Research shows that companies under financial strain face a heightened risk of fraud. With oil and gas companies recently facing unprecedented financial challenges, corruption is a concern in this industry more than ever.
Although much attention has been paid to the impact of the Covid-19 pandemic on the oil and gas industry, the financial challenges facing the oil and gas industry are deeper and more structural; they predate the Covid-19 pandemic and will continue well beyond this crisis. Below are some of the key financial challenges facing this industry sector.
1. Declining consumer demand
Growing concern about climate change and the sudden widespread availability and affordability of clean energy technologies (e.g., wind and solar, storage, energy efficiency and electric vehicles), has led many independent analysts to consider the possibility that demand for oil and gas may never return to its pre-pandemic levels.
In an article entitled “COVID-19 and the energy transition: crisis as the midwife to the new,” Kingsmill Bond of the independent research firm Carbon Tracker explains:
“[T]he signs of the malaise [in the fossil fuel sector] were already there even before 2020 thanks to the growth of renewables and the rising regulatory pressure. Total demand growth for fossil fuels had slowed to just 1% a year, and in nearly 40% of the world fossil demand was already falling…..
And then came the crisis. Fossil fuel demand has collapsed and may never surpass the peaks of 2019. By the time the global economy recovers, all the growth may be met by renewable energy sources. The maths of what happens when a sector near its structural peak hits a cyclical downturn are pretty simple: the peak of demand is advanced by a few years….
And once the peak is passed, the fossil fuel sector as a whole will face an eternal scrappy battle for survival, struggling with overcapacity and stranded assets, with low returns and high risks.“
2. Investor pressure
Investment banks and asset managers have become increasingly active in pressuring large energy users to shift away from fossil fuels. For example, through the Climate Action 100+ initiative, more than 450 investors, representing more than USD$40 trillion in assets under management, are working together to pressure the world’s most significant emitters of greenhouse gas pollution to shift to clean energy.
According to the Financial Times in a February 2020 article,
“[E]nergy companies are increasingly disclosing that they could be cut off from the lending and bond markets as banks assess the impact of climate change. Devon Energy Corp, a US oil and gas provider, said in a filing this month that banks’ concerns over climate change could “make it more difficult to fund our operations.”
3. Excess supply
Reduced demand for oil resulting from the Covid-19 pandemic have led to production cuts in Saudi Arabia, Russia and the United States. However, these cuts have been insufficient to eliminate excess supply, leading to first-ever negative pricing in the oil futures market. Analysts worry that the supply-demand imbalance will continue for years, driving prices below levels needed for profitability.
4. Failure to prepare for the low-carbon future
Despite acknowledging the declining prospects for high-carbon-emitting sources of energy in the coming decades (most oil and gas companies have expressed support for the Paris Agreement on Climate Change), the oil and gas sector has failed to make a significant shift of its capital toward low-carbon energy sources. An analysis by the Carbon Disclosure Project shows that in 2018, just 1.3% of the sector’s capital expenditures went toward low-carbon assets.