1. Preamble: Energy Transition in a Post-COVID-19 World
This paper on the Norwegian energy sector and the interviews upon which it is based were prepared and undertaken between the summer of 2019 and January 2020. Since its completion, two major events have occurred that could radically change the future global energy scene: the COVID-19 pandemic, which led to the lockdown of the world’s economies, and recent disputes between OPEC+ countries that caused a temporary increase in production despite reduced demand. The result has been a collapse in crude oil prices and a significant decline in spending by international oil companies. In short, these events have dramatically changed the global outlook for energy, at least in the near future.
To understand the impact of these two factors, it is necessary to consider a number of major uncertainties affecting future energy markets and the way in which they might develop going forward. The main uncertainty is the extent to which the changes in consumer behaviour seen during the pandemic – voluntary and involuntary – are an anomaly and whether daily life will revert to something approximating business as usual, if the virus is managed through distancing measures and inoculation. Alternatively, these changes may represent a serious discontinuity that significantly alters societal behaviour and impacts future energy markets. Other related uncertainties include the length of the lockdown, whether a revival of the OPEC+ agreement emerges and, if it does, whether oil prices return to pre-crisis levels.
What are the implications for the current energy transition and the role of renewables and clean technologies?
A key uncertainty explored in this research paper is the speed and shape of the transition, which we argue may occur faster than assumed by the ‘energy establishment’. This will be determined by a combination of government policy to promote the use of renewables and energy efficiency, relative energy prices influenced by technology and innovation, and consumer expectations. COVID-19 may affect each in turn. It is likely that for at least the rest of 2020, government policy on climate change will take a back seat as leaders focus on overcoming the pandemic. Governments may also be reluctant to adopt policies associated with environmental protection if they impact economic activity. The weak enforcement of existing environmental regulations could also further delay the transition. Meanwhile, the expected pandemic-related recession may well worsen the commercial viability of carbon capture and storage (CCS) technology, which is central to many of the potential energy scenarios. Given that the energy transition will already be disruptive, any delay will require a more sudden shift in behaviours at a later date and cause greater turmoil, especially if stimulus packages in response to the pandemic are not compatible with climate goals.
As for relative energy prices, some believe the falling price of crude oil will slow the rise of renewables in the energy mix. This could be reinforced if gas prices, which are often contractually linked to oil prices, also decline – although this is not as relevant in Europe where the oil–gas price link is weaker. However, this view neglects two factors. First, governments may try and take advantage of the fall in crude oil prices by increasing sales taxes on oil products. This would allow them to quickly and cheaply raise the revenues they will need in a post-pandemic world to help cover the spending costs associated with the lockdown and consequent recession. Governments could accelerate this approach if producers of oil products are slow to pass on the lower costs of crude to consumers. However, in Europe, increasing sales taxes may face serious opposition of the sort created by the ‘gilet jaunes’ in France. Even in Norway, the need for macroeconomic policy changes to address a growing budget deficit may require broader revenue raising options, such as more sales taxes on energy – which are already relatively high. This may also focus attention on changing the rules to drawdowns on the country’s sovereign wealth fund (SWF), which is already under discussion in Norway.
Such changes to economic policy, both globally and within Norway, further emphasize the imperative of diversifying the economy away from the dependence on hydrocarbon exports. Any rising oil demand from lower prices would not necessarily lead to lower demand for renewables, as the two energy sources do not directly compete. Meanwhile, the demand for renewables is rising. The only exception to this relates to gas use, which does compete directly with renewables and whose price may reflect lower oil prices where the oil–gas price link survives.
What will the oil industry and oil markets look like?
One obvious consequence of recent events is that private oil companies have dramatically reduced their capex spending plans, especially in the upstream. Many smaller companies face bankruptcy, especially those in the shale oil and gas sectors in the US. This could lead to a spate of mergers and acquisitions involving upstream companies, reducing the number of private players in the market. Another consequence could be that the fall in capex and subsequent limitations on supply leads to a much tighter market if and when oil demand eventually begins to recover, pushing oil prices upwards. Given the Middle East’s predominance in the oil sector, continued political instability there, which is likely to be aggravated as COVID-19 spreads, is expected to deliver a further oil price shock. This could benefit unaffected oil suppliers like Norway and reinforce the perception of them as reliable oil suppliers.
As to consumer expectations, much will depend upon whether the pandemic fundamentally alters people’s behaviour and the resulting consequences. One possibility is that, due to less mobility, the current model of globalization will be discredited or decline naturally. Thus, security of supply could well become a much more important policy priority. From a European point of view this could make energy supply from Norway more attractive. It remains to be seen if the globalization model continues within different parameters, with less physical movement but greater connectivity, which might suggest that transport-fuel use declines and electricity use rises.
How will European gas and power markets evolve?
Even before the recent lockdowns, gas prices in Europe were lower than average for that time of year, due to a milder winter and LNG oversupply. By April 2020, prices were similar to those during the financial crisis in 2009. Lower gas prices will potentially benefit consumers, but have a significant impact on upstream companies and governments of producer countries already stretched by additional pandemic-related expenditures. The carbon price in Europe is also now at a two-year low.
There are likely to be two short-term trends in the power market. First, overall falling electricity demand, particularly from industry, will lead to lower power prices and reduce the profitability of the sector. Second, it is likely that in the EU there will be records broken for the percentage of power that is coming from renewables, as summer will mean higher solar production while power demand is limited by the lockdown. This will have a serious impact on the non-renewable energy producers that face the challenges of both lower market prices and smaller sales volumes. However, falling prices also means less capital available to invest in renewables and other aspects of power infrastructure.
One possible side effect of the pandemic is that governments and populations realize the importance of a coordinated global response in dealing with systemic threats; and that there are benefits to extending such cooperation to work on sustainable development. The postponement of the COP26 meeting to 2021 – while reducing the pressure on countries to develop ambitious carbon-mitigation plans – offers an opportunity for a more coordinated and sustainable response to the impact of COVID-19 on the energy sector and for longer term approaches to climate change.