"The Crossroad" - the investment collapse and the future of the energy industry

The pandemic has not saved the energy world from a painful and deep impact. The new IEA’s World Energy Investment Report estimates that the sector will see an unprecedented 20% decline in this year’s global investment  and although the magnitude of decline varies by areas and fuels– there are no regions or technologies expected to escape from the plunge.

 There are different reasons underpinning the severity of such decline

•  The energy sector has been affected by the crisis in a disproportionate way. The nature of measures implemented, with lockdown, travel restrictions and mobility limitations, translated directly into a collapse of oil demand, as this source covers almost entirely the energy needs of cars, aviation etc;
• There is an historic link between economy activity and energy consumption: many industries and services halted operations and with that energy and electricity consumption plunged steeply.
• Certain parts of the energy sector were coming from a big wave of large investments – areas like LNG plants and petrochemicals enoyed a flourish season in the previous years thanks to abundant and cheap feedstocks and rosy prospects. Other sectors, like oil supply and refining were already in overcapacity and going through a rebalancing process that the pandemic has accelerated further

 Of course, it is never a good moment for such global downturn, but in case of the energy sector, the pandemic comes as a disruptive factor in an already complex situation. Even before Covid19 outbreak, it was evident that the global energy industry was already facing multiple dilemmas.

 The oil and gas industry was just recovering from a very difficult period post oil price collapse in 2014, a situation that required most companies to make a lot of ‘homework’ to adapt to technology progress, shale revolution and new efficiencies. And new challenges were just in front of it – including the pressures from society and finance community for diversifying its own business and reducing the environmental footprint of own operations.

 For the coal industry, the slowdown of China’s growth, its transformation in a less energy intensive economy, the abundance of cheap gas from shale revolution and the rise of modern renewables had already disrupted the traditional business model of many private coal producers.

 And the electricity sector – being at forefront of the energy transition – had to cope with changes in the way electricity is produced, priced, regulated and consumed.

 In such context, one important element that is worthy to highlight is how the global energy system has performed in excellent way during the crisis. Huge excess of oil and gas supplies have been stored in sites and on offshore with no disruptions, while power systems continued to deliver reliable electricity with no major disruptions and blackouts. Honour and merit of this go firstly and foremost to millions of workers in the energy sector that have continued to operate despite difficult conditions and circumstances.

 Looking at the future, the pandemic introduces one additional layer of uncertainties. The reduced financial availabilities for many companies, especially those more exposed to fluctuations of energy prices, does not affect only investment plans but also makes diversification strategies more difficult to be implemented. If the collapse of prices has made even more evident for big oil and gas companies the rationale of looking also outside the core business, at the same time, the industry has now much less resources to develop such strategy. But the crisis is reducing also the amount of investment into clean energy technologies as well as in networks, the crucial backbone of any modern energy system.

Obviously, the implications of this crisis are not homogeneous by sectors and by geographies but also function of the specific social and economic conditions of each country. And here comes into the picture the fundamental actor for the future of the global energy (and climate) system: governments.

Past IEA analysis had clearly shown how the bulk of investment in the energy sphere are directly or indirectly related to government decisions. This is more evident in areas where the sector is dominated by National Oil Companies or State Owned Enterprises as it is the case in many emerging regions. But the influence of policy-makers is decisive everywhere when it is a matter of energy choices.

The pandemic comes when the need of transforming the way we produce and consume energy has never been more urgent. However, differently from many other economic sectors, the transformation of the energy system cannot afford to go through boom and bust periods or major disruptions. Energy availability and reliability is a fundamental pre-requisite of modern societies and the pain and deprivation of those still not having it is a clear testimony of its importance.

Navigate wisely this transformation is not and will not be an easy exercise. Amidst collapse of GDP, record debt levels and skyrocketing unemployment, the temptation of following old recipes might be particularly strong.

The good news is that – once compared with more recent global crisis – the energy sector is much more ready to accelerate the transition and so is the financial community. As fossil fuels cannot disappear overnight, the focus has increasingly shifted towards minimising their environmental impact, either through CCUS or by regulating flaring, leaking or emissions in transportation. And new cleaner technologies have made tremendous progress in terms of costs reduction and performance. It is the case of wind and solar for instance but also electric vehicles, while ‘old-new’ options such as hydrogen have come back strong into the debate.

Many governments are trying to translate this into an opportunity for the environment and for the economy. Several are speaking of ‘sustainable or green recovery’ – other of industrial reconversion. Further to endearing slogans, some concrete measures are taken shape as those from France and Germany in the car industry or others in Northern Europe aimed at exploiting the huge offshore wind potential and link it to green hydrogen production.

However, there is much more to do and most of stimulus plans that have been announced around the world still lacks of specific details and measures. How energy and climate objectives will be part of those plan and what policies and instruments will be chosen will probably be the most crucial factor in determining our future and the destiny of the energy industry.