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IEA warns of investment chasm

Energy funding poised to plunge as renewables fare better than fossil fuels

Global investment in the energy sector will contract sharply in 2020, with governments prioritising control of the Covid-19 pandemic and many economies able to reopen only partially. In its World Energy Investment 2020 report, the IEA estimates that global investment could decline by 20pcthe largest slump ever recorded.

The oil sector will be the most severely impacted, with the agency warning investment will fall by a third this year. Consumer spending will decline by an enormous $1tn.

Oil companies have shelved or delayed spending in 2020 to combat the financial impact of Covid-19 and sunken oil prices. Oil demand fell by 25mn bl/d year-on-year in April, when global lockdowns were at their height, and the IEA projects overall losses of 9mn bl/d in 2020. Mobility and aviationwhich account for 60pc of global oil demand—are being particularly affected.

Supply chains are also being disrupted. Of the 28 floating production storage and offloading vessels in production worldwide, 22 are being built in Asia, which has been under quarantine for much of the year. The Italian region of Lombardy, for a period the European epicentre of the pandemic, is also a major manufacturing centre for many oil firms.

And while the effects might not be felt immediately, the IEA estimates global oil production will be reduced by 2.1mn bl/d in 2025, given current investment levels. If funding remains at its current low ebb over the next five years, then output will fall by almost 9mn bl/d. With less projected production, the market could swing from long to short, creating energy security problems for many countries and further price volatility and market imbalances.

Geographical variation

The IEA forecasts a 25pc drop in US investment in 2020, given the high opex requirements of its shale production. Many independent oil firms and shale producers have already cut over 50pc from their budgets, and the bankruptcy of Whiting Petroleum highlights significant financial dangers.

1/3 – oil funding decline in 2020

While many companies have hedged production to avert heavy financial losses this year, the strategy provides little protection into 2021. These firms face mounting problems if structural changes to the global economy have a permanent impact on oil demand and price recovery.

In contrast, the IEA expects Europe and China to fare better. Funding for wind and solar is holding up in Europe, helping to offset losses from fossil fuels and resulting in a 17pc decline in energy investment in 2020. In China, the agency expects just a 12pc fall as the economy recovers more quickly than that of most other developed countries. China will be the largest market for global investment this year and beyond.

Time for change?

Fossil fuels face a significant loss of capital this year, but the transition towards clean energy could also be slowed. The IEA expects funding to slide by 10pc.

With improved air quality across many of the world’s largest cities during lockdown, citizens could demand governments tackle pollution and lower their use of fossil fuels. The IEA estimates global carbon emissions will fall by 8pc this year, or almost 2.6Gt. This would be the largest decline ever recorded.

And with less investment available during a global recession, projects with quick returns and short investment cycles will become more attractive to investors. An Imperial College London study showed that renewable energy companies in advanced economies achieved much higher equity returns over the past decade than fossil fuel-focused firms and will be much better positioned to weather the 2020 economic storm.

But while the IEA expects global coal demand to fall by 8pc in 2020, the quick economic recovery of China and its focus on more coal power plants could offset some of the gains made in cleaner energy. Equally, renewables companies still fail to produce the liquidity, market capitalisation and dividends to which many investors have grown accustomed. And as developing countries take on more debt during the downturn, governments may decide to hold off on reforming their energy mixes.

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