The Coronavirus and Big Oil: Is the Rise of One the Sunset for the Other?

April 27, 2020 – On Friday my wife and I were tested for the coronavirus. On Sunday we learned we were negative. With both of us suffering from symptoms that were in the COVID-19 hit list, and with me being 71, we were screened by nurses and doctors before succumbing to a near-brain-piercing 5-second nose swab. I must compliment the staff at Women’s College Hospital here in Toronto for their professionalism and kindness, and for the call on Sunday evening that told us we weren’t infected. We still have the symptoms but, at least, we are not dealing with the coronavirus, whatever it is that we have.

So what the coronavirus could have done to us seems to be happening not to just the more than 3 million who have contracted it, and the more than 200 thousand who have succumbed, but also to large swaths of the world economy, and as a result to the fuels our globe runs on – oil and natural gas. The world is awash in oil right now with very few customers needing it. It has become an existential crisis for the smaller players, and a significant challenge to the oil majors around the planet. The price for crude oil futures went negative in the last few days with producers having to pay customers to take the stuff away. Storage capacity for unneeded oil is approaching the maximum capacity of the industry to keep it. Industry executives are talking about the end-of-times for their businesses. The banks and other big bettors on the industry including governments are facing oil company bankruptcies and requests for bailouts.

The industry itself can accept a fair share of the blame for what has unfolded, that and national and sub-jurisdiction actors like Saudi Arabia, Russia, the United States, and in Canada, Alberta, Saskatchewan, and Newfoundland and Labrador, who are all addicts.

Why the industry?

Anytime when a business places its bets on one means of earning a profit, it leaves itself vulnerable to the changing nature of the marketplace. It’s not like there haven’t been signals and warnings to the industry to diversify. Oil and gas have gone through multiple booms and busts over the years, some caused by geopolitics and war, and some caused by the growing global concern for the environmental damage wrought by the industry. The former has had a greater influence on performance than the latter which is why the climate change movement has not yet inhibited oil majors in their continued efforts to explore and develop new fields and pump out more than 90 million barrels of it per day. And the climate change movement has equally not inhibited governments from collecting fees and royalties from new exploration leases and from every barrel of oil produced.

The industry has repeatedly tested the waters dipping into renewable energy projects, and it continues to promote its green credentials publicly through advertising. This is what we call “greenwashing” with companies spending almost as much on advertising their renewable credentials as they do on the projects themselves. Back in March of last year, I posted an article here that compared what the Big Five producers, Exxon Mobil, Royal Dutch Shell, Chevron, Total, and BP were spending on new fossil fuel projects, versus renewable energy investments. The difference amounted to $106.4 billion in favour of fossil fuels, and less than 3% of total new investments, or $3.6 billion, going to renewables. But what a difference a year makes. The oil industry today cannot find customers for its products, not because the climate change movement has brought it to its knees, but because of a virus, COVID-19.

Is this short-term?

Likely not say many industry pundits. The industry has never appeared more fragile as political infighting among national actors, combined with a pandemic, is coinciding with a growing number of government agendas to move to a low-carbon future. What COVID-19 may have done is kickstarted the transition sooner than the mid-2020s which seemed the more likely milestone date just a few months back.

Investment firms, and banks, are jumping from the oil and gas bandwagon and questioning the investment risk inherent in the industry. In an article appearing yesterday on CNBC’s website, it talks about the concept of the Overton Window, how an idea that is on the fringe of discourse becomes central to it with increasing rapidity. This appears to be what is happening for the oil and gas sector with the financial community moving the industry from a central place in investment portfolios to a fringe player.

How much so? CNBC author, Andrew Logan, describes the phenomenon.

“In 1980, 7 of the 10 largest stocks in the S&P 500 were oil companies, representing 29% of the index. As recently as a decade ago, that weighting was 15%. Today, with Exxon having dropped to No. 28, there are no oil companies in the top 10 for the first time in the history of the S&P, and the industry’s weighting is below 3% — its lowest in history.” 

What Logan is pointing out is an industry decline already happening even before COVID-19 appeared on the scene, and before a Saudi-Russian quarrel over oil production contributed further to taking the bottom out of the business.

Oil prices today at between $10 and $20 USD per barrel are insufficient for the oil sands in Alberta to continue production. These prices are insufficient for fracking operations in the Permian and Bakken fields in the United States. And considering the government spending of Saudi Arabia, and Russia, oil prices and the royalties earned from sales are insufficient to fund present and future national budgets.

Investment money is now doing the talking and those who expect their money to produce a return on investment are certainly no longer seeing a future in oil and gas. Meanwhile, COVID-19 has delivered the first of what will be two external shocks to demand. The second one to follow will be the implementation of deep decarbonizing policies by national and sub-jurisdiction governments further weakening demand for oil in particular. Few oil operations will be viable. And whereas COVID-19 is a temporary shock, decarbonizing will be permanent.

Lately, we have been hearing from the majority of Big Five oil producers about achieving net-zero emission targets by 2050. But the Overton Window is beginning to shift, so don’t be surprised if those net-zero targets start moving rapidly to a much earlier milestone date. If not, investors will take their money and walk away.