Weak demand pushing oil, gas toward ‘terminal decline’

Workers connect drill bits and collars at an oil rig outside Midland, Texas back in 2014. (File pic)

PARIS: Falling fossil fuel demand coupled with mounting risk for investors could slash the value of oil, gas and coal reserves by two thirds, sending shock waves through the global economy, energy analysts warned Thursday.

The value of projected profits for the sector could also fall by two thirds, according to a report from Carbon Tracker, a non-profit financial think tank focused on aligning capital markets with climate policy.

Competition from clean technologies along with government policies to achieve climate targets and energy security are pushing the fossil fuel industry toward “terminal decline”, the study concluded.

“Terminal decline starts when demand peaks,” lead author Kingsmill Bond, Carbon Tracker’s new energy strategist, told AFP.

“Global coal demand, for example, peaked in 2013 and has never recovered to that level.”

Before the coronavirus outbreak, many analysts predicted global demand for oil and gas would peak in the mid-2020s, while the International Energy Agency (IEA) forecast a plateau towards the end of the decade for oil.

But the economic meltdown triggered by pandemic lockdowns across the world starting in March could accelerate that process.

“We may now have seen peak fossil fuel demand as a whole,” said Bond, who worked for 25 years in equity research.

“When a cyclical shock hits a sector already facing structural decline, it brings forward the peak in demand.”

The IEA foresees an 8% drop in fossil fuel demand in 2020 due to the pandemic.

“Nobody knows how much the recovery will be in 2021,” said Bond.

“But if the recovery is half, and if the fossil fuel industry returns to a growth rate of 1%, it will take until 2025 to get back to 2019 levels.”

“By then, renewable energy technologies will be large enough to supply all the growth in energy demand.”

In 2019, renewable power – mainly solar and wind – already accounted for 72% of all expansion in the electricity sector, the International Renewable Energy Agency (Irena) reported last month.

When a challenger technology takes all the growth, the incumbent – by definition – enters into terminal decline, experience in other sectors has shown.

That threshold is typically crossed when the challenger has 5% of market share.

Collapse of future profits

Fossil fuel faces stiff competition from renewable energy. (AFP pic)

Renewables already account for about a quarter of electricity generation, but – not counting hydro, which has less potential for expansion – only about 4% of global primary energy consumption.

“Now is the time to plan an orderly wind-down of fossil fuel assets and manage the impact of the global economy rather than try to sustain the unsustainable,” Bond said.

Shell’s first dividend cut since World War II, Repsol’s write-off of nearly €5 billion last year, and a wave of bankruptcies in the US shale oil sector all point to possible structural change.

And yet oil and gas companies are forecasting growth in demand for their products.

Indeed, the fossil fuel system as a whole has been investing about US$5 trillion annually on new supply and demand infrastructure for several years running.

The size of the fossil fuel economy – about US$10 trillion in supply infrastructure, and US$22 trillion in demand infrastructure – means its rapid decline could pose a threat to financial stability, the report concluded.

“Companies across the fossil fuel system are worth US$18 trillion in listed equity, making up a quarter of the total value of global equity markets,” it said.

In 2018, the World Bank valued future profits from oil, gas and coal – cast over a roughly 50-year period – at US$39 trillion.

Carbon Tracker calculated that if demand falls by 2% a year – in line with the Paris Agreement goal of capping global warming below 2°C – those future profits would collapse by nearly two-thirds to US$14 trillion.

Producers projecting a return to business-as-usual, by contrast, are banking on profits in excess of US$100 trillion, the report found.

A collapse of future profits would be especially threatening to petro-states whose economies rely on oil export income. The world’s biggest oil and gas earners are Saudi Arabia, Russia, Iraq and Iran.

Those most vulnerable to instability include Venezuela, Ecuador, Libya, Algeria, Nigeria and Angola, the report said.