2020 was a year when the seemingly impossible occurred. From the get-go, the markets were tumultuous responding to every geopolitical event and trade upheaval that the world had to offer. The energy markets are well known for its boom bust cycles with price peaks and troughs but, 2020 offered something different. Political power struggles, multiple trade wars, Corona virus pandemic-covid19 and a looming climate crisis wreaked havoc on traditional fossil fuel supply and demand accelerating a change to the way the world will access and consume energy in the future. It became a demolition of sorts with the promise of a new energy construct that is both sustainable and supportive of the world’s restorative climate mandate.
Below are some of the headline moments that captured ,my attention in 2020 that will likely set the tone for 2021
1. The US -China Trade War Truce
Since 2018, the US and China have been engaged in a trade war. China is the world’s largest crude importer and at that time was importing approximately 10million barrels per day. Due to the role that hydraulic fracturing played in innovating US shale oil extraction technology, the US was able to surpass Saudi Arabia and Russia in 2018 to become the largest oil producer. However, when US President Trump imposed tariff on Chinese exports worth US$300 billion, China in response imposed a 5% tariff on US crude oil in September 2019. U.S. reduced its oil exports to China by 35.6 million barrels from 2018. LNG exports also suffered.
EIA data indicates that crude prices suffered in response to the reduced demand with the largest price drop in 4 years. When considering that the average oil price was $US57.09 per barrel in 2019, the U.S. lost an estimated $US2.03 billion in crude oil revenue due to the trade war (CGTN).
On January 15th, 2020, the two countries signed a phase 2 truce deal where China committed to purchasing at least 52.4 billion US dollars in additional energy purchases within 2 years.
The US in turn agreed to half 15% duties on US $120 billion of imports.
2. Crude Price War Russia and OPEC
The Russia–Saudi Arabia oil price war of 2020 was an oil price war triggered in March 2020 by Saudi Arabia in response to Russia's refusal to reduce its oil production to meet the collective OPEC cut of an additional 1.5 million barrels per day through to the second quarter of 2020. These cuts were designed to keep prices for oil at moderate level given the reduction in demand due to the
Covid-19 pandemic. Due to the pandemic, factory output and transportation was on the decline. Markets were already depressed due to the pandemic however the economic conflict resulted in a sheer drop of oil price by approximately 40% (EIA) from the previous month. This escalated a stock market crash when the market responded to the conflict between the onetime allies. Saudi Arabia’s action to flood the market with cheap oil caused the market to react and prices trended as low as $US 27.34 per barrel eventually settling at $31.13 on March 8th being categorized as the worse price day since 1991. By April 2nd , the parties agreed to work with the other members of OPEC and reduce their overall crude production by 10 million barrels per day from May 1st, 2020 to 30 June 2020 with an adjustment made to 8million barrels per day until December 31st 2020.
3. Oil Prices Turn Negative
Later in April 2020, oil markets turned on its head once again but worse than expected albeit temporarily. US oil prices traded below zero for the first time ever, meaning producers or traders were essentially paying other market participants to take the oil off their hands. The price crash came as the US benchmark oil contract, known as West Texas Intermediate, headed towards its expiry date for May delivery, the month when demand destruction from lockdowns and travel restrictions was expected to peak.
As the physical delivery expectation for the crude got closer, it became apparent that there was no more storage available at main hubs like Cushing to store excess supply above demand. By the end of April 20th, prices dropped as low as minus $37.63 per barrel. Oil markets was at its weakest given it was the peak of lockdown measures , As of April 10, Cushing’s tanks housed 55million barrels of crude, or 72 per cent of working storage capacity of 76.1m barrels, according to the Energy Information Administration. Those who did not have a prior lease contract were out of luck. Some firms resorted to renting tankers to store the surplus supply The negative prices simply reflected the global oversupply of crude oil and high levels of storage utilization in the United States. The issue also highlighted the significant impact a sustained Coronavirus pandemic can have on energy markets.
4. Exxon Leaves Dow Jones
The Dow tracks 30 of the largest publicly traded companies on either the New York Stock Exchange (NYSE) or the Nasdaq. Its purpose is to give investors and the public at large an idea of the direction of the stock market at a glance. In August 2020, Exxon was kicked out of Dow Jones after 92 years. ExxonMobil has been a fixture in the American oil industry for decades and for years delivered very healthy returns to its shareholders. In 2013, Exxon was viewed as the most valuable company on the planet with a market value of $US 446 million in 2014 (CNN).
However, oil has started to have a reduced role in the US economy. That role has been replaced by trillion-dollar firms such as Apple, Amazon and Microsoft. In fact, Apple, Microsoft, Amazon, Alphabet and Facebook are individually larger than the entire U.S. energy sector (Marketwatch). While the oil sector was set on path of growth due to increased natural gas and crude production, the demand for fossil fuels has reduced. There was and still is a deep concern within the fossil fuel industry about how the climate crisis should be navigated. Exxon once the beacon of prosperity has now seen their worth drop by $US 267 billion from its peak as it has failed to time its strategic responses to market conditions. It has also become vulnerable to reduced oil prices. This is just a sign of the new role that oil companies need to carve out for themselves if they want to survive. In the 1980s, energy companies made up 25% of the Dow Index. After the Exxon's exit, energy will account for just 3% of the index leaving Chevron as the sole oil company on the index.
5. Renewables Take the Lead
If 2020 was a boxing match, then it would be remembered as the time that Renewables knocked out Big Oil! It is no secret that the Pandemic shook many industries however it was particularly hard on the oil sector given the reduction in sea, road and air travel. In parallel, the momentum to address climate change never waned. Well before 2020, oil companies such as Equinox (formerly Statoil), Eni and Total started to rebrand and shift more of their portfolios into renewables. In 2020, we saw a greater shift. In 2020, BP rebranded and launched its new ambition to become a net zero company by 2050. It not only declared its company ambitions but also offered to help the world achieve net zero by increasing clean energy advocacy and to launch new teams to help companies and cities decarbonize.
In October 2020, NextEra a Florida Based electric utility that operates the largest US fleet of wind and solar farms topped $150 billion making it more valuable that Exxon and Chevron. These events may be transient and just reflective of extreme market conditions however one should not ignore the signs that the global energy sector is changing. This year oil and gas companies saw record losses. According to Bloomberg, Exxon’s earning fell by 116% and BP lost $US 22 billion in a 640% drop from last year. We shall continue to observe whether the throttling of the pandemic and the eventual economic recovery would reverse the trend.
6. Electrification of the Transport Sector
Countries are aiming to reduce their carbon emissions by moving away from gasoline vehicles over the next decade. In this vain, Japan declared in October 2020 that all new vehicles sold by mid-2030s will be either hybrid or electric.
This would help it meet its 100% electrification ambition and help it meet its carbon neutral target by 2050. This is significant given the role that Japan plays in the manufacture and distribution of gasoline vehicles. China has also made significant inroads with electrification. About 3.8 million electric vehicles were on the road in China at the end of 2019. This is expected to grow to 80million by 2030 (Bloomberg) . UK has also declared that it would end sales of cars that only run on fossil fuel by 2030. France , Norway and Singapore have similarly announced that it will take new gasoline and diesel-powered vehicles off the market by 2040.
7. China Sets Clean Targets
China, one of the world’s largest fossil fuel consumers made an unexpected announcement in September 2020. This was particularly surprising as China's name is often associated with coal production. It announced that it would strengthen its 2030 climate target and aim to achieve carbon neutrality before 2060. It made further announcements at the Climate Ambition Summit 2020 in December 2020, on the five-year anniversary of countries agreeing to the Paris Agreement.
China has repeatedly pledged to reduce its reliance on coal in the past, a major source of smog and climate-warming greenhouse gases but according to Reuters, China still continued to construct coal powered plants. Chinese President Xi Jinping detailed that China would take additional steps to deliver its 2030 ambitions.
It would reduce its carbon intensity by over 65% by 2030 and increase non-fossil energy to around 25% by 2030 compared to 20% in their current target. They would also increase forest stock volume to 6 billion cubic meters by 2030 compared to 4.5 billion cubic meters in their current target and increase total installed capacity of wind and solar to 1,200 gigawatts by 2030. It is believed that these motivations are being powered by environmental interests given its concern over global warming. China has experienced massive floods. From January to June this year, Siberian temperatures were 5 degrees C above average; massive wild fires have ravaged Australia and exceptional heatwaves scorched northern India (Financial times). China also has geopolitical interests. This platform will likely give China the opportunity to be a clean energy leader and the opportunity to demonstrate its technological prowess in green energy.
8. The US officially leaves the Paris Agreement
The Paris deal was drafted in 2015 to strengthen the global response to the threat of climate change. Its aim is to keep the global temperature rise this century well below 20C above pre-industrial levels and to pursue efforts to limit the temperature increase even further to 1.50C.
The US became the first country to withdraw from the Paris agreement. The announcement was originally made in June 2017, but the decision came into effect in 2020. President elect Joe Biden has since pledged his intention to rejoin signaling his intention is to make climate change mitigation a priority during his presidency.
9. Plant Shutdowns
Trinidad and Tobago’s Petrochemical sector took a hit with 6 plants being shut down in 6 months under the burden of low commodity prices and a high operating cost structure. The closure of the plants took 1.2 million tonnes per annum out of production. Companies like Proman and Nutrien were some of the companies that decided to shut down their plants in the interests of reducing financial hemorrhaging. This was in response to fallen commodity prices. The price for a metric tonne of methanol has fallen in the last year from US$300 in the American market and US$340 in the Chinese market to US$180 in the American market and US$160 in the Asian market. Ammonia prices declined from US$200 per metric tonne to US$180 (Trinidad Guardian). These developments have led to quite a few job losses.
10. Job Cutting Sprees
Oil and Gas companies around the world have been shedding workers in response to poor financial performance and weak commodity demand. In Trinidad and Tobago, several petrochemical jobs have been lost. There have also been job losses in the upstream sector because of BP trimming 15% of their global staff. Internationally Exxon Mobil Shell and Chevron announced cuts of its workforce by 15%. Global fuel demand has declined, and consumption has been recovering slowly as Covid-19 restrictions have been lifted in some countries. In Australia, more than 2,000 oil industry jobs have been cut since March 2020 and in the US, more than 107,000 jobs have been eliminated from the Petroleum and chemical sectors and are not expected to return in 2021(Bloomberg).
The rollercoaster that was 2020 still has some of us heaving. One can only hope that 2021 will bring greater ease. Though it was tough, we must pause and be grateful for the signs that the world is willing to adapt and change. The list shows several examples of shifts that display a commitment to the energy transition. Precise actions needed to tackle the next likely crisis of climate change.
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