Climate crisis drives change in energy sector amid pandemic
As Covid-19 swept the globe in early 2020, many governments brought in stay-at-home orders and lockdowns, leading to a collapse in oil and gas prices as transportation dramatically reduced. The impact was immediately evident, with oil majors posting significant financial losses in 2020 – although early financial results from 2021 have them back in the black as economic activity slowly picks up around the world.
Amid the chaos brought by the pandemic, the spotlight has turned to a bigger issue: the climate crisis. In presenting the company’s second quarter results at the end of 2020, BP Chairman Helge Lund stated: ‘The world is on an unsustainable path – its carbon budget is running out […] energy markets have begun a process of fundamental, lasting change – shifting increasingly towards low carbon and renewables.’
‘We’ve seen demand destruction, with the number of people working from home and the end of the single-use car,’ says Lisa DeMarco, CEO and a senior partner at Resilient in Toronto. A natural transition to electric vehicles and residential renewable energies, such as rooftop solar, are also changing the energy market, she says, with the pandemic hastening their adoption as people were concerned about their home spaces.
Innovation is no longer a dirty word. A lot of the progressive oil and gas companies have doubled down on action
‘The necessary lifestyle shifts brought about by Covid really accelerated things,’ she says, especially for transport and fuels. It also highlighted inequities of energy poverty and a push for renewable natural gas to avoid Canada’s carbon price, and the need to ensure a just transition.
‘I don’t think Covid-19 has had an effect [on the energy market],’ says Shane Freitag, Chair of the IBA Section on Energy, Environment, Natural Resources and Infrastructure Law and a Toronto-based partner at Borden Ladner Gervais, however. ‘During the immediate onset and well into the COVID pandemic, the ability to turn on a switch and have power was one less thing people had to worry about. The source of that power, whether renewable or not was not top of mind.’
While energy developments were deemed essential and work continued throughout lockdowns, they will likely be subject to force majeure clauses, Freitag says, due to pandemic-related measures such as quarantine rules and social distancing requirements on sites. ‘Almost every project being developed is going to have some additional costs due to Covid and needing to take extra precautions,’ he says, adding that some were also retooled to manufacture essential personal protective equipment or sanitisers.
Faith Taylor, a partner at Clayton Utz in Australia, agrees that it’s hard to pinpoint a lasting impact of the pandemic on the energy sector. ‘Australia, like New Zealand, has been very lucky in trying to contain the virus, so it’s mostly been business as usual,’ she says. ‘We had a policy quagmire on climate before the pandemic and I suspect we will have one for years after.’
While the policy vacuum is stifling investment, Taylor fears the pandemic will mean details such as the role of carbon pricing may be forgotten as the country focuses on Covid recovery.
Globally, a drive towards net-zero emissions, the election of Joe Biden as US President, and growing investor pressure on environmental, social and governance issues ‘have had more of a profound impact than Covid-19 on the energy market,’ says Freitag.
The International Energy Agency’s recent net-zero report, which calls for an immediate end to new fossil fuel investments, is also largely down to the change in US president, says Peter Zaman, a partner at HFW in Singapore. It’s believed the agency has held this view for a while but was unable to say anything publicly during the former Trump administration. Zaman adds that the report ‘is quite a turning point’.
DeMarco also sees the push for net zero and Covid-related economic stimulus packages as driving changes, noting that some packages include subsidies for lower emissions infrastructure such as transportation. For example, 30 per cent of the EU’s €2tn budget for 2021-27 – which includes the €800bn Covid recovery fund – will be spent on climate measures, while tackling climate change is at the heart of Biden’s jobs and infrastructure plans.
‘Innovation is no longer a dirty word,’ she says. ‘A lot of the progressive oil and gas companies have doubled down on action,’ including by increasing their purchases of renewable energy and striving to reduce the emissions of their products, such as via sustainable fuels and the use of emissions removals technologies.
‘Long-term, for oil and gas, we’re seeing increasing diversification,’ says DeMarco.
Litigation, such as a ruling against Shell in the Netherlands in May which found that the oil major needs to reduce its emissions to 45 per cent below 2019 levels by 2030, and the recent election of three climate activist shareholders to ExxonMobil’s board, could also lead to changes, says Zaman. ‘The ruling against Shell is quite a significant step by a judicial body, essentially telling a company it has to do better on climate change,’ he adds. Shell intends to appeal the judgment.
Lasting changes that may arise from the pandemic could result from two realisations, Zaman says. First, that if humans do not take care of environmental concerns, it will affect lives; and second, that global supply chains are fragile and can easily be altered or affected by events. The way that the pandemic ‘has shut down half the world has been a tangible visual of what climate change could do,’ he says.
‘We’re at a fit and start of evolution,’ says DeMarco. ‘We’re going to look back and see this as the start of a big change.’