The Climate Revolution: Decline in Oil Exploration

Written By: Nora Al-Hinai | Date: February 3, 2021

As we enter the third decade of the 21st century, the response from oil and gas companies in regards to climate change seems to be leading to big changes of their own in terms of their business models and long-term growth strategy.

Several factors are prompting this change including growing global concerns about climate change, technological advances and business opportunities in renewable energy, and the oversupply of oil and gas which has reduced prices significantly. Needless to say, the arrival of Covid-19 has not only magnified these effects, but it has delivered a fatal blow to the industry.

The World Health Organization declared a public health emergency on February 2020, following the outbreak of the Coronavirus. In attempts to curb the spread of the virus, governments worldwide have implemented lockdown measures. Restrictions in air travel, shut down of commercial activities, and the decrease in the use of automobiles and public transport has caused global electricity demand to fall by 20%.

Global Energy Demand

Post Covid-19, demand for oil and gas was already in decline due to an economic slowdown triggered by the US/China trade war. The standoff between Saudi Arabia and Russia, two of the world’s biggest oil producers has resulted in an overproduction of oil. The decrease in demand and increase in supply has has sent prices plummeting to an 18-year low.

As demand for oil was decreasing by March 2020, in an OPEC meeting Saudi Arabia suggested cutting production to elevate prices, yet Russia refused to collaborate. Saudi Arabia responded by increasing its production which Russia followed suit causing an overflow of oil in the world market and prices to fall by 60% in early 2020. In an agreement to stabilize prices, OPEC and Russia have come to an agreement to cut production, but by then it was already too late as the effects of Covid-19 have already hit. By April 2020, oil prices have plunged into negative territory, causing sellers for the first time to pay buyers to offload its oil as the world ran out of places to place the oil that has been pumped out.

By the end of 2020, oil prices dropped by 40% causing oil and gas company’s projects to be insecure and financially feeble. As many companies have invested heavily in oil exploration, the lands that have been acquired may considered to be stranded assets. The world’s top oil and gas companies such as BP, Shell, Exxon, Chevron and Total have sharply cut their exploration budgets and redirect spending into investments beyond petroleum. According to a Bloomberg Analyst, 10% of global oil resources (approx. 125 billion barrels of oil) will not be exploited anytime soon.

Shift towards Clean Energy

According to the International Energy Agency (IEA), global investment has been redirected away from fossil fuels and into renewable energy. Capital spending on energy has plunged 18% in 2020, as well as a fall in demand by 5%. On the other hand, renewable energy projects have benefited from falling costs in addition to extensive government support and backing from monetary policies through lower interest rates. The IEA forecasts a growth of 80% by 2030 from renewables for global electricity demand.

Some of the biggest Oil and gas companies have been rethinking future investment by detailing strategies that steer away from oil and towards renewables. BP for example has aggressively cut its workforce by 15% (10,000 jobs) as oil production has been offset and spending is minimized [3]. The French energy company Total SA has announced it is increasing spending on renewables from $2 billion per year, to $3 billion per year by 2030.

According to some analyst’s oil demand may have reached its peak even before the pandemic, and some countries annual demand for petroleum will not return to pre-pandemic levels for countries such as US, Germany, and Japan. However, oil demand for developing countries is still expected to grow (India and China), and is expected to recover by 2023. However, the IEA predicts that oil and gas will still make up half of energy consumption by 2040.

While fossil fuel investment has decreased in the short run, with energy related greenhouse gas emissions declining by 7% during the pandemic, these impacts may be short lived. China has already started to reboot its economy as emissions have reached pre-pandemic levels. In order to reach the Paris Agreement goal of keeping global warming below 2oC from pre-industrial levels, a predicted one-third of oil reserves, half of gas reserves and 80 percent of coal reserves need to remain unexploited by 2050.

Predicting the future of Oil and Gas

During the first quarter of 2020, renewable energy accounted for 28% of total global electricity supply. Renewables have demonstrated to be the most robust energy source during the pandemic, according to the IEA as the industry is expected to recover by the end of 2021.

American companies such as Chevron and ExxonMobil are still investing in oil and gas exploration while European companies (BP, Royal Dutch Shell and Total) have cut back on exploration investment and announced their plans to be carbon neutral by 2050. BP’s strategy to achieve this is by increasing its green businesses 10 times, at the same time cutting oil and gas production by 40% by 2030. Shell is investing in a huge solar farm off the coast of Holland and is expanding its electric vehicle charging business. Total is investing in major solar projects in Spain and wind farms in Scotland.

One energy analyst speculated that over the next decade, big oil companies will grow their wind, solar and hydrogen businesses by 25 % annually.