What does the current oil crisis mean for the energy transition?

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The current crisis facing the oil and gas industry is the result of a two-pronged situation: the economic slowdown caused by the global COVID-19 pandemic and a price war between Saudi Arabia and Russia, which resulted in massive oversupply and low oil prices. The fallout may have lasting implications for the energy industry.

Before the COVID-19 crisis, the oil and gas sector started to respond to increasing regulatory, investor and societal pressures to tackle CO2 emissions. Several industry players agreed to accelerate emissions reduction, but the commitment would require faster technology adoption and firm policies. Today, the O&G sector is hit by the price collapse and it responds by cutting capital spending, which may include investment originally planned for the decarbonization initiatives.


The move to sustainable energy, in the short-term, is likely to be slowed. Traditional energy companies may shift priorities from environmental and corporate social responsibility initiatives preferring instead to focus on employee safety, cost cuts and immediate sources of profits to weather the storm. Also, one might argue that the lower the fossil fuel commodity prices, the more competitive the power generated from the fossil fuel industry.

The broader stakeholder ecosystem such as governmental organizations might decide to trim subsidies that have boosted energy transition in the past years due to the current hits absorbed by their economies. They may also shift their political will to more urgent economic matters at hand rather than fighting to implement new green regulations.

Government policies during the pandemic have drastically altered patterns of energy and fuel demand around the world. Curtailed travel reduced transport and changed consumption patterns, operations of oil and gas facilities were temporarily disrupted, which led to lower emissions.

Staying the course

Oil and gas players worldwide have reduced their hydrocarbons spending during the COVID crisis, but they kept the energy transition plans on track. Four European leading producers announced net-zero strategies (Shell, Total, BP and ENI), and the CEOs of Shell and BP openly questioned whether oil demand can return to pre-pandemic levels.

Coronavirus has not been the defining factor for the wave of the net-zero commitments from the O&G sector – they are the result of intensifying pressure from investors, governments and the public. The net-zero announcements by Shell, Total and ENI would probably have happened regardless of the pandemic. BP made its announcement in February, before the COVID took off.

The pandemic crisis has driven some governments to introduce emergency plans to cushion the immediate economic effects, and there are growing calls to align those efforts with climate targets. Germany, for example, is calling for investment in renewable energies, intelligent power grids and the hydrogen infrastructure. The acceleration of energy transition could help to advance climate action and to revive the local economy.

Amidst the economic crises brought on by the pandemic, the EU Commission released the strategic road map to promote “green” hydrogen produced from renewable electricity. The announcement is powering the climate-neutral economy and aims at full efficiency in the energy sector. 


Only the European Oil Majors have made meaningful progress in terms of long-term strategic diversification into clean energy. Players, including Shell, Total, BP and Equinor are choosing a path toward emission reductions and the diversification of their businesses into renewables, e-mobility, plastic recycling and energy services.

Total announced in March that despite the current oil crisis leading to a 20% global investment cut in 2020, the Major will maintain its CapEx commitment for renewables and electrification activities. Shell sent another strong message by publishing its new carbon objectives. Shell’s CEO stated that “even in these times of immediate challenges, we also need to keep the focus on the long term”. The company is aiming at carbon neutrality from all up-, mid- and downstream operations and installation by 2050.

In fact, Majors are not the only ones to take this route. The German O&G company, Wintershall Dea, announced in March that it is keeping its clean energy plans, especially carbon capture and storage, despite downsizing investment plans in 2020. Spanish Repsol said it will trim capital spending this year to cope with the impact of low oil prices and the COVID crisis, but it maintained its emission targets and affirmed its commitment to renewables. Italy’s ENI has recently confirmed its “strategy to become a leader in the decarbonization process, notwithstanding the enduring impacts of the COVID-19 pandemic on the Company”.

Rates of return

Majority of other oil companies have been rather slow in pivoting their businesses toward a cleaner portfolio. Behind-the-curtain argument has always been that they can’t invest in renewables significantly because renewable projects offer much lower returns than oil and gas projects. The World Energy Investment report from the International Energy Agency (IEA) found that so far, the spending by oil and gas companies outside their core business areas has been less than 1% of total capital expenditure in 2019, with the largest investment going to solar PV and wind projects.

The competitiveness of oil and gas projects in comparison with renewables projects has however shifted dramatically. In a $40-per-barrel environment, weighted average returns from yet-to-be-sanctioned oil and gas projects globally have seen a massive drop from 20% IRR in a $60-per-barrel environment to around 6% IRR, according to Wood Mackenzie. This means that oil and gas projects are now on a par with renewables. And let’s not forget that renewable projects are much lower risk, with fixed feed-in tariffs and secure long-term revenue, so they’re a very good hedging strategy for many of the oil and gas companies.

In parallel, we should not neglect also the psychological impact of this oil crisis on the broader ecosystem, including both investors/financial market and oil companies. Investors, in general, are keener to provide capital to industries with long-term stability. Low carbon energy can also drive a new generation of talent in the O&G industry. Oil companies might intensify their energy transition and diversification efforts in the long term and come to view renewables opportunities as a serious hedging strategy against future oil crisis, similar to what was done before with the Downstream integration.

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  • Rohan Khurana

    4 years ago

    Oil and Gas is one of the hardest-hit sectors in this pandemic, as it has wiped out almost a third of the global oil demand through global lockdowns and travel bans. It has sent the oil prices swooping down and the industry continues taking a huge hit. With alternate sources of energy adding to increased pressure, it is going to be an uphill task for the industry to bounce back – and, travel bans continue to sustain.

    Prior to the crisis, the forecast from IEA was that jet fuel demand would grow at over 1% per annum over the period of the next five years. The post-pandemic recovery from the recession looks towards an alternative towards cheaper and more established fuels like oil.

    • Anna Yarygina

      4 years ago

      Dear Rohan,
      thank you for your comment – it is absolutely valid. COVID-19 had a significant impact on oil demand and, in particular, the transportation segment. This demand shock, coupled with the supply competition, had squeezed oil prices in an unprecedented manner. Having said that, with the gradual softening of lockdown measures, and with the prospect of global economic recovery in the short to mid-term, oil demand is expected to recover. One point is clear: even if oil markets recover, the consequences of this current crisis will remain and the need for optimization, efficiency, and cost competitiveness in the industry becomes crucial more than ever.

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