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Energy transition to be shaped by world response to COVID-19

SNL ImageThis article was written as a companion to the latest episode of S&P Global Market Intelligence's Energy Evolution podcast and includes exclusive material from the interviews that does not appear in the show.

The coronavirus pandemic may accelerate a shift from fossil fuel spending to investments in renewable energy, but the pace of that transition depends heavily on how governments direct economic recovery spending, and whether the consumer behavior changes induced by the outbreak become permanent.

S&P Global Market Intelligence interviewed some of the leading global climate and energy experts and all agreed that the energy sector will look different on the other side of the COVID-19 crisis. A struggling oil and gas industry will lead to fewer jobs in that field, while changes in commuting, air travel and manufacturing may encourage businesses and governments to reconsider air pollution and traffic congestion problems.

"We may find that going forward, this idea that a multitude of the population is going to get in their cars at 6 a.m. or 7 a.m. and struggle through traffic for two to three hours to get to work: in a field where remote working is acceptable, that paradigm might really go out the window over time," Amy Myers Jaffe, director of the Council on Foreign Relations' energy security program, said in an interview. "In the United States, for example, we waste 6 billion gallons of gasoline a year just in traffic congestion, so the consequences could be quite large."

Mark Lewis, global head of sustainability research at BNP Paribas Asset Management and the former managing director of the Carbon Tracker Initiative, added that residents of smog-choked cities like Delhi, India, or Los Angeles, who are experiencing better air quality as a result of decreasing fossil fuel production might also decide they want a cleaner environment going forward.

"People will notice that, and people will say, well, actually, this is very nice. We'd like to see this on a more structural basis, on a more permanent basis going forward," he said.

A recovery for oil, gas and coal may be even more difficult after this recession given how much cheaper renewable energy has become and more widespread adoption of electric vehicles. The sector has been one of the most resilient in the face of what the International Energy Agency called the "biggest shock since the Second World War" in an April 30 news release projecting energy demand will fall 6% in 2020. The agency's latest report predicts the drop in energy demand will dwarf the previous record annual decline in carbon dioxide emissions of 8% in the wake of the 2008 financial crisis.

"Amid today's unparalleled health and economic crises, the plunge in demand for nearly all major fuels is staggering, especially for coal, oil and gas," International Energy Agency Executive Director Fatih Birol said in the release. "Only renewables are holding up during the previously unheard-of slump in electricity use."

IEA expects that after overtaking coal for the first time in 2019, low-carbon sources of energy such as wind, solar PV, hydropower and nuclear, will continue their growth in 2020 to reach 40% of global electricity generation, 6 percentage points ahead of coal. The amount of gas and coal in the worldwide power mix will drop three percentage points to a level not seen since 2001, according to the IEA forecast.

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Lewis also has doubts about whether companies can justify new oil investment with prices between $20 and $30 a barrel. "By contrast, if you're looking at new renewable infrastructure that's going to ... give you a very visible stream of cash flows over the next 25 years ... in Europe, you'd be looking at prices typically of €50/MWh to €60/MWh for new renewable projects," Lewis told S&P Global Market Intelligence. "Those are still very good long-term investments."

One unknown variable is where governments will direct spending over the recovery.

In the U.S., the Trump administration is working to offer financial assistance via loans to distressed oil and gas companies, among other tools to help the struggling industry. Proposals to include clean energy and other environmental measures in stimulus relief funding were shot down by the Republican-controlled Senate. In the European Union, the €1 trillion Green Deal climate package, crafted before the COVID-19 outbreak, is now being touted as a critical part of economic recovery.

In his conversation with S&P, Birol emphasized that governments have to balance energy policies with those that mitigate the global downturn. "It is very important people around the world don't think that pushing clean energy transitions is at the cost of a slower recovery or putting the money in the wrong place," Birol said. "I think it is important that those policy suggestions gain broad political and public support."

An April 19 online survey of registered voters conducted by Climate Nexus, a communications group focused on highlighting clean energy solutions and the impacts of climate change, found that when it comes to stimulus funding, 75% of respondents want their state to prioritize the "clean energy industry" over the "fossil fuel industry." The same survey found 67% of voters strongly or somewhat supported providing financial bailouts to renewable energy companies while just 44% and 39% felt the same way about the coal sector and the oil and gas sector, respectively.

Bill McKibben, co-founder and leader of climate conservation group, said he thinks renewable energy and economic recovery go hand in hand.

"It's crazy to be predicating the recovery of this economy on technologies that clearly are not the ones we're going to need to rely on going forward," he said in an interview. "We have to reset things for lots of reasons, and that provides us with an opportunity to speed up a transition that everyone knows we have to make."

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Another unknown variable will be what the oil and gas recovery looks like. If demand comes quickly after a prolonged downturn, some parts of the oil and gas industry may be better positioned than others.

"One of the geologically strange things about shale ... is that you can stop drilling now in the United States onshore for a year, two years, three years, and then if you change your mind because the oil is needed, and you can amass the capital and some personnel, you can drill again, and you don't ever have to worry about the so-called reservoir condition," Jaffe said.

That is not the case for countries like Venezuela and Iraq, which are dominated by more conventional plays that could require billions of dollars to restart damaged fields, she noted.

READ MORE: Sign up for our weekly coronavirus newsletter here, and read our latest coverage on the crisis here.

Still, American independent producers recognize that regaining investors' confidence will not be easy given how companies have mismanaged balance sheets in recent years.

"Our industry has created such economic waste that nobody will buy our stocks or own our stocks," Pioneer Natural Resources Co. President and CEO Scott Sheffield told Texas regulators as he pushed for production limits in Texas in April. "Nobody wants to give us capital because we all destroyed capital and created economic waste."

The solution for some oil companies could be a pivot to taking on more renewable energy projects, another step toward speeding the energy transition.

Supermajor Royal Dutch Shell PLC, for one, will not be abandoning its long-term focus on transitioning from more traditional energy markets to operating assets with a lower carbon intensity due to the short-term challenges presented by COVID-19, according to CEO Ben Van Beurden.

"[Oil] demand will come down massively," he said during the company's April 30 earnings conference call. "Who knows, actually, where the viability of our assets will go?"

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Episodes of Energy Evolution are available on iTunes, Spotify and other platforms.