Oil and gas were among the first commodities affected by the COVID-19 pandemic. The demand for oil, especially fuels, is estimated to plunge to a record-low 9.3 million barrels per day (mb/d) in 2020. Countries across the world have imposed voluntary lock downs, thereby causing an unprecedented reduction in travel and transportation – two key sources of global oil demand. Oil producing states have responded quickly, with the OPEC+ group organizing an online conference in April that included, for the first time, Canada and the US. While the OPEC+ agreement committed to cut 10 mb/d for two months, lower production will not match the recent drop in demand. The oversupply of oil will remain, while the volume of oil storage is likely to grow. At current levels, it will take years for the oil market and oil prices to recover.
These sudden but long-lasting shifts have given new impetus to calls for ‘green reforms’. Many view the overlap of continuously low oil prices and post-Corona reconstruction deals as opportune. Pandemic-induced financial and economic decisions made over the next twelve months will shape the economy for the coming ten years – the time frame for halving global emissions. Hopes for a post-crisis sustainability turn have been countered by those who question the oil-replacement capacity of renewables and emphasize the social and economic necessity of supporting the oil industry – to prevent job loss, higher commodity prices, and further economic recession. Notwithstanding these concerns and challenges, there is reason to argue that the Corona crisis will and should trigger ‘green’ government funding and spur changes within the oil and gas industry.
To better assess the impact of low oil prices on climate change initiatives, a number of analysts have turned toward the 2008 financial crisis. Studying investments during the post-2008 economic recession offers valuable insights. Among other things, it shows that investment in the capital-intensive Carbon Capture, Utilization and Storage (CCUS) technology declined. CCUS emission reduction technology is essential to the de-carbonization of heavy industries around the world. It captures the CO2 emissions by major petrochemical and power plants, either injecting them deep underground or utilizing them to produce goods such as cement or food for Algae. While the usefulness of CCUS is widely acknowledged, it is expensive and dependent on substantial government subsidies and an effective carbon credit market. As such, the tracking of CCUS developments is an ideal way of gauging government investment in capital-intensive ‘green projects’. Data by the CCUS Global Institute (see graph below) shows a significant drop in new CCUS projects following the 2008 recession. This, in turn, suggests a decline in governments’ appetite for green projects and a short-term focus on survival among energy companies.
While tracing developments after the 2008 financial crisis is instructive, it does not allow for quick conclusions. The world has changed, and climate initiatives have gained in prominence. Energy companies increasingly realize that in order to remain relevant to their investors and customers they must reduce their carbon footprint. Since 2017, investments in CCUS technology have begun to grow again, including in the Middle East. In the UAE, for example, the Al Reyadah project is expected to capture, store, and use 800,000 tons of annual CO2 emissions by Emirates Steel, being the first iron and steel project of its kind.
A sharp downturn in the oil and gas industry, such as the current one, has always presented a dilemma for governments trying to balance short-term economic needs with long-term climate goals. As the 2008 example shows, many used to gravitate toward the ongoing funding of oil businesses, and there is indication for this trend to continue. In May 2020, the US government announced plans for a bond bailout as part of its coronavirus rescue package. At least 90 fossil fuel companies, many of them owned by giants such as ExxonMobil, Chevron, and Koch industries stand to gain from the Federal Reserve’s coronavirus bond buyback program, alongside coal-heavy firms such as American Electric Power and Duke Energy. The International Energy Agency warned that the corona crisis may slow down the transition to green energy unless there is clear political will to do things differently. Initial shifts in policy can be observed in Austria and France, where governments made their pandemic-induced bailout of national airlines dependent on ecological commitments. In France these include a 50 percent reduction in carbon emissions on all domestic flights of ‘Air France’ by 2024, as well as investing in more fuel-efficient planes. In Austria as well, environment minister Gewessler suggested to tie the bailout to conditions that help minimize the negative impact of aviation on the world’s climate.
In many ways, Covid-19 has created new momentum for climate change initiatives. Since its outbreak, CO2 emissions have declined, allowing countries like Germany to meet their CO2 reduction targets for 2020. The question is whether such momentum can be maintained in the long run. ‘Climate Action Tracker’, a non-profit consortium of climate science and policy institutes, predicts that even a small increase in green investment (0.8% of GDP) could lead to a CO2 reduction of up to 35 gigatons per year by 2030, which would get the world very close to the 1.5 degree target specified in the Paris Agreement 2015 (see graph below). In rebuilding their economies after the Corona crisis, governments may seize new openings and opportunities, opting for a ‘green recovery’. The introduction of carbon taxes, for instance, would cause less rupture now that oil prices are low. Likewise, rich states in the MENA region and elsewhere could use this moment to cut oil subsidies.
Today’s energy market is ripe for a major green disruption. Change could come from outside the oil and gas industry, as indicated by the recent price drop of large solar projects, the growing popularity of electric vehicles, and plans regarding hydrogen fuel cell trains. Importantly though, change may also come from within the oil and gas industry. Already prior to Covid-19, oil majors have begun looking for possibilities to drop their oil barrel carbon intensity. Environmental performance has become a common topic in board room meetings, in some cases conditioning executive bonuses. The pandemic is likely to accelerate company attempts to ‘turn green’. With oil products being significantly less valuable, climate and sustainability targets gain in strategic importance, offering ‘a way forward’ that allows oil companies to stay relevant to investors.