Future Gets Bleaker for Oil, and Brighter for Cleaner energy

As the world increasingly turns away from fossil fuel, the search for cleaner energy is widening in scope and thus leaves the conventional energy industry with a dire future to reckon with. The evolution of electric cars that is gradually becoming a global race kicked off a movement that supports the campaign of environmentalists pushing to implement the Paris climate Accord.

Every day, reports of companies joining the trend of electric vehicle (EV) production hit the news. Also, off-grid electricity generating companies are creating emerging markets globally, all with the goal of eliminating greenhouse-gas emissions.

The goal has given birth to “climate tech”, a broad set of sectors which tackle the challenge of decarbonizing the global economy, with the aim of reaching net zero emissions before 2050. PwC noted in its State of Climate Tech 2020 report that the scope is getting broader.

“It now encompasses low-to-negative carbon approaches to cut key sectoral sources of emissions across energy, built environment, mobility, heavy industry, and food and land use; plus cross-cutting areas, such as carbon capture and storage, or enabling better carbon management,” the report said.

Each success they score marks a significant shift from the old energy system to cleaner energy, and it is good news to the cleaner energy industry as much as it is bad news for the oil industry.

Tesla, a leader in the EV market saw its shares surge after Democrats, who are pro cleaner energy, won the Georgia senatorial election which gives them the majority to control the US Congress.

As the US rejoins the Paris Accord following Joe Biden’s presidential election win, there has been an upsurge in environmental friendly energy emotionalism. Biden backed up his executive order that returned the US to the climate agreement with an order that stops companies from drilling oil and gas on federal lands, halts construction of the Keystone XL pipeline, and directs agencies to review and reverse more than 100 Trump actions on the environment.

Recently, the electric vehicle and solar energy industries have witnessed a surge in investment interest, while the oil industry, immobilized by the outbreak of COVID-19 which crippled travel and industrial activities, saw a decline that reduce global emissions to about 34 billion tonnes a year. Encouraged by this development, investors who are concerned about environment are now pumping money into clean energy startups and companies, with the goal of widening the progress.

Breakthrough Energy Ventures (BEV), the clean-tech fund backed by billionaires including Bill Gates, Jeff Bezos and Michael Bloomberg, raised $1 billion to help start-ups capable of cutting global emissions. BEV had earlier raised $1 billion that it used to back 45 emerging companies. Now the venture capital fund intends to support between 40 and 50 new energy businesses.

BEV used its first $1 billion to support companies working on complex technologies such as clean cobalt and lithium mining, electric aviation, hydropower turbines and emissions-free steel.

The result of these investments has underscored partly, the push behind the interest of investors in cleaner energy. For instance, QuantumScape, maker of next-generation lithium-ion batteries, listed on the New York Stock Exchange in September has leaped in growth. Although its batteries won’t be available before 2025, its market capitalization is currently close to $20 billion, up from $3 billion.

But it is just one among many new energy startups that have emerged from the intimidating shadow of traditional energy to challenge the status quo, and now are disrupting the energy industry.

PwC’s report noted that investment in cleaner energy has soared over the past two years. It said that capital money flowing into start-ups that can help cut emissions hit $16 billion in 2019, up from $400 million in 2013.

While these gains cut across all cleaner energy sectors, electric vehicles and solar energy stand out. The electric vehicle market is projected to hit $802.81 billion by 2027, while solar energy is expected to reach $223.3 billion in 2026.

International Energy Agency (IEA)’s 2020 report indicates that the increase in emerging markets for solar electricity has made it 20-50% cheaper than it estimated in its 2019 outlook. The report said the cost capital for solar is much lower at 2.6-5.0% in Europe and the US, 4,4-5.5% in China and 8.8-10.0% in India.

As many countries join the trend and make policies that enable infrastructure that will foster solar growth, the cost is seen to be winding down below that of grid electricity. The IEA said that the new utility-scale solar projects now cost $30-60/MWh in Europe and the US and just $20-40/MWh in China and India, where revenue support mechanisms such as guaranteed prices are in place. The report projected electricity generation from non-hydro renewables in 2040, reaching 12,872 terawatt hours (TWh), up from 2,873TWh last year.

There is an ongoing race between North America, Asia and Europe to lead the EV market.

The AMR said Asia-pacific and Europe had a combined 78% share in 2019, with the former accounting for 52.3% share. North America and Asia are expected to see improved Compound Annual Growth Rates (CAGRs) of 27.5% and 25.3% respectively. The cumulative of these segments was 40.1% in 2019, and it is expected to reach 51.0% in 2027.

Although there is threatening progress in the cleaner energy industry, the gap between the old and new energies is still wide, and it will take years before it could be bridged. But the time left isn’t for the oil industry to bounce back; it’s more like giving the companies therein the opportunity to switch to cleaner energy.

As the oil industry foresees a bleak future through the evolution, many of its companies are beginning to create exit routes.

Shell is exploring ways to reduce spending on oil and gas production by 30% to 40% for its upstream sector, its largest division. For the downstream sector, the company is cutting 45,000 service stations, the biggest in the world, from its network. This means limiting its oil production to a few key places that include Nigeria, Gulf of Mexico and the North Sea.

British Petroleum (BP), Chevron and Eni had already taken similar steps, cutting jobs and shutting down operations to build new low-carbon businesses in the next decade in preparation for the era of cleaner energy.

Saudi Aramco is also focusing on pumping cleaner fuel. Analysts and sources said the company is working on cutting greenhouse gas emissions to have a better chance to compete as environmental concerns push governments to tighten carbon regulations.

With pro-cleaner energy lawmakers and president in control of the Congress and White House, the United States only needs a legislative backing to seal the fate of the oil industry.