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 and gas took a hit while renewable energy remained resilient, the pandemic is expected to result in a permanent realignment of the international energy market.
Oil Price Crisis
Travel restrictions and government-imposed lockdowns designed to halt the spread of Covid-19 had a considerable impact on energy demand worldwide. Moreover, with industrial capacity significantly reduced due to social-distancing requirements and disrupted shipments, the need for oil and other forms of energy was significantly reduced over this period. This fall in demand, in combination with a price war between Saudi Arabia and Russia, led to a sharp fall in the international price of oil. After opening the year at $66 per barrel, prices slumped to a low of $19.33 on April 21, 2020 as the pandemic began to take hold.
To help stabilise prices, that month members of the Organisation of the Petroleum Exporting Countries (OPEC), along with other oil-producing nations including Russia, Azerbaijan, Malaysia and Mexico, agreed to cut total global output by 9.7m barrels per day (bpd) – equivalent to around 10% of global production. The 23-nation group, known as OPEC+, decided to scale back the cuts to 7.7m bpd in August 2020, before announcing in early December of that year that they would increase production by some 500,000 bpd starting in January 2021.
However, concerned that this decision could lead to excess oil in the market, Saudi Arabia later announced that it would cut production by an additional 1m bpd between January and late March 2021. While these efforts have helped oil prices recover to around $66 per barrel as of February 2021, the instability of the situation has had a lasting impact on oil companies and major oil-producing nations.
In Saudi Arabia, for example, where oil accounts for around 45% of GDP, the government implemented a series of measures to bolster finances, including tripling the value-added tax from 5% to 15%, suspending certain allowances for public sector workers and reducing expenditures in some elements of its Vision 2030 diversification strategy. Elsewhere, in Nigeria – which sources 10% of GDP, 57% of government revenue and 80% of its exports from oil – the government approved $5.5bn in additional loans to help fund a new budget. In Algeria, where oil makes up 90% of export revenue and finances 60% of the budget, the government announced in May 2020 that it would slash that year’s spending plans by 50%.
While the gas industry has not been as dramatically affected as the oil sector, the overall reduction in energy demand has nevertheless had an impact on major gas-producing countries as well.
Perhaps unsurprisingly, the drop off in energy demand coincided with a dramatic fall in investment in the sector. The “World Energy Outlook 2020” report, released by the Paris-based International Energy Agency (IEA) in October, predicted that global energy investment would fall by 18.3% in 2020, with total energy demand declining by 5.3% and emissions dropping by 6.6%. The report forecast that over the course of the year investment in oil, coal and gas would fall by 8.5%, 6.7% and 3.3%, respectively, while investment in renewable projects was projected to increase by 0.9%.
Given the IEA’s findings, which include a projection that renewables will account for 80% of all electricity demand growth over the next decade, some observers have suggested that the pandemic could precipitate a significant shift in the international energy mix. “I see solar becoming the new king of the world’s electricity markets. Based on today’s policy settings, it is on track to set new records for deployment every year after 2022,” Fatih Birol, executive director of the IEA, told international media at the time of the report’s release.
Renewable energy investments have been supported by the rise in the number of sustainability-focused financial instruments issued throughout the course of 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, around 24% higher than the corresponding period in 2019. Moreover, the agency predicted that sustainable bond issuance could reach $450bn by the end of 2020.
While much of this growth has come from developed markets such as Germany – which launched its first two sovereign green bonds in 2020, worth a combined €10bn – emerging markets have also contributed to the trend. In June 2020 the Indonesian government issued a $2.5bn green sukuk (Islamic bond), its third venture into the sustainable debt market, while in September of that year Egypt launched its inaugural green bond worth $750m, the first in the MENA region.
In terms of private sector activity, in September 2020 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 of its kind in the Kingdom. The offering – which was four-times oversubscribed – included five- and 10-year dollar-denominated bonds to finance green projects such as smart metres. The same month Qatar National Bank became the first institution to issue a green bond Qatar, raising $600m via five-year unsecured notes to finance or refinance the bank’s green projects.
Meanwhile, building on its government’s use of sovereign green bonds, in October 2020 Indonesian power company Star Energy Geothermal sold the country’s first green corporate bond with an investment-grade rating, raising $1.1bn for capital expenditures associated with the company’s geothermal operations in Darajat and Salak.
While trends suggest that the energy sector is moving away from traditional fossil fuel sources in favour of renewables, questions remain over the scale and timeline of such a transition. “It has been a tumultuous year for the global energy sector. The Covid-19 crisis has caused more disruption than any other event in recent history, leaving scars that will last for years to come,” notes the IEA’s world energy report. “But whether this upheaval ultimately helps or hinders efforts to accelerate clean energy transitions and reach international energy and climate goals will depend on how governments respond to today’s challenges.”
Indeed, despite the dramatic fall in fossil fuel investment, there was still some significant activity in this segment during 2020. In June of that year Abu Dhabi National Oil Company announced a $20.7bn energy infrastructure deal with a global consortium that would lease the rights to 38 gas pipelines, while – despite concerted efforts to diversify away from hydrocarbons – Saudi Arabia’s Public Investment Fund invested around $2bn in the oil industry in 2020. The fund also acquired stakes in international oil giants BP, Shell and Total, which were seen as attractive investments given the fall in share prices Moreover, in April 2021 Bahrain announced that drilling at its new offshore Khaleej Al Bahrain field is slated to begin in 2022. The field was discovered in 2018 and the country is seeking investors to tap its estimated 80bn barrels of shale oil.
Questions have also been raised about whether emerging markets can afford a green recovery, with some analysts anticipating that countries will prioritise economic growth over environmental goals as they emerge from lockdowns. In Southeast Asia, for example, countries such as Indonesia and Vietnam still have significant deposits of coal, which is viewed in some quarters as a cost-effective option for boosting power generation. “As Southeast Asia rapidly becomes more developed, the need for energy service provision will continue to grow,” Roberto Lorato, CEO of Indonesian energy company MedcoEnergi, told OBG. “There is still great potential for exploration activity in this region and, given that it is growing as a key economic bloc, it is imperative that established energy players are able to serve this dynamic market well.”
Nevertheless, the transition towards renewables in the energy mix of countries across the spectrum is likely to continue apace in the coming years. “It is only a matter of time before green energy will control the market; it has been increasing its supply at a much higher pace than the fossil fuel industry,” Hatem Al Mosa, CEO of the Sharjah National Oil Corporation, told OBG. “Green energy will capture most of the market within the next two decades.”