and economic grounds. On the other hand, oil and natural gas will emerge from the pandemic leaner and stronger and will allocate their resources on the core business which sustains them, namely oil and gas.

    The third inaccuracy is that the fossil fuel industry has faced a public relations problem and has struggled to attract investors. The global oil industry has never failed in its entire history to attract investors. That is why the oil supermajors are always in the top ten of the most profitable companies in the world. As for the public relations problem, this is promoted by militant environmental activists and oil and gas asset divestment campaigners. Their militancy has forced recently shareholders of French oil giant Total to reject overwhelmingly a proposal asking the company to do more for the environment. So the rebellion against militant environmental activists is starting. Renewables have to compete for a bigger market share in the energy mix along oil and gas in a diversified market.

    The fourth inaccuracy is that there could be a new energy order. Nothing is further from the truth. The current order led by oil and gas will continue to preside over the global energy mix well into the future.

    However, the COVID-19 Pandemic may have sharpened the race for a new world order. The bashing of China in the United States continues unabated amid accusations that China should be made accountable for intentionally misleading the world about the spread of the pandemic and allegedly impeding US efforts to prevent it spreading into the United States. There were even calls for the US Congress to legislate to strip China of its sovereign immunity and allow people who have been unemployed and the businesses that have been devastated to sue China for damages. However, China will ignore such baseless allegations and will retaliate against any action taken to hold it responsible for the pandemic.

    And whilst the coronavirus outbreak might have shown an aspect of rivalry between the United States and China, their rivalry goes far beyond the pandemic. It is about the next world order and who will emerge as the dominant power in the 21st century. It is also about the petro-yuan supplanting the petrodollar as the oil currency of the world.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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