Oil Industry Faces Existential Threat from COVID-19 and Net-Zero Transition
The global oil industry faces significant challenges due to the COVID-19 crisis and the transition towards a net-zero economy. The price of US crude oil turned negative in 2020, forcing producers to pay buyers to take excess barrels. Meanwhile, the capital costs of upcoming oil projects are enormous, with each company's average capex exceeding $2 billion, and even more for giants like ExxonMobil. The average break-even oil price for upcoming planned oil fields is significantly higher than projected future prices, posing an existential threat to oil and gas companies.
The COVID-19 pandemic led to a 5% drop in global oil demand, causing the price of US crude oil to plummet and even turn negative in April 2020. This unprecedented situation forced producers to pay buyers to take excess barrels, highlighting the industry's oversupply issue. The high capital costs of upcoming oil projects exacerbate this problem. Each company's average capex for a new project to first production exceeds $2 billion, with ExxonMobil's average exceeding $6 billion. This means that even before production begins, these projects require substantial investments, putting companies at risk if oil prices remain low.
The transition to a net-zero economy further threatens the oil and gas industry's business model. The average break-even oil price for upcoming planned oil fields of the five biggest oil and gas companies is significantly higher than the projected $35 per barrel by 2030 under the IEA's net zero scenario. This means that these projects may not be profitable in a lower-carbon economy, potentially leading to significant losses for oil companies and their investors. Moreover, a less oil-dependent world means lower oil demand and prices, which could result in substantial losses for oil companies and their investors. Carbon Tracker estimates that there are $200 billion of unfunded liabilities and decommissioning costs in the US alone, with the whole system being about $50 trillion of fixed assets that could be stranded.
The oil and gas industry faces significant challenges due to the COVID-19 crisis and the transition towards a net-zero economy. The negative oil prices, high capital costs, and the threat of stranded assets pose serious risks to oil companies and their investors. As the world moves towards a lower-carbon economy, the oil industry must adapt and diversify its business model to remain competitive and sustainable.
