17 Dec Is oil and gas a dying industry in the wake of COVID-19?

This year has presented the world with a seemingly unending raft of challenges, to our health, society and economy. And COVID-19 has definitely made its mark across most business sectors in most countries. However, while there have been several headlines claiming that the pandemic heralds the demise of the oil and gas (O&G) industry, this is not the case. While energy transition is underway, and obviously remains a priority for a world facing the impact of climate change, the truth is that oil and gas industry will remain in the energy mix for decades to come.

A short-term drop in demand for the oil and gas industry in 2020

Of course there has been a massive fall in demand for O&G this year, particularly during the first wave of the pandemic. In April, Brent crude oil dropped to below US$20 per barrel, which is the lowest it has ever been. But this is directly tied with the drop in aviation and movement.

Most countries were in some form of lockdown at the same time, with unprecedented travel bans and a corresponding fall in demand for flying and driving. This clearly led to a massive decrease in demand for oil.

It also led to various politicians, commenters and green energy advocates telling the media that “oil is dead”. For example, in May a Green Party MP in Canada, Elizabeth May spoke with reporters about the future of energy. She urged that the sector should not be supported economically, and that the pandemic has clearly shown the death of the oil industry.

Despite Mrs May’s assertion, and those of many other commentators on the energy sector, this is clearly not the case. The International Energy Agency (IEA)’s data from before the pandemic shows that the demand for O&G is expected to increase globally for years to come. Specifically, the IEA says that demand for petroleum and other liquids will continue to grow far beyond 2050.

Similarly, the demand for natural gas is predicted to increase by 1.1% every year. The IEA has, of course, taken into account the sharp drop in demand in 2020, but is clear that this is a direct result of the pandemic. Demand for oil has decreased by 9.3 million barrels a day this year, but as I’ve said this is because of the fall in aviation and transport demand. When economies begin to reopen, this will change and there will be a sharp increase in demand. The IEA predicts a sharp increase in demand next year and say that it will increase by 5.7 millions of barrels every day between now and 2025.

Demand for petrochemical products is rising fast

The short-term demand for endless by products of the oil industry has been rising this year. For example, petrochemical products like PPE (personal protective equipment) and packaging have skyrocketed, also because of the pandemic.

Oil underpins our entire society, and this is something that Governments and energy giants need to communicate when they announce their plans for transition towards net zero. This is how Petronas, Malaysia’s state-run energy company, is framing their messaging for the sector’s future.

Rather than contribute to the “oil is dead” narrative, CEO Muhammad Taufik spoke in a more nuanced way at the India Energy Forum held in October 2020. He spoke about moving towards energy transition and acknowledged the aim for green energy.  However, strategies must include O&G as it will still form more than half of the energy offering. He said: “We still believe there is promise in the O&G industry, the only change is that we need to produce it in a more cost effective and cleaner way.”

Balancing value with renewables is the challenge ahead

All energy companies will now be examining their upstream portfolios to get the maximum value out of them. Energy security has been brought to the top of the list for people’s concerns due to the pandemic, but the way forward for the world’s energy provision must be a careful energy mix that includes O&G for the foreseeable.

There is a policy shift towards liquified natural gas (LNG) in the medium terms. And this will continue to expand, particularly as the demand for energy grows in developing economies. What we need is a balance of LNG, solar, hydro, wind and other renewables along with a better managed O&G industry.

Even before the pandemic, this was the strategic aim for energy companies. And now as the world works on post-pandemic economic recovery plans, renewable energy will play a big part. However, the renewable and green energy sector itself will rely on fossil fuels for production and development, manufacturing, shipping and provision of power.

Fossil fuels remain the cheapest forms of energy provision

Just as repairing the global economy depends on the energy sector, so does elevating the millions of people living in poverty around the world. The pandemic has shone a spotlight on the poverty divide in just about every country. It may be more obvious in developing countries but even in the UK, UNICEF has had to step in for the first time in its history to feed hungry kids. In India, the Government is prioritising getting low-cost energy to all of its citizens, and to do so are including fossil fuels, wind and solar power into the mix.

There’s no doubt that, despite mixed messages, the O&G sector has a significant part to play for years to come. Oil and its by products currently underpin every aspect of our society, supply chain and production cycle. To overturn the world’s dependence on oil will take a long time, and for now, fossil fuels remain the most cost-effective way of powering the world.

Read Jan Egil’s previous article where he discusses the challenges facing energy companies heading towards net zero