Page 8 - AsiaElec Week 10

AsiaElec TRANSITION AsiaElec
Oil price crash raises questions for energy transition
GLOBAL
THE global oil and gas industry’s enthusiasm for the energy transition could be in doubt as the world reacts to the collapse of the oil price and the spread of the coronavirus.
While it may take time for falling oil prices to have any effect downstream in the power and renewables markets, oil companies will be think- ing about their strategy and investment priorities during a time of lower revenues and greater risk.
IEA executive director Fatih Birol said this week that the spread of the coronoavirus could have a knock-on effect on the global oil indus- try’s energy transition plans, and he urged pro- ducers to act carefully.
“Companies will be faced with lower reve- nues and their commitments to clean energy transition will be a challenge,” he said. “Actors need to behave responsibly.”
“The coronavirus crisis is adding to the uncertainties the global oil industry faces as it contemplates new investments and business strategies,” Birol said.
“The pressures on companies are changing. They need to show that they can deliver not just the energy that economies rely on, but also the emissions reductions that the world needs to help tackle our climate challenge,” he added.
Since the start of 2020, many companies and investors, with BlackRock and BP in the fore- front, have declared that climate risk is invest- ment risk, and that they will put sustainability and emissions reduction at the forefront of their strategies.
Demand
Global oil demand fell by 2.5mn bpd on the year in the first quarter, or around 2.5%, the IEA estimated in its report, as coronavirus fears cut travel and economic activity. China accounted for 1.8mn bpd of that fall.
The IEA has now reduced its oil demand fore- cast, with this decreasing in 2020 before sharply rebounding in 2021. From then on, growth will be sluggish until 2025. 2020 demand is now set at 99.9mn bpd, down around 90,000 bpd from 2019. This is a sharp downgrade from the IEA’s forecast in February, which predicted global demand would grow by 825,000 bpd in 2020.
Now that prices have fallen, market observ- ers will now be anxious to see them rebound, although this could take months.
“Looking ahead, prices will eventually rebound, as current levels are below the marginal cost of production for the majority of operators, including all the US shale basins. Sub-$40 isn’t sustainable for any longer than a short period, most likely just months,” Jack Allardyce, research analyst at Cantor Fitzgerald Europe, said.
“An extended period of low prices would gen- erally be expected to have a positive impact on demand, although the current picture is clouded given the growing coronavirus outbreak.”
While the oil price shock and the Sau- di-Russian production conflict are supply prob- lems, demand may refuse to rise on low prices because of lower economic activity caused by the coronavirus.
Commitments
Looking ahead, the IEA said the short term would ultimately depend on how quickly gov- ernments move to contain the coronavirus out- break, how successful their efforts are, and what lingering impact the global health crisis has on economic activity.
Birol’s comments bring into focus the fact that energy companies’ commitments to reduce emissions and combat climate change are vul- nerable to receiving less investment and opera- tional focus.™
P8
w w w . N E W S B A S E . c o m Week 10 11•March•2020