How did the Fuel and Energy sector fare in 2020?
We actually did it. We made it through 2020 – a strange year if there ever was one.

It started off not too badly – economies were doing well, oil was being produced, new technologies were being developed and introduced.

    Analysts even made forecasts in January – only half in jest — about whether we should anticipate a crisis during the year if no crisis was predicted.

     People reacted quite calmly to news of an outbreak of an unknown disease in China. Everyone was so sure that this was a local health issue representing a danger only to people living there.

    But already in February, the unknown epidemic had shut down Chinese industry. And in an era of total globalisation, this led to problems in the world economy. It became quickly clear that the coronavirus could not be localised. And with lightning speed it turned into a pandemic.

    One after the other, countries stopped people from travelling and then began to shut down – passenger and freight volumes  on all forms of transport abruptly collapsed, factories closed down, people were told to stay home.

    Consumption of oil products and electricity and coal fell to critical levels the world over and many projects in the fuel and energy sector simply stopped. The year of the pandemic became a difficult test for energy throughout the world – both traditional and renewable. But it also became a watershed, with new trends starting up in energy.

    Oil – from $50 to $10 and back again

       The oil markets before the pandemic struck were hardly rosy: the world had not fully recovered from the price falls that began in 2014 with the advent of the “shale revolution” in the United States. It was then that the sharp rise in hydrocarbon production, thanks to fracking and horizontal drilling, not only put the country on the short list of major players on oil markets, but also flooded the world with fuel.

    Oil prices reacted to the glut by sinking. It was only two years later that more than 20 oil-producing states – both OPEC countries and those outside OPEC – concluded an agreement on limiting production of “black gold”.

    At the beginning of 2020, oil cost more than $60 a barrel, but with the advent of COVID, the price went into a steep dive. The situation became so stalemated that at the beginning of March, the key players in the accord – Saudi Arabia and Russia – were unable to agree on their understanding of the market. The OPEC+ agreement was shattered and, within days, the World Health Organisation declared a pandemic.

    The stars were so badly aligned, oil demand was so unpredictable and markets so volatile that a price war broke out.

    At the OPEC+ meeting on 6th March, the price of oil plummeted by more than $9 to $45 a barrel. Saudi Arabia lifted its restrictions on production and began selling oil with huge discounts. Brent oil stood at $31 a barrel at the beginning of the day on 9th March – and sank to $22 at the day’s close. This was the sharpest fall in the space of a single day in nearly 20 years, since the end of the second Gulf War.

   This meant that the oil industry was hit by a double whammy – the absence of an agreement on price coincided with a sharp decline in world-wide demand for oil.

    In mid-April, OPEC countries and those outside the organisation managed to agree on cuts to oil production from 1st May – cuts of 9.7 million barrels a day. In August, the agreement underwent review and the reductions were to stand at 7.7 million b/d day until the end of the year.

    But the agreement appeared to have been clinched too late. Oil prices nosedived. There was simply too much raw material around and problems had emerged on where to store it.

    Futures on American West Texas intermediate (WTI) oil with delivery in April fell at the close of trade to minus $37.63 per barrel. This was of course, merely a speculative instrument as traders were afraid that U.S. storage sides would fill to capacity and of reports of a flotilla of tankers carrying 50 million barrels of oil on its way from Saudi Arabia.

    But May futures saw no repeat of such sleight of hand. Prices quickly returned to positive territory, but one thing was clear – it was a year with likely more surprises to come.

    It was also clear that this was a year in the world where, for the first time, a major crisis focused not on oil supply but on demand for oil. There had been previous crises centred on supply, generally in the aftermath of revolutions: the six-day war in 1967, the 1973 Arab-Israeli (Yom Kippur) war, the 1979 revolution in Iran.

    Russian Deputy Prime Minister Alexander Novak saw in the December figures total world demand for oil at 6-7 million b/d lower than pre-pandemic levels.

    “Of course, we thought that by the end of the year, the restoration of demand would be higher than what has occurred, what we are observing today,” he said. “What I can say is that demand at the moment has been risen by 15-17 million b/d but compared to what existed before the pandemic, the general dip in demand stands at about 6-7 million b/d.”

    The International Energy Agency (IEA) has forecast a decline in demand for oil this year of about 8.5 %.

    And while oil prices remain fairly unstable in view of a second wave of lockdowns, COVID vaccines and various political headlines, they are closing out the year at a relatively robust level – February futures for Brent stand at about $50, WTI at $46-47.

    New Year spread

    It is, of course, difficult to make predictions for oil, given current conditions in which the situation changes from day to day. It is enough to look at analysts’ forecasts ranging from $40 to $60 a barrel.

    But should effective vaccines emerge and if no restrictions are imposed on flights, demand for oil will rise. Some experts are even predicting oil shortages, taking into account an expected $80 billion cut in investments by world oil companies.

    Analysts Saxo bank see a particularly marked rise in the oil prices in the second half of 2021 – when mass vaccinations are expected to get under way. Brent could climb to $62 a barrel.

    Goldman Sachs are even more optimistic in outlook and are hoping for $65 a barrel by the end of the year and a $55 average for the year as a result of shortages of resources.

     Bloomberg’s consensus forecast puts prices at $47.80 for a barrel of Brent in 2021. The U.S. Energy Information Administration forecasts $48.50 a barrel, while Fitch forecasts Brent to stand at an average of $53 a barrel for the year, the Bank of America at $60 by summer. JP Morgan expects demand for oil to return to pre-pandemic levels by 2022.

   Three cheers for renewables

    At the outset of the pandemic, many predicted that COVID would “kill off” not only fossil fuels, but also renewables — that the economic crisis and lack of funds would at the very least slow down for some time the development of long-term renewable energy.

    But those forecasts have not been borne out. On the contrary, the pandemic has spurred investor interest in renewables. In the first instance, oil has proved to be too unstable an asset for investment and, secondly, a long list of countries have played a role by supporting alternative energy sources as part of global plans for an energy transition.

    More and more major oil companies have declared their intention to expand their capacity in renewables rather than oil and gas projects.

    Research by Frost and Sullivan showed that within 10 years, renewable resources will account for more than half the world’s installed energy capacity – cost reductions and altered policies by various countries will lead to sharp increases In capacity of solar and wind power in the decade to come.

    By 2030, $3.4 trillion dollars will be invested in renewables, including $2.7 trillion in wind and solar. In the same time frame, 54.1 % of world energy capacity will be renewable energy – including hydroelectric power. Nearly 38 % will be provided by a combination of wind and solar sources.

    Adnan Amin, of the Harvard Kennedy School’s Belfer Center and former head of the International Agency for Renewable Energy (IRENA), estimates that nearly half all newly installed capacity every year since 2011 has been in “green” energy.

    A total of 164 countries now have plans to develop renewable systems at the national level – compared to 43 countries 15 years ago. Solar, wind and hydroelectric power account for more than a quarter of world-wide power generation.

    Earlier this year, British oil and gas major BP predicted the end of the oil era throughout the world, saying that world demand for oil might never recover to pre-pandemic levels – the first of the great companies to make such a bold prediction. BP said it intended to focus on diversifying its sources of energy, including renewables, and become the world’s largest energy company.

    Unpredictable gas

    The situation on gas markets is even more interesting.

     According to IEA forecasts, demand for gas by the end of the year, will decline by 3 %, or 120 billion cubic metres. That might not seem to be a great deal, but it is the largest drop in history of the indicator.

    Russian Deputy Prime Minister Novak said demand for gas should rise by 3 % in 2021 to reach pre-pandemic levels.

    In any case, gas markets before the onset of COVID operated on the basis of quite low prices owing to a series of warm winters.

    Gas reservoirs in Europe remained full last winter owing to climatic conditions and to efforts to guard against the failure so far to resolve problems associated with the transit agreement with Ukraine.

    The pandemic simply added fuel to the fire.

    Spot prices at the start of 2020 at the Title Transfer Facility (TTF) hub stood at $135 per 1,000 cubic metres – by July, the price had sunk to $60.

    “Spot gas prices on Asian and European markets in the first half of 2020 were more than 50 % lower than the previous year,” Yury Sentyurin, Secretary General of the Gas Exporting Countries Forum, told the Russian newspaper Rossiiskaya Gazeta.

    “According to our calculations, the average price on major world hubs – the Henry Hub in the United States and the NBP (National Balancing Point) in Britain—at the close of 2020 will be no higher than $3.50 per 1 million BTU British Thermal Units ($128 per 1,000 cu. m).”

     While gas prices started to recover back in the spring, the road to higher prices was a slower one. They began to increase only in the autumn. At the beginning of summer, the gas price in Europe was lower than in Russia – and that meant export was being conducted at a loss. In November, prices in Europe climbed to $150-170.

    According to statistics from Russia’s customs service, Gazprom’s earnings from export over 10 months fell by 44 % to $19 billion. The volume of exports declined by 11 % to nearly 159 billion cu. m. But in October, exports volumes climbed by 11 % to nearly 18 billion cu. m.

    What was unexpected was the fact that the pandemic appeared to have no effect on supplies of Russian LNG – over 10 months, they rose by more than 3 %.

    And GECF Secretary General Sentyurin says he expects Russia’s LNG world-wide trade to increase by 3 % this year. The LNG market is more flexible and reacts quickly to changes in price.

     That explains its popularity.

    According to forecasts by Russia’s Energy Ministry, by 2035, LNG will account for more than half of the world gas market. And Russia can within five years account for a quarter of the LNG world market, producing 68 million tonnes. As Reuters reported in the autumn, not a single final investment decision was taken this year on any one project.

     The IEA says it expects demand for gas to recover gradually in 2021 as consumption of gas returns to pre-crisis levels. And consumption of gas will increase, according to the IEA, by 1.5 % annually to 2025. Most of the growth will come from Asia-Pacific countries, primarily India and China.

     About half the growth in supply is expected to come from North America and the Middle East, though an important factor will be the ability of the U.S. shale sector to recover quickly, given the sharp reduction in investment in the oil and gas sector in 2020. The main driver of the gas trade will remain LNG.

    According to the IEA, Russia will be the main source of additional gas supplies after the United States and supply a fifth of that growth. The agency forecasts annual growth in production of 1.7 %.

Glimmer of sunlight in the mineshaft

    The coal-generating industry passed through difficult times even before the pandemic.

     Different countries are talking more and more often about an energy transition and abandoning coal-fired stations on grounds they pollute the atmosphere. Coal accounts for 38 % of world electricity production.

    New coal projects are being announced, mostly by China and India, though Europe and other countries are closing down industry sites. And more pointedly, it is not just rich European countries proceeding with closures, but also, for example, Vietnam and Pakistan.

    The IEA says world coal consumption fell by 7 % from 2018-2020 – the greatest such decline in half a century. At the close of this year, coal consumption sank by 5 % – the highest such figure since World War Two. And within 10 years, the European Union is due to slash consumption by 60 %.

    Production in Russia this year will dip 10 % to 400 million tonnes, according to the Energy Ministry. Export will slip by 4 %.

    But the IEA expects coal production to rise by 2.6 % next year owing to increased demand for electricity in developing regions. The Chinese and Indian markets are recovering, offering hope to the industry’s leaders.

    And rising demand may come not only from Asia but, surprisingly, also from the United States and Europe. And a rise in world gas prices could well affect those increases in consumption.


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December 2020