COVID-19 Writes an Epitaph for an Already Declining Fossil Fuel Industry
In April 2020, the Center for International Environmental Law (CIEL) published the report Pandemic Crisis, Systemic Decline: Why Exploiting the COVID-19 Crisis Will Not Save the Oil, Gas, and Plastic Industries. It is an account of an already declining oil, gas and petrochemical industry and how the COVID-19 crisis has exasperated the sectors decline, sending it on an accelerating collapse trajectory.
At the time of writing, it was the 10th anniversary of the dramatic and catastrophic blowout of the Deepwater Horizon oil rig, a useful metaphor for the current state of the industry, 'An Accident Waiting to Happen'. The aftermath of the accident revealed a total lack of preparedness in dealing with the disaster. No doubt we will look back on the COVID-19 crisis in a similar vain.
The impacts of the pandemic has been considerable, with the global economy almost grinding to a halt. Many operations have shut down, including international air travel. Some authorities have used the crisis to engage in nefarious activities. In Glasgow, the UN climate summit was postponed. The overall social and economic impacts of the pandemic are uncertain, but they are bound to be considerable.
The Oil, Gas, and Petrochemical Industry in particular has been hard hit. As a result it has sought Government bailouts. As CIEL reports:
the oil and gas sector is exceptional for its efforts not only to seek extraordinary levels of government support in response to the crisis but also to exploit the crisis to reverse longer-term trends confronting the industry.
Common Dreams reported that the US Senate was prepared to 'make hundreds of billions of dollars in condition-free loans available to fossil fuel corporations,' prompting calls from environmentalists to use funds for fighting COVID-19 instead. In addition, fossil fuel companies have been engaged in extensive lobbying during the crisis. CIEL tapped into data produced by Influence Map (IM), a UK based data analysis not-for-profit company. A briefing from Influence Map outlines the available evidence that has been collated so far (the Group will continue to investigate and report).
The key points are:
The oil and gas sector are demanding both financial support and deregulation, especially with regard to climate change.
A waiving of environmental reporting requirements from the US Environmental Protection Agency (EPA). In Canada, corporates linked to tar sands are seeking tax breaks.
In the EU, the EU Emissions Trading Scheme will likely be toned down to help industry.
A group of think tanks have been leading the lobbying efforts. Amongst them is the The American Petroleum Institute (The API). They were the main driver behind the EPA's suspension of environmental laws.
The API is the largest trade association for the oil and gas industry. DeSmog outlines the background of the API. It has funded climate denial organisations, with the aim of promoting '“uncertainty” about climate change science and links to fossil fuels.' It claimed that using natural gas would reduce CO2 emissions, taking the position without a hint of irony that:
The oil and gas industry considers climate change a very important issue and is engaging constructively to address this complex global challenge.
In an effort to prop up the US fracking industry, the API grossly exaggerated the number of jobs, claiming that 'more than 7.5 million jobs would be at risk from a fracking ban'. However official records estimated the total number of jobs at 636,000. According to OpenSecrets, the API spent $7,080,000 on lobbying in 2019 and $6,970,000 in 2018.
In the UK, Oil and Gas UK produced a report that referenced the the COVID-19 crisis (P6). It notes a 'perfect storm' related to the crisis and the increased competition between Russia and Saudi Arabia that led to an increase in production from those countries. It concludes euphemistically, as prices collapse, that:
This price environment will cause significant cash flow and investment challenges for all areas of the UK industry, the full implications of which are still being considered.
Out of the various organisations mentioned in the IM briefing, its worth mentioning The State Policy Network. This is a group of various state based think tanks. DeSmog investigates the background:
The State Policy Network (SPN) is a group of free market think tanks in the U.S. According to its website, there is at least one member in every state “fighting to limit government and advance market-friendly public policy at the state and local levels.” SPN is registered as a 501(c)(3) nonprofit organization, and is supported largely by conservative foundations.
Its aim is to 'educate the general public and policy makers in every state to embrace market-friendly policies that maximize liberty and opportunity.' It supports other prominent think tanks, such as the Heartland Institute, Cato Institute, and the Heritage Foundation. As far as climate change is concerned, apparently 'the planet is believed to be experiencing a global cooling-not a warming.'
It's funding comes from various sources, including the Koch Industries Group. According to Greenpeace the SPN is a 'Koch Industries Climate Denial Front Group' (Koch also funnels money to the API).
With an inevitable decline forecast in the use of fossil fuels, the petrochemical industry is seen as a profitable sector. With the surge in fracked natural gas across the US, considerable investments have been made in plastic production infrastructure. The industry is exploiting the COVID-19 crisis as a means to counter the growing campaign against single use plastics. US fracked gas has made its way to the UK, courtesy of petrochemical company INEOS, which is using it as a feedstock for plastic manufacture (see the report I produced below for Frackwatch).
Report:
Fracking For Cracking. How Shale Gas Is Fueling The Plastic Crisis
But there's a problem here. The crisis has seen a steep decline in industry stocks. As CIEL reports:
Oil, gas, and petrochemical stocks have been affected more rapidly and much more deeply than almost any other sector; the oil and gas sector lost more than 45% of its total value from the beginning of January to early April 2020.
But this isn't a new pattern. There has been a steady decline over the past decade, affecting all the oil and gas majors. As such, the crisis has revealed the flaws in a global economy addicted to fossil fuels, which could prove fatal. As the report concludes:
an increasing number of investors, decision makers, and communities will recognize that the risks of exposure to oil, gas, and plastic exceed the potential benefits; and the present crisis is likely to accelerate the necessary and inevitable transition away from fossil fuels.
A particular focal point here is pension funds. There is an emerging trend of pension funds becoming more concerned about the declining potential in investing in fossil fuels. Some have already divested part or most of their portfolios. Others are working with the industry towards what they see as a low carbon future. Part of this process is climate change risk management.
Climate change risk management (CCRM) was incorporated into the EU Directive, the Institutions for Occupational Retirement Provision 2 Directive (IORP II), adopted on December 8th, 2016. Member states had until January 13, 2019 to incorporate IORP II into national law. These are the main requirements of IORP II:
The risk assessment is to be carried out every three years or after any significant change in the risk profile of the pension funds “in a manner that is proportionate to their size and internal organization, as well as to the size, nature, scale and complexity of their activities”.
The assessment must cover “new or emerging” risks, “including risks related to climate change, use of resources and the environment, social risks and risks related to the depreciation of assets due to regulatory change”.
IORP II is founded on the principle that 'pension funds are particularly exposed to climate risks given their long-term investment profile.' Indeed a report from the Economist Intelligence Unit:
Valued the average expected loss as a result of climate change across scenarios as $4.2tn in financial assets.
COVID-19 will of course change the landscape significantly. And that realisation appears to filtering through to pension funds.
In the US, climate risk is assessed by the EPA's Climate Change Impacts and Risk Analysis (CIRA) project, which 'quantifies the physical effects and economic damages under multiple climate change scenarios.'
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ransportation has been badly hit by the global shutdown. CIEL notes that, 'Transportation consumes nearly 70% of all petroleum products.' The US is the largest consumer, accounting for 20% of global consumption. Air travel in particular has been hard hit. Bailouts for the industry could total up to $1trillon. However a Guardian article stipulates that any relief for airlines should have climate conditions attached. There is a strong likelihood this could happen in the wake of a decision by the UK court of appeal, to axe the Heathrow third runway expansion, ruling the proposal illegal on climate grounds. Add to this the considerable expansion of online remote video communications during the pandemic, such practices will no doubt continue in the future.
CIEL has highlighted another serious problem that has developed within the oil and gas industry. Due to the collapse in demand, storage space is running out. This is affecting gas as well as oil, due to the glut in natural gas from the US fracking industry. The competition with Russia and Saudi Arabia has also been a contributing factor. As a result this has caused oil prices to go negative. As such:
producers may be forced to pay buyers to take oil off of their hands in order to avoid costlier disposal – in effect, creating negative oil prices until the supply can drop enough.
Indeed as Politico reported:
U.S. oil futures prices fell to their lowest-ever level by far..., at -$37.63 per barrel, meaning owners of the futures contracts were paying to offload them.
Once restrictions are lifted, the huge glut of oil (and gas) in storage will affect production for years to come. As CIEL notes:
In the wake of a similar but far smaller downturn in 2014, it took more than two years of drawing down stored oil before some semblance of balance returned to markets.
This will have a knock-on effect on the petrochemical industry, with demand waning there also.
There is little doubt that the current crisis has exposed serious cracks in the system. Before the crisis, the fossil fuel industry needed to be propped up with massive subsidies. Rolling Stone reveals the extent of those subsidies based on a study by the International Monetary Fund (IMF):
the world spent $4.7 trillion — or 6.3 percent of global GDP — in 2015 to subsidize fossil fuel use, a figure it estimated rose to $5.2 trillion in 2017. China, which is heavily reliant on coal and has major air-pollution problems, was the largest subsidizer by far, at $1.4 trillion in 2015. But the U.S. ranked second in the world.
With shale gas company bankruptcies increasing in the wake of the crisis and debts piling up throughout the sector, investors are changing tact. As CIEL reports:
The scale of corporate debt accumulated by the industry was highlighted on April 9th , when a group of major banks announced plans to begin taking possession of oil and gas companies and assets in an effort to recoup up to $200 billion in loans to the troubled sector.
As unwelcome chickens come home to roost, the financial sector is beginning to withdraw support from the industry, due to the gloomy outlook for oil and gas. As a result:
The two largest development banks, the European Investment Bank and the World Bank Group, have policies designed to eliminate nearly all direct fossil fuel funding, and a consortium of additional multilateral development banks have committed to aligning their investment activities with Paris Agreement goals.
Importantly, equity investors are also shifting their priorities. According to DivestInvest, a whopping $12Trillion has been earmarked for divestment. This will impact pension funds as they are the largest category of equity investors globally. This effectively means that:
As the risks of investing in the oil and gas sector become ever more apparent, more and more investors subject to fiduciary duties will likely choose to steer clear of these companies.
To say the fossil fuel industry has been living beyond its means would be an understatement. The industry has been spending more on dividends and buybacks than money coming in. The petrochemical industry will also be drawn into this vortex. Cutbacks in single-use plastics are inevitable, with the EU taking the lead in introducing legislation to that effect. In addition China is also moving towards the elimination of single-use plastics.
There's an elephant in the room here. It's called renewable energy. Before the crisis, renewables were already successfully competing with fossil fuels. In reference to a BNP Paribas report, CIEL reports that:
for oil to remain competitive with electric vehicles, oil prices would have to drop as low as $10 per barrel. The report concludes “that the economics of oil for gasoline and diesel vehicles versus wind- and solar-powered EVs are now in relentless and irreversible decline, with far-reaching implications for both policymakers and the oil majors.
And that's the story that's emerging throughout the renewables sector. As renewables are cheaper to produce and run in the long term, it will initiate a natural displacement of fossil fuels. The laws of physics also apply here. Underpinning this is the concept of Energy Return on Investment (EROI). A paper from Hall et al., 2014, goes into EROI in some detail.
The paper details the link between energy expenditure and GDP. This can give an indication of how effective the economy is working. The paper notes that:
Rapid increases in the economic cost of energy (e.g.from five to ten percent) result in the diversion of funds from what is typically devoted to discretionary spending to energy acquisition. Consequently, large changes in energy prices influence economies strongly.
But ultimately economic performance is directly linked the the EROI. Although there is plenty of oil and gas in the ground, it is becoming increasingly difficult to extract. This means it becomes more expensive to extract. In other words:
when more money is required more energy is required too, and that there is a limit to how much we can pay for oil that occurs as one approaches using a barrel of oil to extract another barrel of oil.
The following table from the paper gives approximate EROI values for various energy sources. A ratio of 100:1 is the expected value from fuels that are easily extracted and require little energy input. A ratio of 1:1 means that the optimum energy value of the fuel is the same as the energy expended to extract it.
The EROI of unconventional fuels tend to be much lower than that of conventional extraction. Canadian tar sands is around 4:1. But the actual value will probably be lower. Values for shale oil are similar. There aren't any quoted values for shale gas as these are difficult to extrapolate. However a more recent study from 2016 focusing on shale gas production from the Marcellus shale region in Pennsylvania has worked out an approximate EROI of 10:1. This figure can vary slightly depending on the production stage at a well. This value will drop through time though as all the 'sweet spots' are used up.
The future then is renewables. But there is a caveat to this assumption. There are obvious shortcomings to renewables. In short, the sun doesn't shine all the time and the wind doesn't blow all the time. And mineral resources will be required, which incurs its own environmental problems. Ultimately it's striking a balance. Storage (batteries) is seen a possible solution. Carbon Capture and Storage (CCS) is also touted as a solution. However its implementation would substantially reduce the EROI value. But perhaps the only real solution is life-style change. As the paper concludes:
If any resolution to these problems is possible it is probable that it would have to come at least as much from an adjustment of society's aspirations for increased material affluence and an increase in willingness to share as from technology. Unfortunately recent political events do not leave us with great optimism that such changes in societal values will be forthcoming.
With the current crisis, it would appear that some of those changes are already starting to take place. Part of this process is the inevitable manifestation of stranded assets. Fossil fuel companies have already been writing off assets totaling billions. According to the IMF, Gulf producers could be looking at losses upwards of $2Trillon:
...rising concerns over the environment are seeing the world gradually moving away from oil. This spells a significant challenge for oil-exporting countries, including those of the Gulf Cooperation Council (GCC) who account for a fifth of the world’s oil production.
The Carbon Tracker Initiative suggests that the COVID-19 crisis could act as 'midwife to the new'. It would certainly be reasonable to assume that the world won't be quite the same when the crisis passes. But it would also be reasonable to assume that the acolytes of our current global neoliberal system are unlikely to lose their religion overnight. The realities of what is unfolding are certainly impossible to ignore. The decline of the old fossil fuel powered system is an inexorable process. But a fundamental shift in societal values are also essential if change is to be achieved. Humanity is at a crossroads. Whatever route we take away from the COVID-19 crisis will determine our future for better or worse.
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