(Bloomberg) – Big Oil is raking in historic sums of money, but the windfall is not being invested in new production to help replace Russian oil and gas. Instead, executives are rewarding shareholders, preparing the world for an even tighter energy market in years to come.
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The five largest oil companies in the west together earned $36.6 billion on top of their first-quarter spending, or about $400 million in excess cash a day. It was the second-highest quarterly free cash flow on record and enough to relegate billions of dollars of Russia-related writedowns to mere footnotes in their recent earnings reports.
Oil booms usually trigger a race for higher production, but not this time. All five supermajors have kept their capital expenditure budgets firmly in check and committed to maintaining that discipline in the years to come – even as oil prices closed above $100 a barrel on all but five days. since Russia invaded Ukraine in February. With production from wells naturally decreasing each year and major projects taking half a decade or more to come online, any expansion delays occurring now will push back the possibility of new production even further.
“In previous cycles of high oil prices, the majors were investing heavily in long-cycle deepwater projects that wouldn’t see production for many years,” said Noah Barrett, senior energy analyst at Janus Henderson. , which manages $361 billion. “Those kinds of projects are just on the table right now.”
In short, if consumers are looking for Big Oil to urgently replace Russian production, they better look elsewhere.
The last time crude oil was consistently above $100 a barrel was in 2013, Big Oil’s combined capital expenditure was $158.7 billion, nearly double what companies are spending now, the data shows. compiled by Bloomberg. The group includes Shell Plc, TotalEnergies SE, BP Plc, Exxon Mobil Corp. and Chevron Corp.
“Discipline is the order of the day,” BP CEO Bernard Looney told analysts on Tuesday. The London-based major is not budging on its $14-15 billion spending plans for the year, with its medium-term forecast hitting a high of $16 billion despite 10% cost inflation in some parts of its activity.
Shell, which posted record profits exceeding even analysts’ highest estimate, was equally clear. In her first set of results as chief financial officer, Sinead Gorman repeatedly said Shell would stay within its $23 billion to $27 billion range. “Nothing has changed in terms of our capital allocation framework,” she said.
Instead of spending on new projects, companies choose to reward shareholders after years of poor performance. Exxon, BP and TotalEnergies have ramped up share buybacks while Chevron is already buying up record amounts of shares.
There are clear reasons why Big Oil chooses not to spend more. Chief among them are climate concerns and uncertainty about the future direction of oil demand. Years of pressure from investors, politicians and climate activists culminated in the past two years, when all the oil majors pledged some form of net zero target by mid-century. BP and Shell have actively positioned themselves to move away from long-term oil and gas. All are under additional pressure to improve yields that have declined over the past decade due to soaring costs and low prices.
“Any decision to scale up, sustain or add new fossil projects today could lead to the risk of a comeback in a few years,” said Jason Kenney, an analyst at Banco Santander SA. Climate change, technological developments like electric cars and rapidly changing government emissions policy are major risks today when deciding whether to invest billions in a new project, a- he declared.
Against this backdrop, investment in the upstream oil and gas sector fell 30% in 2020, while last year’s spending of $341 billion was 23% below pre-pandemic levels. writes the International Energy Forum in a report.
“Two consecutive years of large and brutal underinvestment in oil and gas development is a recipe for higher prices and volatility later this decade,” warned Joseph McMonigle, IEF’s general secretary.
This message was not well received by consumers around the world. From Pakistan to Paris, billions of people are suffering from a cost of living crisis fueled in large part by high energy costs. In the United States, President Joe Biden has implored oil companies to reinvest profits from soaring oil prices into increased production to help ease shortages caused by Russia’s war on Ukraine. Some U.S. and European politicians have called for a windfall tax on corporate profits to help ease the burden on consumers.
To be fair, that doesn’t mean companies aren’t investing in growth at all. But they “will only focus on low-risk, high-return assets” such as shale or expanding offshore fields near existing operations, according to Kenney.
Exxon and Chevron, for example, are spending heavily to expand production in the US Permian Basin, the world’s largest shale oil region, with projected growth rates of 25% and 15%, respectively. BP is increasing its investments in U.S. shale, but the company will not be able to increase production from the Permian until it completes construction of two major gathering systems by the end of the year.
However, most of the Permian growth will more than offset declines elsewhere in the US supermajors’ global portfolio, rather than adding barrels to the total. Exxon’s first-quarter production of 3.7 million barrels per day was the lowest since its merger with Mobil in the late 1990s. Together, Exxon and Chevron plan to spend more on buyouts and dividends this year than for production.
“For so long, investors and politicians have been telling industry that we need less oil and executives remember that,” Barrett of Janus Henderson said. “If the world needs an extra million barrels a day to bring prices down, I don’t know where that will come from.”
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