Green light: As global demand for hydrocarbons dropped in 2020, the shift towards sustainable energy intensified

The year 2020 was a dramatic one for the global energy sector, with the Covid-19 pandemic slashing demand for hydrocarbons and upending market norms. Seeing that investment in oil took a hit while renewable energy remained resilient, some stakeholders expect the pandemic to result in a permanent realignment of the international energy market.

Oil Crisis

The energy sector was dramatically affected by the outbreak of Covid-19, as a sharp contraction in demand due travel restrictions, government-imposed lockdowns and lower industrial output – in combination with a price war between Saudi Arabia and Russia – led to a sharp fall in the price of oil. After opening the year at $66 per barrel, prices slumped to less than $20 in April 2020 as the virus spread around the world. To help stabilise prices, that month members of the Organisation of the Petroleum Exporting Countries, along with other oil-producing nations such as Russia, Azerbaijan, Malaysia and Mexico, agreed to cut total global output by 9.7m barrels per day – equal to about 10% of production. Further revisions to output levels followed over the remainder of the year.

The collapse in oil demand and prices coincided with a dramatic fall in investment in the energy sector. The “World Energy Outlook 2020” report by the International Energy Agency predicted that global energy investment would fall by 18.3% that year, with total energy demand declining by 5.3% and emissions dropping by 6.6%. The report forecast that demand for oil, coal and gas would fall by 8.5%, 6.7% and 3.3%, respectively, in 2020, while demand for renewable energy was projected to increase by 0.9%.

Green Bonds

Renewable energy investment was supported by the rise in sustainability-focused financial instruments issued during 2020. Despite the fall in overall energy investment, figures compiled by credit ratings agency Moody’s showed that global sustainable bond issuance – consisting of green, social and sustainability bonds – totalled $288.2bn in the first nine months of the year, 24% higher than the corresponding period in 2019. While much of the growth in 2020 came from developed markets such as Germany, which launched its first two sovereign green bonds for around €10bn, emerging markets also contributed to the trend.

In June the Indonesian government issued a $2.5bn green sukuk (Islamic bond), its third venture into the sustainable debt market, while in September Egypt launched its inaugural green bond worth $750m, the first in the Middle East and North Africa. That same month Saudi Electricity Company, which is 80% owned by the government and has a monopoly on electricity transmission in Saudi Arabia, raised $1.3bn with a green sukuk – the first in the Kingdom. Also in September 2020, Qatar National Bank became the first company to issue a green bond in Qatar, raising $600m. One month later Indonesian power company Star Energy Geothermal sold the country’s first green corporate bond with an investment-grade rating, raising $1.1bn.

Transition Pace

While trends suggest the energy industry is moving away from fossil fuel sources and towards renewables, there are still some questions around the scale and timeline of such a transition. Indeed, despite the dramatic fall in oil investment in 2020, there was still some significant activity in the segment. In late June Abu Dhabi National Oil Company announced a $20.7bn energy infrastructure deal that would lease the rights to 38 gas pipelines, while Saudi Arabia’s Public Investment Fund invested around $2bn in the oil industry, despite moves to lessen the country’s dependence on hydrocarbons. The fund acquired stakes in BP, Shell and Total during 2020, which were seen as attractive investments given the fall in share prices.

While cheaper oil could incentivise nations in many regions of the world to use fossil fuels for their energy needs during the recovery from the pandemic, the transition towards renewables is nevertheless likely to continue, as the segment has been increasing its global supply at a more rapid pace than oil and gas.