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GUIDE IN BRIEF

Covid-19 is changing the future of fossil fuels

Published Last updated This article is more than 2 years old.

💡The Big Idea

Coronavirus has created an existential crisis for the oil and gas industry, forcing every company to reckon with what it will take to survive. Here’s the TLDR on our latest member-exclusive field guide on fossil fuels going bust.


🤔Here’s Why

1️⃣  The coronavirus crisis has set off one of the most devastating downturns in the fossil fuel industry’s 150-year history.

2️⃣  It’s highlighted the downsides of countries staking their fortunes on the spending power of oil companies.

3️⃣  And it’s widened a trans-Atlantic divide about where the profits of the future will be made.

4️⃣  If there is a future for the industry, it’s in accelerating the energy transition.

5️⃣  The demands of today’s young talent may leave oil companies no choice but to diversify.


📝 The Details

1️⃣ The coronavirus crisis has set off one of the most devastating downturns in the fossil fuel industry’s 150-year history.

From the creation of the world’s first successful oil well in 1859 to the disruptions caused by fracking, the fossil fuel industry has been characterized by a boom-and-bust cycle that continues to this day. Many producers are clear-eyed about the industry’s opportunities and risks, but few could have prepared for the swift and devastating impact of the coronavirus pandemic.

Suddenly, the oil industry was faced with the possibility that some common uses of oil—airplane fuel, for example—might take years to return to pre-crisis levels, if they ever do. The pandemic revealed “increasing uncertainty surrounding the future demand for oil,” said Shell CEO Ben van Beurden, coupled with “increasing attractiveness of stable returns from some renewables.”

2️⃣ It’s highlighted the downsides of countries staking their fortunes on the spending power of oil companies.

The global lockdown punched a hole in global oil demand and sent prices crashing to historic lows. The result was an overnight fiscal catastrophe for oil-dependent African economies like Nigeria that were accustomed to building their budgets on oil prices double what they are now. But it also sent shockwaves through relative newcomers to the oil and gas game—including Senegal, Mozambique, Uganda, and others—that had pinned their economic aspirations on major drilling projects that were still in the works. Dozens of those plans are now up in the air, as the public health impacts of the virus present a massive unanticipated expense.

3️⃣ And it’s widened a trans-Atlantic divide about where the profits of the future will be made.

The 2015 Paris climate agreement led to a fundamental divergence of opinions between European and American companies. The UK’s BP, the Netherlands’ Shell, Italy’s Eni, and France’s Total (along with state-owned Saudi Aramco), some of which had already dabbled in renewables, were among the first to join a coalition in support of the agreement; the US’s ExxonMobil and Chevron sat out. A year later, most of the same European companies launched an investment fund for renewables, again without their American counterparts.

In a series of conference calls in April and May, CEOs hinted at their position on a key philosophical question underlying the trans-Atlantic fissure: For the Americans, the pandemic is a bump in the road; for the Europeans, it’s a signal that peak oil demand may be closer than they thought—or even in the rearview mirror.

4️⃣ If there is a future for the industry, it’s in accelerating the energy transition.

The rise of renewables and electric vehicles means the defection of Big Oil’s biggest customers: utilities and motorists. Two risky paths forward are emerging: managed decline, which would extract as much money as possible out of the assets that already exist and stop investing in new or unprofitable ones; or a bet on a renewable future, which would see oil companies redirect cash from shareholder payouts to developing new carbon-free energy sources.

5️⃣ The demands of today’s young talent may leave oil companies no choice but to diversify.

Climate change and the boom/bust cycle have made the fossil fuel industry, once a choice career path for engineers, increasingly unpopular as a job destination for young people in the US. Oil companies that are more progressive about diversifying into clean energy and embracing ambitious climate goals may have an easier time pitching themselves as places where young people can reshape the industry from the inside, says Ben Ratner, a senior director for oil and gas at the Environmental Defense Fund.