Houston — Both crude oil and overall fossil fuel demand may have permanently peaked in 2019 if a slower economic recovery from the coronavirus pandemic becomes reality, hastening the arrival of peak oil demand by more than a decade, according to a new report from the Boston Consulting Group.
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The pandemic rapidly cratered global oil demand by more than 20% from a 2019 high of more than 100 million b/d, and a combination of growing renewable energy supplies and potentially permanent changes to the way many people telecommute and work from home could ensure that worldwide consumption never again hits such highs.
A slower U-shaped economic recovery could mean global fossil fuel demand already has peaked, while a quicker V-shaped recovery likely would restore fossil fuel demand by 2022, still leaving a weakened energy sector in its wake, the report contends.
"Our analysis suggests the possibility that demand for fossil fuels has already peaked. If the world economy does not rapidly recover from the crisis, and if efforts to curb emissions accelerate moderately, global fossil fuel demand will have peaked in 2019," the report states. "The growth in fossil fuels was always going to come to an end, but the COVID-19 crisis may have accelerated this by more than a decade."
Such a scenario would place greater pressure on oil and gas companies' bottom lines, force the need for more of a lower-carbon energy transition and accelerate industry consolidation, according to the report.
And no sector is expected to be harder hit than the US shale oil industry. Active US drilling rig counts and fracking crews already are down nearly 75% since mid-March, according to S&P Global Platts Analytics, while US upstream capital spending has plunged 35% for 2020. The latest Platts Analytics forecast assumes the rig count will reach bottom in the next few days and stay relatively flat until early 2021 as operators wait for several months of sustained higher oil prices.
A June 22 report from Deloitte highlights that the US shale sector already was losing money on average even before the pandemic amid crude price swings and the loss of capital from Wall Street investors.
"Now, simultaneously faced with a new normal of lower oil prices, reduced demand, capital constraints, heavy debt loads and COVID-led economic uncertainty, the industry is entering a period of 'great compression,'" the Deloitte report argued.
The shale sector could write down the value of its assets by as much as $300 billion, according to Deloitte, in part because about 30% of all shale operators are essentially insolvent with NYMEX WTI crude oil priced at $35/b or below. Front-month WTI was trading at around $40.41/b June 23.
"The history of oil and gas is filled with periods of extensive consolidation. Following a 15-year boom, the U.S. shale segment appears to be next," said Duane Dickson, Deloitte vice chairman of US oil, gas and chemicals. "As COVID-19 impacts amplify pressures on shale companies through 2020, a wave of impairments may prompt the deepest consolidation the industry has ever seen over the next six to 12 months."
Despite the big dip in demand for fossil fuels, the growth of wind and solar power are still expected to rise worldwide even though expansions have slowed somewhat during the pandemic.
The International Energy Agency (IEA) still projects that global wind and solar power generation this year to increase by more than 10% and 15%, respectively. And this growth is further squeezing conventional fossil fuel operators.
"Together with continued growth of renewable energy sources and increasing electrification in transport, this means that the recovery in demand for fossil fuels will lag behind global GDP," the Boston Consulting Group report stated.
And, in the event of a U-shaped recovery as global coronavirus cases continue to rise, global energy demand may never recover. If it does, it wouldn't come until after 2025, the report states. Oil demand would suffer from a myriad of factors: slower transportation and travel growth, increasing fuel efficiency from vehicles, earlier aviation flight retirements, increasing electrification of power supplies and more.
And then there's the potential for more permanent lifestyle changes.
"In transportation, it remains unclear whether some of the recent restrictions may trigger longer-term behavioral changes in business and long-distance travel," the report states. "Several countries are introducing green recovery programs that combine post-pandemic economic stimulus funding with a transformation toward lower carbon dependency. And the European Union's flagship Green Deal could significantly accelerate the deployment of low-carbon technologies — with potential spillover to countries outside the EU."