The last few years haven’t been easy for coal, gas and oil companies. They’ve come under growing pressure from climate activism and divestment campaigns, and the rapid growth of cheaper alternatives. COVID-19 however, has put everything on fast forward, brutally exposing their frailties, wiping billions from market valuations, and catapulting them into situations they thought they would only have to deal with five or ten years from now. It’s the biggest shock to the global energy system in more than seven decades, with the drop in demand this year set to dwarf the impact of the 2008 financial crisis. Many energy analysts are now saying something that would have been unimaginable a few months ago — it looks likely that global carbon emissions peaked in 2019.
The historic decline in global emissions is not something to be celebrated. It comes at an unimaginable cost, hundreds of thousands of premature deaths and devastating economic trauma around the world. Nor is a peak guaranteed. If governments do not learn the lessons of the last financial crisis, and put clean energy technologies — renewables, efficiency, batteries, hydrogen and carbon capture — at the heart of their plans for economic recovery, then this brief, unlooked-for window of opportunity will close. There are good reasons to believe though, that this time will be different, because this time, it’s all about the money.
“If demand for fossil fuels bounces back in 2021 by half the amount it fell in 2020, and grows at 0.5% a year, it would take 8 years to get back to where the industry started. And in the meantime, the renewable energy revolution has not stopped.”
Kingsmill Bond, Energy Strategist, Carbon Tracker
Black rocks burning
Coal has been the hardest hit, with global coal-fired power generation set to fall by more than 10% this year. That’s the problem with being the dirtiest and most expensive source of electricity. You’re the first thing that gets switched off, and you don’t get switched on until demand comes back up again. The key issue is what economists call the ‘marginal cost.’ The idea is simple: once you’ve built your power stations, it’s more expensive to run the ones that need fuel than the ones that rely on wind, rain or sunshine. Think about it. Coal-fired electricity requires you to keep on digging up black rocks, transporting them to power plants, and setting them on fire. Once you’ve installed your wind turbine, solar panel or hydropower plant though, the electrons come pretty much free of charge.
A similar economic logic applies to natural gas — demand is on track to decline by 5% in 2020, the largest recorded year-on-year drop since natural gas was developed at scale during the second half of the 20th century. Renewables will be the only energy source that will grow in 2020, with their share of global electricity generation projected to jump by 5% this year. Adding momentum is the fact that renewables keep on getting cheaper. Not only is clean energy now the lowest cost source of power generation for at least 85% of global power generation, it’s actually cheaper to build new wind and solar, including battery storage, than to continue operating 40% of the world’s existing coal capacity.
Money talks. It doesn’t matter how strong the coal and gas lobby has been, how many officials they’ve bribed or how many campaign donations they’ve made — the inexorable logic of economic gravity is taking hold. Those companies hoping to eke it out for another few years have suddenly, like Wile E. Coyote, discovered that there’s no ground under their feet. Union leader Nicholas Klein’s often misattributed aphorism comes to mind. First they ignored clean energy, then they laughed at it, then they fought it with every dirty trick they had, and now they’re on the wrong end of a battle they cannot win.
The bad news is coming thick and fast. In the United Kingdom, where humanity’s industrial experiment first began, the country didn’t switch on a coal plant at all between the 10th April and the 17th June, and permanently retired two coal plants during lockdown, leaving just four in operation. Eight years ago, about 40% of the country’s electricity came from coal. This year, it’ll be a rounding error. Renewables have filled the gap; their output was higher than fossil fuel generation in the UK for the first time ever in the first quarter of 2020, with wind energy alone supplying almost as much electricity as natural gas.
Across the Channel, thermal coal has been eviscerated, with imports to Europe plunging to lows not seen in 30 years. Thanks to the EU’s slow ratcheting up of the carbon price, four fifths of the continent’s coal fleet is already more expensive to run than to build new wind and solar. This presumably, is why, since March, Sweden and Austria have closed their last coal plants, Poland and the Czech Republic have scrapped planned coal expansions, Portugal has brought forward its planned coal shutdowns by two years, Italy’s largest utility has brought forward its closures by five years, and seven of Spain’s remaining 15 coal-fired power stations have been retired after the owners admitted they couldn’t afford to keep them open any more. Two years ago, 15% of electricity in Spain came from coal. In May this year, it contributed just 1.4% of the power mix.
It’s Germany however, that has surprised analysts the most. In Europe’s industrial powerhouse, and the fourth largest economy in the world, coal only supplied about 20% of the power mix in the first half of the year (compared to 31% in 2019) and more than half of electricity has come from renewables. This remember, is a country that’s been hammered by environmentalists from the one side for its refusal to abandon coal, and from the other by carbonists for its ‘profligate’ spending on clean energy. Suddenly, from out of nowhere, it looks possible that Germany’s remaining 40GW of coal power will shuttered by the middle of this decade, well ahead of the government’s 2038 deadline. Someone, somewhere, is muttering Ich hab’s dir doch gesagt under their breath (just not sure who).
This is not intended as a criticism of environmentalists — far from it. Their untiring efforts have slowly but surely shifted the climate conversation to the center of debate in Brussels. It’s been a grueling process, the result of decades of activism, painstaking planning, lobbying, and death by committee. The reward, when it came though, was quick. The European Green Deal, in the space of less than 24 months, has gone from NGO wish list to the new defining mission of the European Union, and more than $572 billion, or 30% percent of the bloc’s massive stimulus package has been allocated for investments in policies to fight climate change. The way Europe sees it, if every nation in the world is going to be in debt for at least the next decade, they might as well be paying for something that solves the biggest challenge of the 21st century.
That same political calculus of course, is nowhere to be seen in the United States. In 2018, the current president declared that “coal is indestructible” and that “the coal industry is back.” The current president is of course, not exactly the world’s most reliable purveyor of facts, and has an interesting way of defining, ‘back.’ Last year saw an 18% decline in coal generation, a 15% fall in coal consumption, and a 53% drop in the value of coal stocks. Coming into 2020, the US coal industry was already in the middle of its very own Kodak moment, punchdrunk from a combination of climate activism, cheap gas and renewables.
The lockdowns have acted like a clean uppercut to the jaw: as demand for electricity has plummeted, expensive coal has been the first thing to go. The latest estimates suggest that US coal generation this year will provide less than 18% of power supply, and analysts predict it could fall to just 10% in five years, down from 50% a decade ago. By contrast, renewables will account for over a fifth of electricity generation this year, surpassing coal for the first time since 1885, when the Statue of Liberty first arrived in New York. Nobody in the coal industry, it appears, is laughing any more.
Don’t drill baby, don’t drill
They’re not laughing in the oil and gas sector either. It wasn’t that long ago that energy executives and their lobbyists in Washington were celebrating the shale gas ‘miracle,’ a vast reservoir of cheap energy unleashed by hydraulic fracturing and horizontal drilling, turning the country into the largest oil and natural gas producer in the world. The miracle however, was built on shaky ground (sorry, couldn’t resist). Shale oil and gas producers burned through $342 billion of cash in a decade using borrowed money, with nothing to show for their shareholders, and more than 200 companies, owing over $130 billion in debt, have filed for bankruptcy since the beginning of 2015.
Drill baby drill? More like burn, baby, burn. The country now has just 189 active drill rigs, down from 675 in March. 30% of operators are now technically insolvent, 20% have stressed financials, and the industry is looking at a further $300 billion in write-downs. The spectacular implosion of the global gas and oil markets has revealed a house of cards, an industry built on debt and based on the assumption that profitability would eventually materialize. It never did, and investors have finally lost patience. Last month alone, seven oil and gas companies declared bankruptcy, including Chesapeake, the poster child of America’s drilling renaissance, a company that, a decade ago, was worth $37.5 billion.
Adding insult to injury, earlier this month three major North American oil and gas pipelines were stymied. First to go was the proposed Atlantic Coast Pipeline, after legal challenges drove costs up to $8 billion from about $4.5 billion. The next morning, a federal judge ordered the shut-down of the Dakota Access Pipeline. While a subsequent court order has allowed it to keep operating during the appeals process, it’s still an extraordinary victory for the Standing Rock Sioux tribe, considering how much money is at stake (the owner of the pipeline alone will lose a billion dollars if the pipe is shut down). Later on the same day, the US Supreme Court upheld a decision to suspend construction on parts of the infamous Keystone XL pipeline, leaving it in a limbo from which it will likely never return.
The pipeline setbacks in North America demonstrate the potency of the opposition the gas and oil industry now faces from tribes, community activists, landowners and those fighting for a clean energy transition. Despite three executive orders, relentless regulatory rollbacks and the federal government’s complete abandonment of climate policy, the US environmental movement has managed to tie these projects up long enough for public opinion to shift, and more importantly, for the business cases to fall apart. The tactics of delay and frustrate that have been used so effectively by fossil fuel giants to prevent meaningful action on climate change are now being used against them, hitting them where it hurts the most, in their back pockets.
It’s tempting to celebrate, but also worth remembering that while executives will get golden parachutes, workers will bear the pain. The US coal mining industry, which employed 70,000 people at the end of 2014, had laid off almost 20,000 of them before the pandemic hit, and between January and June this year a further 9,400 jobs were lost. In the oil and gas industry, more than 100,000 oil and gas jobs have been lost since March, most of them in the support activities market. This goes against what so many climate advocates recognise as crucial: a ‘just transition’ that ensures hydrocarbon workers are not collateral damage. Many of those jobs aren’t coming back, and the people that have lost them are going to be angry, and hurting. Their future, like so many other things, is now at stake in the United States’ 2020 presidential election.
“What’s front and center has been the extreme volatility and carnage that’s occurred in the energy sector. These companies are now in survivor mode, never mind thinking about the energy transition.”
Jennifer Rowland, Senior Analyst, Edward Jones
The last great hope of the coal barons
What about Asia? The hardest truth of the climate crisis is that while most of the advocacy is taking place in the West, humanity’s collective future will mostly be decided by what happens in the East. The United States and Europe may be the world’s second and third biggest carbon emitters, but Asia is home to more than 60% of humanity, and emits more than half of global carbon emissions. Most of that comes from coal — the continent makes up more than three quarters of global coal consumption, and most analysts expect the appetite for coal to roar back after briefly being tripped up by the virus.
Most analysts however, aren’t looking at the underlying economic dynamics. Take India for example, the fourth largest carbon emitter in the world, and the world’s second largest coal consumer. In February this year, the Minister for Coal, Pralhad Joshi, said India would eliminate all imports of thermal coal by 2024, and a month later, the country revealed its first reduction in carbon emissions in four decades. The pandemic has accelerated these trends. Electricity from coal-fired power fell from 75% in March to 63% in May, and coal imports by more than a third. Meanwhile, clean energy sources, benefiting from a ‘must-run’ status compelling power companies to use solar or wind energy whenever it is generated, rose from 16% to a never-before-seen 28% of the energy mix. The pandemic has tipped the scale in favour of renewables, and peak coal production and consumption in India now looks like it may happen this decade, years ahead of schedule.
The sight of blue skies across the country hasn’t gone unnoticed either. India’s leaders, echoing their counterparts in Europe, are already talking about a green recovery, their warm feelings for clean energy spurred on, no doubt, by some cold-blooded financial calculations. The cost of adding solar electricity is now about 2.5 rupees per unit generated, compared with around 4.5 rupees for new coal capacity. Public and private actors alike in India are suddenly thinking very carefully about whether they want to invest in highly polluting new coal-fired power plants with payback periods of 20–30 years, at double the cost of deflationary, politically popular renewables.
Coal is facing political and economic headwinds in other parts of Asia too. In May, South Korea’s government was re-elected on a pledge to phase out domestic coal use, with many in the ruling coalition pushing to end financing of overseas projects. It’s the first major Asian country to commit to a zero-carbon target by the middle of the century, and a few days ago, the new government confirmed a $61 billion Green New Deal to create 1.9 million jobs through 2025, and help its economy recover from the impact of the coronavirus. The plan will move Asia’s fourth-largest economy away from its heavy reliance on fossil fuels and towards environmentally friendly industries.
In June, the Philippines approved a resolution calling for a climate emergency response, which includes not permitting any new coal plants, and Bangladesh announced it was considering cutting its coal pipeline to just 5GW. Japan, the world’s third largest economy, is also shifting course. Stung by international criticism at last year’s UN climate conference in Madrid, the government has announced it will close 90% of its coal-fired power plants by 2030. While the actual plan is vague on details, it’s the first serious indication that a phase-out is up for debate.
Perhaps more importantly the Japan Bank for International Cooperation, which last year provided over $4.8 billion in financing for overseas coal plants in Southeast Asia, has announced new rules, saying it will now support only efficient generators and only in countries that have a national strategy to reduce carbon emissions. In practice, this means overseas financing will fall to a fraction of its previous levels. While it’s not a complete break with coal, it is, as the environment minister Shinjiro Koizumi has pointed out, “a big, positive move” that reflects a new mentality in Japan, one that goes beyond the legacy of Fukushima.
The Godzilla of Coal
Ultimately though, none of this matters without China, the perennial monster in the room, the place where all roads in energy eventually lead. China is the world’s largest consumer of energy, the largest producer and consumer of coal, the largest importer of oil and gas, and by far the largest emitter of carbon. It’s also notoriously secretive, with accurate information hard to find, and the political tea leaves difficult to figure out. This makes it simultaneously the most important, and least understood country in the world when it comes to talking about the future of fossil fuels.
In China, coal is still king; half the world’s coal is mined and burned there, it accounts for about 65% of the electricity mix, and employs over 3.5 million people. Unlike Europe, the United States and India, China appears to be doubling down on dirty energy. Carbon dioxide emissions have surged as lockdowns have eased, rising 4–5% year-on-year in May. With the Communist Party focused on symbolic poverty targets (next year is the centenary of its founding) and bracing for economic headwinds from the US trade war and the fallout from COVID-19, approving coal plants has been an easy win for provincial officials trying to stimulate growth.
In the first six months of this year at least 40GW of coal power projects were approved, and more plants have been allowed to start construction than in 2018 and 2019 combined. That means there is now 97.8GW of coal-fired power under construction and another 151.8GW at the planning stage. That’s a total of 250GW in development — more than the entire coal power capacity of the United States — and yet to keep the world to under 2 degrees, China’s coal capacity is going to have to be cut by 400GW within the next decade. These kind of numbers put everything in perspective, showing exactly why the climate fight is going to be either won or lost in China. It seems like an almost impossibly tall order.
Impossible, that is, until you start following the money. Coal, remember, is expensive. Almost half of the country’s fleet is losing cash, and around 70% of coal plants now cost more to run than building new onshore wind or utility-scale solar (thanks, in no small part, to all those years of ‘profligate’ spending by Germany). China actually has far more coal-fired capacity than it needs, with the average plant sitting idle for more time than it generates power. The country’s coal barons are in the same predicament as their counterparts in Europe, the United States and India: they’ve run off the financial cliff. The industry might be able to run on the fumes of its considerable political and social power for a few more years, but eventually gravity is going to kick in.
The state won’t prop up failing industries forever, especially polluting ones, and if this sounds contradictory, well, then welcome to the maddening game of trying to figure out energy policy in China. On the one hand, Beijing has relaxed restrictions for coal plants, on the other, it’s just issued a directive stating that all ‘outdated’ mines will be required to shut permanently by the end of 2020. The best way to understand this is as a tug of war between competing interests within the Party — the carbonists, who care primarily about growth and employment — and the modernists, who care about moving the economy towards low-carbon technologies and services. Sound familiar? The only difference between China and the rest of the world is that in China, the fighting doesn’t take place out in the open.
Ultimately it’s going to come down, as it so often does, to the economics and on this front it’s looking bad for the carbonists everywhere. This year alone, we’ve seen blacklistings of coal by BlackRock, Standard Chartered, Morgan Stanley, HSBC, Citi, BNP Paribas, and Japan’s three mega banks –Mizuho, MUFG, and SMBC Group — the three largest private financiers of coal globally. This brings to 133 the total number of globally significant banks, insurers, and asset managers that have now announced their exit from coal, 41 of them coming in 2020 alone. The rate has accelerated by 50% this year.
Coal is also becoming harder to insure, with 19 of the world’s biggest 35 insurers now saying they won’t touch it. Insurers have also divested coal from roughly $9 trillion of investments, almost 40% of the industry’s global assets. For now, Asian banks, export credit agencies and private-equity firms are keeping the coal pipeline going, but as more global banks retreat, operators will face higher financing costs, a vicious circle that makes coal even less affordable. Financial institutions, unmoved for so many years by the moral argument against pumping carbon into the atmosphere, seem to have suddenly discovered a conscience now that the economic argument is convincing. Who would have guessed?
The worst hit industry in the world
It’s not just coal anymore, either. Big Oil is in serious trouble too. Coming into the 2020s, it seemed likely they would enjoy at least another five years of dominance before renewables and electric vehicles combined to put them into slow decline. These remember, are some of the richest and most powerful institutions in human history — since 1990, the six biggest private oil companies have earned more than $2.4 trillion in combined profits. In 2019 alone, they reported profits in excess of $55 billion, making Big Oil one of the most profitable industries in the world. When you’ve been riding that high for that long, there’s very little incentive to change, climate refugees and coral reefs be damned.
COVID-19 changed all of that, crushing demand just as a price war between Russia and Saudi Arabia flooded the world with cheap oil, a perfect storm that drove the price of benchmark crude, briefly, into negative territory. While it’s now recovered to about $40 per barrel, that’s still far below what oil firms need to make a profit. Forget tourism or retail or even airlines — nobody has been hit harder by this pandemic. As much as $1.8 trillion will be wiped from the revenues of oil and gas companies this year — the worst-hit sector in the world. Just to put this in perspective, that’s six times greater than the impact on the more visibly affected retail sector. 20 oil and gas companies defaulted on their debt for in 2019. In 2020, the number is 18, and we’re only halfway through the year.
“I don’t think we know how this is going to play out. I certainly don’t know,” Could it be peak oil? Possibly. I would not write that off,”
Bernard Looney | CEO, BP
It’s not going to get better. The longer the planes sit on the tarmac and the cars sit in garages, the greater the glut becomes. BP says it expects the price of oil to now remain a third lower than expected for decades to come, meaning it will have to leave some of its reserves in the ground, and last month slashed the value of its assets by $17.5 billion. It was later joined by Shell, which cut its dividend for the first time in 80 years, and announced a $22 billion write down. The economic reality of both COVID-19 and the climate crisis is starting to bite, and for the three European majors, the writing seems to be very clearly on the wall.
In February, BP announced it would be carbon neutral by 2050, and was followed with similar commitments by Shell and Total in April. This is going to require massive investments in wind, solar, biofuels, battery and offsets such as avoided deforestation. Over the long term, that strategy will undermine the value of more oil and gas assets, especially if the more pessimistic global economy projections materialize and it takes longer for oil demand to recover, if it recovers at all. The added sting? All three are saying they will now pull out of industry lobbies that oppose climate action.
In stark contrast, their North American counterparts, ExxonMobil, ConocoPhillips, and Chevron, are hanging on in the hope that the good old days will eventually come back. They won’t — and certainly not if institutional investors have their say. Oil and gas stocks, for so long a mainstay of traditional portfolios, are now looking like an increasingly bad bet. Although the decline began in 2015, it’s accelerated in the last year, falling by 35% while shares in major renewable firms have risen by the same percentage. In 2007, 12 of the 100 largest companies in the S&P 500 were oil companies. Today, there are just two, and the entire sector is now worth less than Apple’s $1.5 trillion market capitalization.
A few weeks ago, an electric car company, Tesla, overtook the world’s biggest private oil and gas firm, ExxonMobil in valuation. Everyone thinks the car company is wildly overvalued (it is, they only sold 367,500 cars vehicles last year) but then again, nobody seems to point out that the oil companies are wildly overvalued too. Most of their valuation depends on them being able to exploit existing and future reserves, and if they can’t then they’re in deep trouble. This was all true before the pandemic of course, but the tide has suddenly gone out far quicker than anyone expected. The leviathans of energy, accustomed to swimming in an ocean of readily available capital, suddenly find themselves in a shrinking inland sea, and nobody wants to be stuck with the beached whales.
A window of opportunity
So where to from here? 2020 has been the worst year ever for fossil fuels, and that’s good news for humanity. It is however, a tragic reprieve. This is not what a just transition looks like, and the consequences of such widespread economic devastation, on top of the human suffering, are still unknown. There are no guarantees either — while the momentum is now clearly in favour of clean energy, the considerable political and social power of dirty energy cannot be underestimated. Many companies will cling on right to the bitter end. Make no mistake, we’re still in for a long and ugly fight.
Nevertheless, the events of the last few months have provided humanity with a new window of opportunity, a once in a generation chance to change course before it’s too late. It’s premature to suggest that the current pandemic marks the end of fossil fuels, but it’s not a stretch to call it the beginning of the end of the largest and most powerful industry in human history. That, at least, is something that is worth celebrating. These are historical times, in more ways than one.
The next time you switch on the news, keep an eye out on what’s happening in the global energy markets. You might just be pleasantly surprised.