It’s been an astonishing three months for the oil & gas industry — the oil price turned negative for the first time; Europe’s four leading producers announced net-zero strategies (BP, Shell, Total and Eni); oil companies worldwide reduced their hydrocarbons spending while keeping energy-transition plans on track; and the bosses of Shell and BP openly questioned whether oil demand will ever return to pre-Covid levels.

On top of this, Shell, Total and Equinor have vowed to spend $685m on the world’s first large-scale carbon capture and storage (CCS) network; gas distribution companies in the UK, Germany and the Netherlands have announced plans for zero-carbon gas grids; and there have been numerous calls around the world — including from UN secretary-general António Guterres and European Commission president Ursula von der Leyen — to exclude fossil fuels from post-coronavirus economic stimulus packages.

Is it just a coincidence that all these developments have occurred at the same time as the coronavirus pandemic? Has there been a fundamental shift in strategy for the oil & gas sector? Or is this just a temporary blip brought on by the Saudi-Russia oil spat, with the industry continuing business as usual once the global economy recovers?

According to Wood Mackenzie vice-president Valentina Kretzschmar, coronavirus has not been the defining factor for the wave of climate-friendly moves in the oil & gas sector — they are the result of intensifying pressures from governments, investors and the public.

“Even though all of the majors have announced quite severe cost-cutting measures — and in some cases they slashed dividends, like Shell and Equinor — really none of them cut new-energy budgets and on the contrary, the European majors reaffirmed their commitment to this net-zero path,” she tells Recharge.

“So, if anything, the crisis has galvanised their resolve to stay on this path. In my view, they’re realising that these energy transitional pressures are not going to go away — they were there before the crisis. There were pressures from regulators, investors and consumers, they're not subsiding. They're not going away. In fact, they're intensifying. And this is why they reacted, because they can see that they're intensifying.”

The net-zero announcements by Shell, Total and Eni would probably have happened regardless of the coronavirus, she adds. (BP made its announcement in February, before Covid-19 took off around the world.)

“Let’s not forget that this is also the [results] reporting season. Many of them used their results to come out with their carbon strategies.”

Erik Reiso, senior partner and head of consulting at Norwegian analyst Rystad Energy, adds that the coronavirus-driven oil demand slump has not changed companies’ long-term strategies.

“The general oil & gas investment activity drops because you get this price slump and then the share of [energy transition expenditure] in their investment plans actually increases. So in that sense you could say that it’s sped up, but I don’t think it’s because of them doubling down on [their energy-transition plans]. It’s more a matter of pursuing what they’ve said and the other stuff falls away… the share of capital flows going to the new stuff becomes higher.”

One example of this could be that Europe will actually see more money being spent on offshore wind projects than offshore oil & gas this year, he adds.

Kretszchmar points out that the low oil price has also increased the attractiveness of renewables projects for fossil-fuel companies. Many oil companies had steered clear of investing in wind and solar projects because the returns were proportionately much lower than for oil & gas projects — but this has now changed.

“In this current oil price scenario, what we have seen is that oil & gas projects are actually on a par in terms of returns, they are on a par with renewable projects which have traditionally yielded much, much lower returns and they're much more risky projects as well,” she explains.

Long-term impacts of Covid-19

The next question is whether the pandemic and associated demand slump will have any long-term impacts on oil companies’ strategies.

That will largely depend on how oil demand picks up, presuming it does.

“Could it be peak oil? Possibly,” BP chief executive Bernard Looney recently told the Financial Times. “I would not write that off… I genuinely don’t know what the future looks like. All I know is it’s uncertain.”

This viewpoint was echoed by Shell boss Ben van Beurden at the end of April when he was asked if demand will ever return to 2019 levels: “It’s hard to say. We don’t know what’s on the other side of this crisis.”

Looney is among those wondering if pandemic lockdowns may change people’s behaviour in the longer term, with less travel, more online meetings and more working from home driving down future oil demand.

“It’s gotten more likely to have oil be less in demand,” he told the FT. “Second, I think people are more aware of the fragility, the frailty of the ecosystem that we’re living in — that things can change overnight. People are looking up at the skies and seeing clean skies and things are quieter on their roads — people will emerge from this potentially more conscious of the quality of air and the environment.”

Kretszchmar says that the rare unpolluted skies seen in places such as India, China and Los Angeles have “illustrated that the path we were on before was unsustainable”.

“A lot will depend on whether this crisis leaves us with some permanent changes [in people’s behaviour]… and my sense is that some of the changes may well stay. We may modify somewhat how we work… I think we will feel better about asking our employers to work from home… and travelling for business and personal purposes may be reduced.

“If we have this kind of structural shift in demand and it takes another five years to grow to where we were, for example, in 2019, then you may well have this point where actually clean energies go faster and they overtake this [rebound in oil] growth. So it may well be that 2019 was the peak year.”

Having said that, she adds: “ But my sense is that [oil] demand will pick up and, and therefore, we may well be going back to the old unsustainable normal.”

Reiso notes wryly that the latest oil price is what drives industry investment, “even though you're supposed to look far ahead — but that’s the way the world works in oil”.

Moving faster on decarbonising power, transport and heating

The calls for a climate-focused post-Covid-19 economic recovery could prove to be more significant than behavioural changes on future oil & gas demand — particularly in the EU, which is expected to adopt a net-zero-emissions by 2050 strategy by the end of this year.

Ursula von der Leyer, the European Commission (EC) president, said: “We can turn the crisis of this pandemic into an opportunity to rebuild our economies differently… by investing in renewable energy [and] by driving clean cars…”

Germany chancellor Angela Merkel — highly influential within the EU — has made similar statements, calling for economic stimulus programmes to focus on clean technology and renewable energy.

“The EU is very focused on climate and they're big enough to have a global impact if they set their priorities straight,” says Reiso. “So I think, coming out of this [pandemic], you do require some sort of economic incentive to restart industrial activity. One lever that will be pulled is greenifying power and energy — and that would not have happened had there not be a crisis. So I think the weight on the expansion of carbon-neutral energy is going to be huge.

“What happened after the 2009 [economic] crisis, for instance in Germany, was that programmes were put in place to help the car manufacturing industry in that country. Presumably [there’s] going to be the same thing this time, but I think this time around it's going to be perhaps skewed in such a way that you accelerate the adoption of electric vehicles in your sale numbers more than we would have seen otherwise.”

The EC is expected to unveil its economic stimulus plans on 27 May, but a leaked working document shows that the nascent clean-hydrogen sector is going to be a major beneficiary, receiving as much as €30bn-plus in new funding.

Hydrogen is seen as a key decarbonisation tool in many European capitals as it is a zero-carbon fuel that can be used for transport, heating, heavy industry and even power generation. But more than 95% of the 70 million tonnes of hydrogen currently produced globally annually — largely for oil refining and ammonia fertiliser production — is derived from unabated natural gas or coal (known as grey hydrogen), pumping out nine to 12 tonnes of CO2 for every tonne of hydrogen produced.

The CO2 could be captured and stored to create low-carbon “blue hydrogen”; or “green hydrogen” can be created by using renewable electricity to spilt water molecules into hydrogen and oxygen inside machines known as electrolysers. As both blue and green H2 are more expensive to produce than grey hydrogen, policy support will be needed to encourage their use and create the economies of scale required to bring down costs.

How governments divide their support between blue and green hydrogen will therefore largely determine what role natural gas will play in the decades to come.

Natural gas is expected to be phased out in the EU as a fuel for heating and power generation by 2050 — at least, without CCS. Gas distributors in the UK, Germany and the Netherlands are leading the way, already announcing plans to replace the methane in their networks with “clean gases” — in all likelihood green and blue hydrogen — by 2050.

If green hydrogen is favoured over blue — as it was in a leaked draft of Germany’s forthcoming hydrogen strategy — there may be no role for natural gas in Europe after 2050. But if blue hydrogen is supported, natural gas may be needed for decades to come with CCS (even if only 95% of the CO2 emitted in methane-derived hydrogen production can be cost-effectively captured).

As Reiso points out: “The interesting part about blue hydrogen is that if you are able to scale that, you could actually start exploring more for gas — actually do more of what you already do upstream.”

The scale-up of blue hydrogen would obviously require a massive increase in CCS deployment, which recently took a big step in the right direction when Equinor, Shell and Total recently signed off on the $685m Northern Lights project off Norway, which will be the world’s first CCS network.

“This technology needs desperate investment because we need to scale it up,” says Kretzschmar, admitting that CCS is “absolutely miles off” where it needs to be. “We need to build economies of scale in order to bring costs down to make it effective capturing technology.”

The leaked EC working document revealed that new funding was being considered for CCS infrastructure as part of the commission’s stimulus package, which could be a major boost to the oil & gas sector.

All this demonstrates the extent to which policy drives the energy industry, says Kretzschmar.

“The role of governments and regulators cannot be underestimated in how we proceed in this post-Covid world,” she explains.

“I think you will notice that obviously different [oil] companies have very different strategies and it's only the European majors that have really come out with these [net-zero] commitments,” she points out. “And I think this is obviously very, very closely linked to the regulatory environment [in Europe] and also the pressure that governments put on these companies.

“Let's not forget that the EU has got these net-zero carbon targets out to 2050 and these companies will have to comply.”

US oil majors such as ExxonMobil and Chevron have made little effort to move away from fossil fuels because there is no governmental pressure from the Trump administration to do so, she points out, although, of course, this could change after the US presidential election in November.

“It's really the governments that have to play this crucial role in really guiding and providing leadership in terms of regulation.”

'Still an important role for oil & gas'

Reiso believes that an economic recovery in the next 18 months will bring oil demand back to the levels seen at the end of 2019, with peak demand finally being reached in the latter half of this decade.

And he points that “the fundamental decline in oil fields around the world that are already in production exceeds the decline in percentage terms of the demand curve”.

“So it means that you still need to actually develop quite a few fields and drill more wells just to fill in that gap. So it doesn't mean that the industry goes away, but it becomes structurally smaller over time, at least by some metrics, as you go beyond that peak,” he says.

Kretzschmar also warns that Europe should not drive out the fossil-fuel sector while there is still demand for its products.

“We have to be careful not to kill off our industry and not to go back to the Seventies when we were dependent on very geopolitically volatile regions. It has taken a lot of time to develop our industry to the level where it is now and we don't want to go back down this route.

“So on one hand we want to push out oil and gas, but on the other hand, we also have to see it as a strategic resource because this brief oil price war between Russia and Saudi Arabia was a very strong reminder that these two countries are the lowest-cost producers in the world. They want to be the last man standing in this game and they will be, and their market-share strategy is going to continue. So we certainly don't want to be in a situation where we still need oil and gas and we would have to depend on these countries.

“We do not want to cut the branch that we sit on right now. I'm all for the energy transition and a fast energy transition, but I'm against any unthought-through moves.”