Could clean energy be the winner in the oil price war?

The Saudi-Russia oil price war, combined with the destruction of demand by the coronavirus pandemic, has once again thrown the oil and gas sector into turmoil. Cuts to all discretionary spend are expected across the sector as companies go back to survival mode.

How will this impact the embryonic energy transition efforts by oil and gas companies?

Carbon commitments thrown into doubt

A growing number of oil and gas companies, led by the European Majors, have set targets to reduce carbon emissions. In a US$60/bbl oil price environment, most companies were generating strong cash flow and could afford to think about carbon mitigation strategies.

But now, the sector will struggle to generate enough cash to maintain operations and honour shareholder commitments. All discretionary spend will be under review – that includes additional budget allocated for carbon mitigation. And companies that haven’t yet engaged in carbon reduction strategies are likely to put the issue on the back burner.

Could low oil prices slow down global growth in renewables?

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.

Oil and 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.

Can renewables compete with O&G projects at US$35/bbl?

At US$60/bbl, solar and wind assets – with average returns of 5-10% IRR – have found it difficult to compete with expected double-digit returns for oil and gas. But at the current oil price, returns from oil and gas are now in line with what investors can expect from low risk solar and wind projects.

Is there a silver lining to the oil price collapse?

Time will tell how clean energy spend is affected as budgets are cut. But the energy transition is here to stay. 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.

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What’s inside this report:

• A comparison of O&G players’ responses to the energy transition
• Typical energy project IRRs
• And more

This report is also available as part of the Corporate Service & Benchmarking Tool. Wood Mackenzie customers can access the report via the portal.