How the Oil Crash Stands to Change Energy Industry

While it is undeniable that the COVID-19 crisis has
significantly impacted the oil and gas industry, it is equally undeniable that
the industry was occupying unsteady ground for several years before the
pandemic. Global oil demand was approaching -30% in the weeks just preceding
the first salvos in the war against the novel coronavirus; factoring in the
government restrictions resulting from COVID-19 represented a correction to
which the oil and gas industry were unable to respond quickly enough with
matching production cuts.

Following the decrease in commercial and industrial activity
due to the pandemic, electricity demand has also dropped off; lending and cash
flows across the entire sector have been and will continue to be affected,
potentially altering the landscape in ways that some experts say might be
permanent.

Chaos in Balance
Sheets, Lending

According to Jason Hall, a financial expert and writer for
the business publication The Motley Fool, “The cracks in many
oil company balance sheets are starting to widen. Whiting Petroleum (NYSE: WLL)
filed for bankruptcy in early April. Chesapeake Energy (NYSE: CHK) has hired
restructuring advisors as one of its largest investors. The implications aren’t
just for oil producers, or onshore operations. Offshore driller Diamond
Offshore (NYSE: DO) said it will skip its next interest payment, an action that
will cause the rest of its debt to default.” 

Banks are not rushing to bail out the industry either,
regardless of the potential impact on the economy overall. “There is word that
some of the biggest banks have already started the process of setting up
separate operating companies to take over oil production assets from borrowers
that default,” Hall says, “instead of trying to sell the assets for pennies on
the dollar.” Hall believes that asset values are now so depressed in the
current environment that banks can’t afford to take the losses they would incur
in what will is likely to be an extreme buyer’s market for troubled oil assets.

Hall said that all of this could permanently alter lending
in the energy industry. With so many oil producers that can’t survive even a
few months in the current environment, he expects that lenders will require
companies to retain far more cash in the future, restricting their cash flow
even further.

The Butterfly
Effect: Clean Energy Taking a Hit

The ‘Fool’s John
Bromels, another industry expert, points out that areas of the greener and
cleaner energy sector are also being hard-hit as a result of the upset in oil
and gas. “When you’re thinking about the impacts of the oil price crash,”
Bromels says, “you’re probably not thinking about hydrogen fuel cells, but
there are actually some indications that today’s low oil prices could put a big
dent in fuel cells tomorrow, affecting stocks like Plug Power (NASDAQ: PLUG)
and Bloom Energy (NYSE: BE).

Hydrogen is, of course, a very clean, energy-efficient fuel,
but that hydrogen has to come from somewhere. In the U.S., it typically comes via
the use of natural gas. “Fuel cell companies like to tout that it can come from
cleaner sources like biomass,” Bromels said, “but those sources make fuel cells
more expensive than relying on hydrogen from cheap, abundant natural gas
drilled right out of shale basins.” Since the oil price crash has set the
economics of shale drilling on its ear in the U.S., many producers have opted
to cease operations. “Most shale producers extract both oil and gas, so the big
domestic natural gas oversupply that’s kept prices so cheap may be coming to an
end,” Bromels said.

The Future for Electricity

Senior energy and materials specialist Matt DiLallo has a
grim take on how the disrupted electricity infrastructure will impact fossil
fuel demand in the wake of the oil price crash. “For more than a decade, we’ve
seen a slow transition from the century-old fossil fuel energy infrastructure
to new forms of energy like wind and solar electricity and electric vehicles,”
he says. “I think this oil crash will accelerate that transition.”

As far as electricity
generation goes, “John (Bromels) makes a compelling argument that natural gas
prices will rise because of a reduction in shale drilling,” DiLallo says. “If
that’s true, it’ll make natural gas power plants even less competitive with
wind, solar, and energy storage. At the same time as natural gas prices are
going up, the short-term demand for wind and solar plants is going down,
because utilities need less electricity, and developers are running into their
own financial problems.”