The oil and gas industries have been a point of contention in the public eye a long time. With the climate crisis looming, players the arena of the energy sector have come under significant pressure to reform the fossil fuel industry into an entity that aligns with wider sustainability targets. As the economic reality of the climate situation starts to bite, pervasive investor scepticism and growing competition from renewables has many traditional oil and gas companies beginning to strategise around climate risk and concerns of stranded assets. With increasing competition from renewable energy sources, the sector is well on its way to diversification. Consequently, oil and gas companies hold a considerably weaker position in the market than half a century ago.
There is a continuous debate questioning whether the use of fossil fuels will ever diminish completely. Having fuelled the industrial revolution, many argue that our society is too heavily reliant on these sources of energy to ever make the renewable switch. However, the historically volatile oil industry has suffered three significant price collapses in the last twelve years, with the first two collapses followed by a rebound. The most recent one, however, is “two-pronged”; consisting of a supply glut and demand disruption from COVID-19. In the context of public and government dialogue surrounding #buildbackbetter, the current state of the oil and gas industry leads many to question: Will the oil industry ever fully recover its former sway in a market that may well outgrow it in coming decades?
Previously in March 2020, oil prices dropped when OPEC and Russia failed to agree on a stable production level as a response to falling demand led by the global pandemic. Russia was unwilling to accept cuts of more than 1 million barrels per day. Consequently, oil prices plunged to a multi-year low, with crude prices down to $30 per barrel on 15 March 2020, as compared to $67.05 as of 1 January 2020.
Oil prices have been historically unstable, and the market has continued to adapt to these uncertainties. However, the detrimental effect of COVID-19 on global demand has created a “double-whammy” effect, states the chief executive of APPEA Andrew McConville, who speculates that it will continue to be a challenging time for the sector.
Goldman Sachs reports that global oil demand has fallen 25% in the wake of the COVID-19, with a lack of transport usage significantly contributing to the demand disruption. With fundamental changes in people’s travelling, commuting and working habits, there is speculation that longer-term behavioural change may reduce the need for oil and gas. Research from consulting company McKinsey hypothesises that the pandemic has acted as a catalyst, accelerating permanent shifts in the industry’s ecosystem that reflect a long term trend of declining demand for fossil fuels.
Indeed, oil companies seem to be strategising along similar lines, with BP slashing the value of its assets by $17.5bn and Shell writing off $22bn assets to account for assets that may become stranded or worthless as the market shifts towards greener energy sources such as wind, solar or nuclear. Players in the fossil fuel market are struggling with declining demand, business stability and employee safety. Many will need to begin to focus on building a more flexible business model that can evolve and adapt to upcoming changes.
The need to adapt business models to continue to create value for the company is visible in BP’s new green strategy, which was publicised during the first week of August. Its commitment to commit $5bn per annum to alternative energy investments encapsulates its nascent strategy to ride out the energy transition by rebranding itself as an integrated energy company, as opposed to its historical identity as an international oil giant.
As with a multitude of industries hit by the economic impact of COVID-19, the future of the oil and gas industry is uncertain. The sector has indeed weathered past hardships and volatility; however, the confluence of COVID-19, price wars and the climate crisis may represent the beginning of a new era in the energy market, within which oil and gas companies will have to find their place. Whether this will involve a fundamental restructuring and remodelling of the entire industry, or a phasing out of oil and gas entirely is hard to predict. Indeed, there is speculation that the coronavirus pandemic has been something of a final nail in the coffin of a dying industry. Either way, 2020 has been a pivotal year for this sector so far, and change is most certainly afoot.