Oct 14, 2020 - Energy & Environment

The oil industry faces a long-term reckoning

Data: IEA; Chart: Sara Wise/Axios
Data: IEA; Chart: Sara Wise/Axios

The International Energy Agency's very long-term outlook released Tuesday offers useful analyses about the cloudy future of the industry and petro-states.

Why it matters: The pandemic's long-term effects and the prospect of future climate policies are together causing a rethink of the sector's financial future.

  • COVID-19 "sharpens the dilemmas" facing the industry and the pandemic is "prompting a re-evaluation of oil and gas strategies and assets," IEA said.
  • Lately, big companies have jointly written down their asset values by $50 billion, revealing the "shift in perceptions about future income."

The big picture: IEA has slashed its estimates of the future value of oil and gas production.

  • Here's one of the dilemmas IEA is talking about: Even if climate policies and new tech start moving the world away from oil, production declines from existing fields mean a lot of new investment is needed.

However ...

  • "[I]nvestors are looking with increased scepticism at oil and gas projects due to concerns about financial performance and the compatibility of company strategies with environmental goals."
  • "Some of the financial concerns might ease if prices pick up and projects start to offer better returns, but questions about the industry’s contribution to reducing emissions are not going to go away."

The intrigue: Another place these problems are showing up is that, as IEA notes, the market capitalization of publicly traded oil-and-gas companies has dropped about 40% over the last year.

  • This implies that markets have priced in not only the pandemic's effects, but a "significant future tightening of climate policies."
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