America's Fossil Fuel or Europe's Bet on Low Carbon Future?

The coronavirus pandemic has indelibly impacted the global energy sector. Although the demand for oil has noticeably dropped and prices have plunged, the pace of shift to renewable energy from fossil fuel is still uncertain.

The oil and gas industry is currently facing testing times in the wake of the COVID-19 pandemic. The dual effect of coronavirus demand disruption and a supply glut has pushed the industry into an unprecedented crisis. As global energy demand fell off a cliff amid lockdown and oil prices tanked, the recent months have been perhaps the most testing times for the global energy industry. The sector has already suffered a setback due to concerns about long-term sustainability as the world seeks to curtail its use of fossil fuel. With the virus causing the most catastrophic dip in energy sector across the globe, the debate about long-term oil consumption has intensified.

Does COVID-19 Provide Green-Energy Transition Opportunity?

The benefits of clean energy systems have been known for quite some time. Supermajors like TOTALS.A. TOT, Royal Dutch Shell (RDS.A, Equinor ASA EQNR, BP plc BP, ExxonMobil XOM, Eni E and ChevronCVX have long been revving up investments and expanding their renewable foothold. The ongoing turmoilin oil market presents a global opportunity to accelerate the transition to alternative fuels. Top European energy players have started betting big on greener sources. But their U.S. peers have an opposing view. They believe that oil demand will soon rebound and slow down the shift to renewable energy.

Global oil giants have rationalized their planned capital budgeting, slashed operating costs and suspended share buyback to cope up with the prevalent adversities. With such remodeled business strategies, companies expect to balance their books, generate enough free cash flow and put a check on escalating debt levels.

However, European players are trimming their capital spending primarily on oil and gas activities, and sparing their renewable and low carbon businesses from budget cuts. This move is in line with the European Union’s emphasis on green COVID-19 recovery plan, a vital step toward realizing the Paris Climate Agreement, a global commitment to fight against climate crisis.

Europe’s Low Carbon Push

London-based integrated energy giant BP has cut its 2020 organic capital budget by roughly 25% from the prior guidance to $12 billion. Yet, this Zacks Rank #3 (Hold) company is committed to keep its low-carbon investment plan of $500 million intact.

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Meanwhile, its larger rival Shell looks to trim its 2020 capital spending by a minimum of $5 billion from the past projection of $25 billion to weather the crisis. However, the company reaffirmed its focus on expanding its renewable energy drive. While upstream and downstream businesses would each constitute 45% and 30% of total investment reduction, the Integrated Gas and New Energies division would be hit by only 25% of remaining spending cuts. The oil major was expected to invest approximately $2 billion till 2020 and then up to $3 billion a year thereafter in its low-carbon energy division.

Another European biggie TOTAL has decided to lower its 2020 capital expenditure guidance by nearly 20% to less than $15 billion from $18 billion. But it has not shrunk its $1.5 to $2 billion of energy transition investment goal this year.

Italian energy firm Eni has downwardly revised its 2020 capital budget by roughly €2 billion, representing 25% of its total budget, while Norway’s Equinor has revised its capital budget this year to $8.5 billion from the earlier $10-$11 billion. Yet, both the companies are keeping their pot of money for total renewable spending unchanged. Equinor has stuck to its planned investment of $1 billion in clean energy for 2020 and 2021.

Equinor, Shell and TOTAL recently announced their decision to invest in the Northern Lights project to transport and store carbon. It is Norway’s first exploitation license for carbon capture and storage (“CSS”) on the Norwegian Continental Shelf. With an initial investment of roughly NOK 6.9 billion, the project can be the first carbon dioxide storage for industries of Norway and Europe and help in reducing net greenhouse gas emissions to zero by 2050. The project is awaiting Norway government’s final decision.

Despite companies pumping money into strategies to de-carbonize the energy system by increasingly shifting to alternative fuels, renewable and low carbon technology investments still make up for only 15% of these players’ total investments. Therefore climate advocates want the companies to invest more. The group had aimed to significantly decrease carbon emissions by 2050 even before COVID-19 came along. Yet, some investors are of the opinion that these plans are not sufficient to achieve the Paris climate targets of keeping global average temperature increase to well below 2°C above pre-industrial levels and to limit the increase  to 1.5 °C.

America’s Oil Boom

U.S. oil and gas companies hold a different opinion compared to their European counterparts’ renewables focus. They argue that oil demand will bounce back once the global economy recovers from the pandemic. ExxonMobil and Chevron continue to earmark investments for oil production.

Both the players have reduced their capital investments for the current year. Chevron has trimmed its 2020 capex guidance by 20% to $16 billion, while ExxonMobil has cut it by 30% to $23 billion from the previously announced guidance of $33 billion. But both the companies believe that long-term fundamentals of their business are intact. Large shift to another source of energy still seems far-fetched.

The current collapse in the oil sector might not be a game changer for the climate-change movement. The American Petroleum Institute sees the COVID-19 demand dip to be temporary. Oil consumption would pick up as lockdowns are eased and businesses reopen. President Trump’s administration is infusing additional stimulus measures like tax breaks to attract billions of investment in its oil and gas sector. It is rolling out relevant measures to accelerate fossil fuel development, making it difficult to reduce greenhouse gas emission. Citing the economic burden imposed on Americans, the President has even decided to withdraw from the Paris Climate Agreement, per which the United States had agreed to reduce its climate pollution by 26%-28% below 2005 levels by 2025.

Conclusion

Despite getting a clear view of lower-emission energy system, the pace of shift to renewable energy from fossil fuel is still uncertain. Oil prices have already started to rise on global output cuts and easing of lockdown norms. However, demand recovery is unlikely to be rapid, as some restrictions remain and the possibility of a second wave of COVID-19 exists.

The race for green energy is gaining momentum. But the transition away from conventional energy sources will largely depend on how governments, companies and societies embrace the fundamental changes in the energy system. Declining prices of renewable energy gives it a competitive edge over fossil fuels. Yet, building a more resilient renewable energy system will not be easy. The question whether oil will continue to dominate the energy sector or be overpowered by clean energy systems in the long run is still debatable.

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