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Covid-19 bringing the oil industry to its knees, but also placing obstacles before clean energy

Alina Vasiescu (Translated by Cosmin Ghidoveanu)
English Section /

Covid-19 bringing the oil industry to its knees, but also placing obstacles before clean energy

The oil industry is seriously affected by the pricing war between Saudi Arabia and Russia, as well as by the very weak demand generated by the Covid-19 pandemic, factors which have led to the collapse in oil prices.

As such, independent oil companies stand to suffer the most. For instance on April 1st, American company Whiting Petroleum Corp. asked to be placed under bankruptcy protection, but has announced that it has enough liquidity to continue its operations and to cover its financial debts during its restructuring.

Oil giants are also facing issues, as they have been forced to cut spending and suspend massive stock buyback programs. Things being that way on the energy market, a growing number of questions appear over the future of oil companies, as well as about the outlook of clean energy, especially as there are opinions that the world's economic model will change after the current crisis, and the focus in the future will be on a cleaner economy.

Forbes recently wrote that the US economic deadlock led to the loss of about seven million jobs in March alone, an evolution that will negatively affect demand for oil and gas. According to the source, this will cause market prices to fall even further, perhaps below $ 20 a barrel. But the collapse will be relatively short-lived, according to Forbes, which adds that although experts expect oil prices to rise again, the future of green energy is now questionable. That is because gasoline prices are low and thus, the pressure for investment in alternative fuels is extremely low.

Even Fatih Birol, Executive Director of the International Energy Agency (IEA), says: "The sharp drop in the price of oil could undermine the shift to clean energy. In the absence of measures by national governments, which have the most important investment levers, cheaper conventional energy will force consumers to use it less efficiently. At the same time, the appetite to buy energy efficient cars or to modernize homes and offices for energy saving will decrease".

The IEA notes the reduction of global CO2 emissions in 2019 and anticipates that we may see them decrease this year, as a result of the impact of the coronavirus pandemic on economic activity, in particular transportation. Thus, the IEA emphasizes that this reduction will not be the result of new policies and strategies by governments and companies. Most likely, these emission reductions would represent a short-term evolution, which could be followed by their growth resuming, as the economic activity begins anew, according to the IEA.

Jennifer Gordon, a member of the Global Energy Center of the Atlantic Council, says: "The current reduction in carbon emissions is probably not sustainable, and low fossil fuel prices could affect the competitiveness of alternative energy sources. The pandemic will probably slow down the energy transition for several reasons, even if it has made this need for clean and reliable energy more acute."

These views on the delayed shift to cleaner energy come after a recent World Economic Forum (WEF) study suggested that there is no compelling reason for phasing out fossil fuels and implementing renewable energy technologies.

According to experts quoted by Forbes, the US will face challenges in the coming months, and America can not afford to lose its jobs in the energy sector, nor security and energy independence, and therefore the intervention of the government is necessary.

Some economists suggest that a recovery of the industry will occur in the fourth quarter of this year.

The global capacity of renewable energy production increased last year

Global renewable energy production capacity reached 2537 gigawatts (GW) at the end of last year, up 176 GW from 2018, but the coronavirus pandemic casts doubt on the sector's prospects in 2020, with an impact on both supply chains and production facilities.

According to figures from the International Renewable Energy Agency (IRENA), published by CNBC on April 6th, last year's growth was slightly lower than the total of 179 GW in 2018 (according to revised data).

IRENA stressed that renewable energies accounted for 72% of the total increase in electricity production in 2019, with solar and wind energy increasing by 98 GW, and almost 60 GW, respectively. Together, these two technologies accounted for 90% of the renewable increase in 2019, according to the source. From a geographical point of view, Asia accounted for 54% of the renewable capacity added last year.

Even though the increases posted by IRENA may seem promising, the predictions for this year show a series of challenges for the renewable sector, many of them tied to the Covid-19 pandemic, which caused serious problems with the supply chains and has forced some production facilities to shut down.

Hedge funds, keeping their eyes on the oil industry in crisis

Hedge fund managers believe that the oil market reached a turning point at the end of March, and for the first time in more than two months they have begun adding to their positions, anticipating that prices will go up, after falling to an unsustainably low level.

An analysis released on April 7 by Reuters shows that, as a whole, in the week ending on March 31st, hedge funds and other asset managers were net sellers of 19 million barrels of oil in the six most important futures and options contracts on the global markets. However, they initiated new acquisitions of 40 million barrels and sales of 59 million barrels, according to position records published by ICE Futures Europe and the U.S. Commodity Futures Trading Commission.

According to the source, the number of new buys was the largest since before Christmas. In addition, it is for the first time that new "long" positions have been added to the market since the end of January.

Portfolio managers added long positions largely on West Texas Intermediate Crude Oil - WTI (+33 million barrels), traded on the New York Mercantile Exchange - NYMEX and ICE Futures US, and to a lesser extent on Brent (+ 8 million barrels), crude oil listed on ICE Futures Europe.

Reuters notes that extremely high or low prices are unstable in terms of their dynamic, so they never last very long, leading to rapid and substantial adjustments in consumption and / or production.

The extremely high prices of 2008, 2011 and 2018, and the extreme lows of 1986, 1998 and 2008, respectively, lasted little, usually a few weeks or months.

According to experts, the rapid accumulation of crude oil and fuel inventories along the supply chain threatens the available storage capacity and risks bringing production to a halt.

Big oil companies issued USD 32 billion in debt to deal with the crisis

According to the Financial Times, companies that have sold bonds mid-March include ExxonMobil in the US, Royal Dutch Shell and BP in the UK, Equinor in Norway and Total in France. All of them have issued bonds denominated in euros and dollars.

The largest oil companies in the world have sold debt worth over $ 32 billion in recent weeks to cope with the current crisis, but also to maintain payouts to shareholders.

According to the Financial Times, mid-March bond companies have included ExxonMobil in the US, Royal Dutch Shell and BP in the UK, Equine in Norway and Total in France. All of them issued bonds in euros and dollars.

Companies in the oil sector use any possible financial instrument available before cutting dividends. They announced massive cuts in spending (billions of dollars), suspension of stock buyback programs and the postponement of projects.

Brendon Moran, a banker at Societe Generale, quotes the Financial Times: "The card that is played is the same as in the previous crises: those who can go to the bond market, do so. This ensures liquidity and also demonstrates that they have access to financing".

In the first week of April, Shell borrowed EUR 3 billion and USD 3.75 billion, and BP - EUR 3.25 billion Euros and USD 3.25 billion. Total and Equinor have raised EUR 3 billion, and USD 5 billion dollars, respectively. OMV Austria raised EUR 1.75 billion.

Just weeks before, US giant ExxonMobil raised USD 8.5 billion in the same way, according to Financial Times figures.

For some companies, such as Shell and BP, bond issues come in addition to providing new, multi-million dollar credit facilities.

While some smaller companies and independent companies have already cut their dividends, due to financial pressures, major energy groups treat this measure as a last resort solution, as they are aware that payments to shareholders are one of the few reasons why part of investors aren't selling those shares, as they are subjected to the pressures of extricating themselves from industries with a high carbon consumption.

Analysts anticipate that, amid the crisis in the sector, although dividend payments by large oil companies are generally safe for the time being, it is possible that in the future they will be made through the issuing of additional shares, rather than through cash payments.

Alina Vasiescu

There is concern on the renewable energy market that the coronavirus pandemic may adversely affect investments in clean energy, which will be less attractive because of the sharp drop in oil prices.

The Organization of Petroleum Exporting Countries and allies outside the cartel (OPEC + Alliance) said they would agree to extend the cut of their crude oil production, if the US and other states join the cuts to prop up the prices, affected by reduced demand amid the coronavirus pandemic (COVID-19), according to sources quoted by Reuters.

Global oil demand decreased by 30%, or about 30 million barrels per day (bpd), as measures to limit the spread of the epidemic reduced demand for fuels. OPEC officials and allies outside the cartel will look into the situation in a video conference, after US President Donald Trump announced that he had prompted Saudi Arabia and Russia to conclude a 10-15 million barrel-per-day production reduction deal, or about 10% - 15% of their global supplies. The provisions of the agreement are not yet officially known.

On April 7th, an OPEC source said the scope of the output cut depends on the volumes that other producers, such as the US, Canada and Brazil, are willing to cut.

US officials have not pledged any production cuts, while Trump said US oil production has already declined.

Other producers outside the OPEC + Alliance, such as Canada and Norway, have expressed their willingness to reduce production.

In its March 6th meeting, the Organization of Petroleum Exporting Countries and the allies outside the cartel (OPEC + Alliance) have failed to reach an agreement on reducing production to offset the economic effects of the epidemic.

The OPEC has proposed a reduction of crude oil production by an additional 1.5 million barrels per day (bpd), in the second quarter of 2020.

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