Never before have the major oil companies earned so much as in the past six months: the combined profit amounted to more than 100 billion dollars (about the same in euros). To the chagrin of politicians, the profits are hardly shared with citizens and companies in need. How is that possible?
Reports of the death of the oil sector appear to be grossly exaggerated. Several years ago, when the demand for oil collapsed during the corona pandemic, Big Oil seemed to shrivel. ExxonMobil, America’s most powerful company for nearly a century, even disappeared from the Dow Jones Industrial, the index of thirty major American companies. Your role has come to an end, newspapers wrote, including de Volkskrant; Now it’s big tech’s turn.
Today it is the tech companies that are taking a hit and the fossil sector has risen from the ashes: in the last quarter ExxonMobil made almost $ 20 billion profit, BP more than 8 billion, Shell just under 10 billion, 13 billion for Chevron and 10 billion for TotalEnergies. Saudi Aramco took the lead and made almost half a billion dollars in profit. Per day.
The almost perverse profits led to beaming CEOs and grumpy politicians. First of all, because of the main cause, the latter say: oil companies are profiting from the war in Ukraine. The sanctions resulting from the Russian invasion, plus Moscow’s shutting of the gas tap, led to energy shortages and exploding prices.
As oil giants fill their pockets, citizens and governments are paying the price, say politicians who have set up multi-billion dollar programs in recent months to cushion the worst financial blows for citizens.
The annoyance turned into anger in recent days when it turned out that almost all oil companies mainly let their shareholders benefit. Dividends are increased and huge amounts of shares are bought back. This makes investors happy, because the profit has to be shared with fewer people.
Shell CEO Ben van Beurden already felt the mood. At the presentation of the quarterly figures last week, he spoke of a ‘social’ reality in which oil companies have to return a part of the profits that have been thrown into their laps to society.
Meanwhile, Shell is doing the opposite: it wants to increase the dividend by 15 percent and bought back 4 billion dollars of its own shares. When asked how much the energy company has paid in an extra tax that the British government already introduced last spring, there was a shocking answer: nothing. According to financial top woman Sinead Gorman, this is because considerable investments have been made in recent times, and that money may be deducted from the payment for the so-called mumps tax.
The outgoing Shell CEO has nice talks, but when push comes to shove, he apparently prefers to give his money to the shareholders. The group is not alone in this, only BP contributed something to the British tax (about 800 million) and TotalEnergies has been forced by the French government to lower prices.
Resists
Fossil companies therefore say that they understand the need to skim off their profits, but sometimes they even resist. Now that the government wants to increase the mining levy from next year to use part of the proceeds to pay for the price ceiling, Neptune Energy, the largest gas producer in the North Sea, has threatened to stop its investments in the Netherlands. Neptune wants the same arrangement here as Shell in England: investment costs may be deducted from the additional tax to be paid.
We would like to invest a lot of money in new gas sources that the Dutch government so badly needs to become independent from Russia, but not at the expense of profit, seems the reasoning of Neptune Energy. Followed by the threat: if we leave, the security of supply of natural gas will be at stake. A warning that should lead to shivers in The Hague in times of gas shortage.
The government doesn’t seem impressed. A ‘solidarity contribution’ was announced this week, a temporary increase in corporate tax, with retroactive effect to 2022. This contribution should generate €3.2 billion, which will be used to pay for part of the expensive support packages for citizens and businesses. A spokesperson for the Ministry of Finance would not say which company has to pay which amount.
Sharpening knives
US President Biden is also sharpening knives: he stated this week that the oil industry is profiting from the war in Ukraine and ordered the sector to lower prices at the pump, instead of treating investors. Oil companies also need to invest more in production and refining or risk higher taxes, Biden said.
The accusation caused the president to sneer at industry. The boss of the American oil dome American Petroleum Institute Mike Sommers called Biden’s comments “downright ridiculous.” Several US concerns had already withdrawn from Russia before the US government imposed sanctions, Sommers said. Shell has also quickly withdrawn from Russia, which has cost the group billions. How to profit?
The criticism of Biden is understandable, because his oil change is remarkable to say the least: ‘No more drilling’ was one of the main points of his election campaign. Biden wanted less oil, not more, like now.
In fact, the oil sector is doing what it is asked of it: if the world is to be climate neutral by 2050, the search for new oil and gas fields must stop now, the energy agency IEA warned more than a year ago. That wish is not being met, but investments have been significantly reduced worldwide.
Maybe too much; to have enough fossil energy by the end of the decade, the oil sector will need to invest $466 billion annually in extraction. Last year, that amount remained at 305 billion, calculated Bloomberg news agency. According to the same IEA, investments are even 50 percent below what they should be.
A gaping hole
How can the IEA argue for stopping the search, on the one hand, and encourage oil extraction on the other? The main reason is that there is a gaping gap between the growth of renewable energy generation, the expected supply of fossil fuels and the total world demand for energy. Wind and sun grow spectacularly, but not spectacularly enough to compensate for the necessary decline in fossil fuels. Moreover, it looks dark in terms of European sustainability: the construction of, for example, new turbines is lagging far behind the political ambitions for wind energy at sea, this week showed.
The effect of energy shortages has been experienced by the world over the past year and a half: exploding prices. Until renewable generation has largely taken over from fossil fuels (or much more energy is saved), the high prices are unlikely to disappear, analysts say.
It does not contain much more extra fossil investments than those 305 billion dollars. This is not only beneficial for the climate, but also for the cash book of the oil giants, they have found, following President Putin. He noted this year with satisfaction that throttling the gas flow did his income good, instead of harm.
Big Oil now also knows that less oil and gas yields higher profits. In normal times, this idea doesn’t hold true: as soon as prices rise, oil companies look for more, so they can boost their profits, before the oil price plummets again due to the extra supply. Now the situation is different. Only Saudi Aramco and China’s Sinopec are seriously investing in expansion. All major western concerns have put their searches on the back burner.
They can do that safely, because they know that prices will remain high. And they find the oil cartel Opec on their side: it recently even lowered production.
Chevron’s boss put it this way: “The market isn’t paying us for growth.” Investing in oil therefore makes little sense, green energy yields too little, so the money goes to the shareholders, the only remaining friends of Big Oil.
The oil sector therefore seems to be in the process of a total empty sale: existing stocks are being sold for a good price. As a result, energy will remain scarce in the coming years, until green energy takes over the role of fossil fuels.
This may be happening sooner than expected, the IEA reported two weeks ago. Demand for coal will peak this decade, natural gas demand will peak by 2030, and oil demand will also peak in the middle of the next decade. Then the fossil era will soon be over. This prospect makes investing in oil uncertain, another reason why oil companies are in no rush.
So the world seems to be heading for the end of the oil age. That’s a cheery idea. But until that happens, citizens and businesses have their teeth together.