Could COVID-19 Change the Oil Industry’s Green Commitments?

COVID-19’s rapid spread around the globe has caused the greatest suspension of human activity in history and led to some 2.6 billion people being quarantined, more than the world’s population during WW2. With this drastic closure, oil demand has fallen off a cliff and prices have followed. Rystad Energy forecasts a 9.4 percent reduction in oil demand this year.

On Sunday, OPEC+ formally agreed a 9.7MMb/d output cut to stabilize oil prices and sure up the global industry. Despite the welcome news, oil prices have barely altered. Oil companies and oil producing countries like Mexico are closely watching the path of oil demand and its associated price fluctuations. Environmental commitments that oil companies have publicly made and global initiatives, including the Paris Agreement, that many nations have signed up to are expected to be pressured.

Will the world’s energy transition, which oil companies have recently taken steps to be part of, be jeopardized by the current crisis?

Green Intentions

Prior to the crisis, the oil and gas industry as a whole had come to recognize its vital role in fighting climate change and several major companies working in Mexico had committed to a greener future. BP this year announced its intentions to be a net zero company by 2050, while Total had prioritized “becoming a responsibly energy major.” Norway’s Equinor, which is partnered with both BP and Total on Mexico’s Block 1 and Block 3, had promised to reduce emissions to net zero by 2050 in its home country and net carbon emissions by 50 percent globally, while growing its renewable energy capacity tenfold by 2026.

But the crisis has forced brutal capital expenditure cuts on virtually all major oil companies. Total will reduce CAPEX by 20 percent, equivalent to US$3 billion of its 2020 budget, while BP expects to see a 25 percent cut in organic capital expenditure. Equinor, meanwhile, has slashed one-fifth of its CAPEX budget.

A large part of these companies’ green intentions are to do with investments into renewables. Wind, solar, hydrogen and biofuels are popular choices. But these choices also offer lesser profitability and a reduced return on investment in comparison to tried-and-tested hydrocarbon extraction, despite the maturing of the renewable energies market.

One of the major benefits of renewable energies is the reduction in price volatility. Unlike oil, wind and solar are not so prone to demand destruction. Yet, conversely, as Jennifer Gordon pointed out to the Atlantic Council, current low fossil fuel prices are reducing the competitivity of renewables against hydrocarbons.

Changes in Travel

The restrictions that governments have put in place to reduce the spread of COVID-19 have generated a temporary change in working habits. Rather than commute to the office, hundreds of millions are working from home, telecommuting with colleagues and continuing to work. Home office has now become a viable alternative and according to The Guardian, this will be a permanent position for many companies even after the crisis has passed. With commutes now taking place behind a computer screen rather than a steering wheel, road traffic levels have dropped sharply. In the UK, road traffic has fallen to levels not seen since 1955.

Air traffic has also reduced. Eurocontrol, a European organization to support aviation, reported an 88 percent drop in the continent’s air traffic on March 31 compared with the same date in 2019. Air traffic over Portugal fell by 94 percent.

While the International Air Transport Association said recently that COVID-19 could see airlines lose US$113 billion in 2020, airlines including Boeing have had to receive governmental financial support to survive. Experts told CNBC that the current crisis has a feel similar to that of 9/11, which created a “large temporary impact” that saw demand on airlines fall 31 percent for the next five months. Less transport, combined with the shutdown of industry, has seen pollution drop around the world, with NASA reporting up to 30 percent less nitrogen dioxide over China than normal.

However, following the global economic crisis of 2009, world carbon emissions jumped by the highest margin ever recorded. In 2010, the Global Carbon Project registered a 5.9 percent year-on-year increase as companies in all sectors drove up production cheered on my national governments. During the oil price collapse of 2014, emissions also fell before rising again.

For now, the pandemic will continue to depress global oil demand. In the case of air travel, this reduction is likely to be temporary. But the crisis’ impact may fundamentally shift our working practices and unlike 2008’s financial crisis or the 2014 oil price collapse, the move towards telecommuting – and so a reduction in road and public transport traffic – may be permanent.

Oil Out in the Cold

In Canada, this dilemma is already being considered. According to The National Post, public opinion is making the federal government reconsider supporting the nation’s oil and gas sector, which as part of the Canadian energy industry, contributes over 10 percent of Canada’s GDP and generates 550,000 jobs indirectly.

In the US, oil companies were disappointed to be left out of the federal government’s US$2 trillion stimulus package as the Department of Energy suspended the purchase of low-price crude for the country’s Strategic Petroleum Reserve. Rigs across the country, and particularly in shale’s heartland of the Permian Basin, are idle. 

In Mexico, meanwhile, the government is pushing full-steam ahead with hydrocarbons. The country’s victory in refusing to accept an OPEC+ output cut and the reduction of its exports by 33 percent take place in the context of President Andrés Manuel López Obrador’s 2.6MMb/d production promise. Considering the administration’s decisions to construct the Dos Bocas refinery and thermoelectric plant in Huexca, Morelos, which El Universal says contravene the country’s Paris Agreement pledges – that include a 22 percent reduction in greenhouse emissions by 2030 – it would seem that Mexico’s choice has already been made.

A Brighter Future?

What will be the response after COVID-19? Certainly, emissions will rise as industry and movement reignite. But whether those emissions are driven by strategies focused on boosting oil production will depend on the energy approach taken by companies and countries alike.

It is vital that regardless of the pandemic, private companies continue to invest in green alternatives and play their role in the industry’s move towards a greener future.