A Joe Biden administration is bound to usher in a 180-degree pivot on climate change from the outgoing presidency. But with control of the Senate hanging in the balance with the battle set to go down to the wire in Georgia, Biden’s plan to squeeze $2 trillion from the federal purse to pursue his ambitious Climate Plan could end up severely hamstrung. But with the global shift to renewable energy in full swing, the American political landscape might not matter that much in the long run.
Indeed, Goldman Sachs has predicted that global capital spending on renewable energy will surpass fossil fuel Capex for the first time ever in 2021.
According to the investment banker, renewable power will reach 25% of the total energy supply capex in 2021, beating out hydrocarbons for the first time ever. According to Goldman’s Carbonomics Report, renewables will reach 25% of the total energy supply capex in 2021, beating out upstream oil and gas investments for the first time in history.
The report says that cleantech has the potential to drive $1-2 trillion per annum in green infrastructure investments and could hit $16 trillion by 2030. This could create 15-20 million jobs worldwide (green infrastructure is 1.5-3.0x more capital- and job-intensive than traditional energy).
Source: Goldman Sachs
Falling cost of capital
Goldman Sachs says a big factor that will help clean energy achieve the remarkable feat is a major bifurcation in cost trends, with renewables recording a big fall in the cost of capital vs. rising costs for fossil fuel investments. According to GS, the weighted average cost of capital (WACC), aka the hurdle rate for renewables, currently clocks in at 3-5% compared to 10-20% for oil and gas investments. Related: Oil Prices Under Pressure As Oil And Gasoline Inventories Build
According to the International Renewable Energy Agency (IRENA) Renewable energy costs declined rapidly over the past decade, with solar photovoltaics (PV) falling 82% while onshore wind generation costs declined 39%. These trends are expected to continue in the coming years.
The situation could not be more different for the fossil fuel sector.
The global oil and gas sector has recorded the biggest Capex cuts in history: Oil and gas companies focused on the North American market have cut capital expenditure by 49% in 2020; Independent Oil Companies (IOCs) by 29% while National Oil Companies have lowered Capex by 24%. Related: Why Iraq Isn’t Producing 10 Million Barrels Per Day Yet
The North American market has been particularly hard hit, with the sector expected to record a staggering $530 billion reduction in capex over the next 5 years. 2020 upstream oil & gas spending is tracking to fall 60% from its 2014 peak.
Source:The Duff & Phelps Capex Cut Tracker
A lot of the ongoing risks in the oil and gas sector are closely related with the growing danger of stranded assets and massive asset writeoffs.
The unprecedented destruction in energy demand has triggered a wave of asset devaluations, with Royal Dutch Shell (NYSE:RDS.A) announcing that it will writedown $22B of its assets while ExxonMobil (NYSEXOM) has warned it might write off $30B.
Those figures could get a lot bigger as the quarters roll on, with nearly a third of their assets worth nearly a trillion dollars doomed to be declared worthless. Indeed, the average oil reserve life has already fallen by 20 years due to stranded assets.
A slew of potential Covid-19 vaccines have improved the oil and gas outlook somewhat by offering hope for a recovery in 2021. However, a lot will still depend on how committed OPEC+ will remain to its production cuts. The coalition held a ministerial committee meeting on Tuesday but failed to reach a formal agreement on quotas even as Saudi Arabia urged members to consider delaying a boost to output by two million barrels per day come January. With the majority of oil producers struggling to balance their budgets amid historically low oil prices, it’s going to become increasingly hard to convince everyone to keep toeing the line.
By Alex Kimani for Oilprice.com
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Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. More