Investor payback from wind and solar projects is now competitive with oil & gas as the price for crude languishes at under $25 per barrel (bbl) following the market collapse fuelled by the spread of coronavirus — and would be even at $35/bbl, according to analyst group Wood Mackenzie.
Before the pandemic, when the price of crude was at $60/bbl, wind and solar projects’ average 5-10% internal rate of return (IRR) “found it difficult to compete with expected double-digit returns” for oil & gas, said Valentina Kretzschmar, vice-president of corporate analysis. But even if the oil market were to rebound, the growing pressure on the sector to commit to net-zero carbon meant renewable energy “presented opportunities for companies with strong balance sheets”, she added.
“Our analysis shows that 75% of pre-final investment decision projects globally would return less than the cost of capital, assumed at 10%... Oil & gas projects are now in line with average returns from low-risk solar and wind projects," WoodMac said in a special note on the impact of coronavirus on the oil & gas sector.
“Capital allocation is no longer a one-way street for Big Oil — renewables projects suddenly look as attractive as upstream projects at $35/bbl.”
“The energy transition is here to stay,” said Kretzschmar. “If anything, pressures to commit to net-zero carbon will only intensify. Renewables present opportunities for companies with strong balance sheets. Diversification into clean energies could ensure their long-term survival.”
Kretzschmar downplayed notions that the swingeing “survival mode” cuts now being made by oil & gas companies to discretionary spending would impact on renewables investments — as many including the International Energy Agency (IEA) have feared.
“Historically, the oil price has shown no correlation with investment in renewables. The installation of both wind and solar continued to increase through the last oil price downturn,” she said.
“Oil & gas companies make up a tiny proportion of global investment in renewables. The sector accounts for less than 2% of global solar and wind capacity. Even if Big Oil stopped investing in renewables altogether, that would have a minor impact on growth.”
Kretzschmar noted, nonetheless, that in the short-term, the oil & gas sector will “struggle to generate enough cash to maintain operations and honour shareholder commitments” in a sub-$35/bbl industrial landscape, with all discretionary spend “including additional budget allocated for carbon mitigation” being put under review.
“A growing number of oil & gas companies, led by the European majors, have set targets to reduce carbon emissions. In a $60/bbl oil price environment, most companies were generating strong cash flow and could afford to think about carbon mitigation strategies.
“Companies that haven’t yet engaged in carbon reduction strategies are likely to put the issue on the back burner,” she acknowledged.
The global oil price last week hit lows of sub-$25/bbl, from more than $65/bbl in January, as credit ratings agency S&P warned the industry that the price of crude could fall to $10/bbl this year.
Beyond the capital repositioning by oil & gas companies, IEA chief Fatih Birol argued last week that the coronavirus economic stimulus packages being drawn up by governments around the world should build-in “large scale” spending on clean energy technologies including wind, solar, green hydrogen and carbon capture and storage, as it would “bring the twin benefits of stimulating economies and accelerating clean energy transitions”.
