Energy spending slump risks slowing transition, creating supply shortage
Global energy investment is expected to plunge by 20%, or almost $400 billion, in 2020 as the COVID-19 crisis risks slowing the world’s transition to cleaner and sustainable energy systems, the International Energy Agency.
Through a combination of falling demand, lower prices and a rise in non-payment of bills, world energy revenues flowing to governments and industry are set to shrink by well over $1 trillion this year, according to IEA’s World Energy Investment 2020 report.
Set to be the largest ever collapse in global energy investment in history, the decline will take the heaviest toll on oil, said the IEA, with global consumer spending on the commodity set to fall below the amount spent on electricity for the first time.
“The finding of the report is troubling in many ways,” said FatihBirol, the IEA’s executive director. “There is a great risk that the lockdown that world has experienced may lead to a lock-in of obsolete energy technologies which could determine the energy [landscape] for years to come.”
“The slowdown in spending on key clean energy technologies also risks undermining the much-needed transition to more resilient and sustainable energy systems,” Birol said.
The report comes a day after the heads of the world’s biggest oil and gas producers pledged to maintain a strategic focus on producing cleaner energy and helping to mitigate climate change despite reeling from the impact of the pandemic on oil and gas prices.
SUPPLY CRUNCH RISK
With oil producers slashing upstream budgets and many national oil companies forced to limit spending overseas to focus on their domestic markets, however, global investment in oil and gas is expected to fall by almost one-third in 2020, according to the report.
The US shale sector is set to be hit hardest, with investment in shale forecast to fall by 50% in 2020 as investor confidence and access to capital has now “dried up,” the IEA said.
The spending slump is also creating a “clear risk” of tighter oil and gas markets in the coming years if demand starts to move back toward its pre-crisis growth path, according to the report.
The decline in upstream investment in 2020 takes an estimated 2.1 million b/d away and some 60 Bcm of natural gas output from anticipated oil supply in 2025.
“The lasting implications of today’s crisis also depend on the scars that it leaves on the oil and gas industry,” the report said. “A prolonged period of lower prices could provoke a profound industry shake-out, with weaker or higher-cost players forced to the sidelines or out of the business altogether… A more concentrated and risk-averse industry could struggle to invest adequately in new supply.”
By comparison, the IEA had said at the start of 2020 that global energy investment was on track for growth of around 2%, which would have been the largest annual rise in spending in six years.
RENEWABLES MORE RESILIENT
Energy spending this year is expected to plunge in every major sector, from fossil fuels to renewables and efficiency, the IEA said, noting however that renewables investment has been more resilient during the crisis.
Investment in clean energies such as renewable power, battery storage, nuclear, and carbon capture and storage, will likely fall by around 11% this year and remain well below the levels needed to meet the Paris Agreement climate goals, Birol said.
The spending collapse also holds implications for both the global refining sector, which could see an acceleration in the closure or idling of low-efficiency plants, a process already underway in regions such as Europe with declining fuel demand and overcapacity.
“This would accelerate the restructuring of the global refining industry towards regions benefiting either from cheaper inputs, such as the Middle East or… in developing countries in Asia,” the IEA said.
On the other hand, lower oil prices and a reluctance to pay higher upfront costs could see a new cycle of cheaper, less-efficient vehicles and appliances delaying progress on fuel efficiency, the IEA said.
By the end of 2019, the China-focused electric car sales growth had slowed to its lowest rate since 2011 and, so far in 2020, COVID-19 has reduced Q1 car sales, with electric cars down 9%, the IEA said.