Last year, Big Oil made record profits that got stuck in the throats of governments, activist organizations, and international bodies such as the UN and the IEA.
Yet those same governments practically encouraged these profits by subsidizing fuels to avoid even higher inflation and all the problems that such a development would have produced.
In 2022, with demand for energy roaring back after the pandemic and Russia’s invasion of Ukraine, the consequent gas supply squeeze, and fears of a similar oil squeeze, the target that Big Oil had painted on its back temporarily disappeared. Energy security temporarily became more important than decarbonization.
That era is over, according to some analysts. Now, the pressure on Big Oil to decarbonize is going to increase.
All Big Oil majors except BP reported weaker profits for the second quarter because of the decline in oil and gas prices. BP, which reports on Tuesday, is also expected to book slimmer profits for this year’s second quarter than last year’s. The time of plenty seems to be over.
According to the Financial Times, this means that the supply squeeze threat has passed, and now the governments that subsidized diesel and gasoline will once again increase the pressure on the oil industry to go green.
In fact, the pressure has never decreased, even when oil was trading above $100 a barrel last year. And despite that pressure, Big Oil has signaled a retreat from earlier ambitious transition targets.
It seems everyone got a reality check last year. Only Big Oil came out with different outtakes from that check than the governments that slapped windfall profit taxes on the industry and then worried it would stop investing in more production.
The pressure is working: European supermajors have been splashing on various low-carbon projects, from wind and solar capacity to EV chargers. But that was before 2022. This year, BP and Shell basically walked back their decarbonization pledges to the frustration of their activist investors.
Those same investors, by the way, received much lower support for their climate-related resolutions at this year’s AGMs than in previous years. The rest of the shareholders must have liked the share repurchase programs and the fatter dividends.
Meanwhile, the American supermajors, who have generally steered clear of things like wind and solar, are venturing into raw transition materials: Exxon and Chevron both announced forays into lithium mining this year, signaling the potential direction their decarbonization drive would take.
The two are also busy expanding their carbon capture capabilities. Exxon, for one, sees a future in which its decarbonization business could one day outgrow its core oil and gas business.
In Europe, BP and TotalEnergies just won a tender for offshore wind capacity in Germany, essentially beating the wind industry on its own turf. Just because the leadership of these companies has signaled it will go easy on the whole decarbonization affair doesn’t mean it will pass on opportunities to benefit from generous government funding for wind and solar.
Big Oil has been under the microscope for years now, with governments, regulators, and activists all watching the industry closely for any suggestion they might want to expand their core business.
Yet when they did do that, activists protested last year as expected, but governments didn’t. Governments in Europe spent billions on fuel subsidies contributing to Big Oil’s massive profits. In the U.S., President Biden and his energy secretary pleaded with Big Oil to boost oil production after actively working to make boosting oil production as difficult as possible.
Now, decarbonization is back on the table as a top concern amid a ramp-up in the climate emergency talk from officials such as the UN’s Antonio Guterres. But the perception that the supply squeeze threat is over, as suggested by the Financial Times last week, may well be wrong.
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Oil and gas prices are palpably lower now than they were this time last year, but they are on the climb. And the reason they are on the climb is that fears are growing that demand for oil will soon exceed supply thanks to OPEC+ efforts to prop up prices and unrelenting demand growth, despite price movements.
The current situation is somewhat paradoxical: national and international government officials are calling for the decarbonization of the hydrocarbons industry. At the same time, they are forecasting higher demand for these same hydrocarbons and, in the case of the IEA, warning that this higher demand would result in a deficit.
It would be reasonable to suggest that this means decarbonization efforts are not exactly going as planned. The reason for this is that the need for energy is immediate and pressing. People need energy right now and not in five years. And Big Oil is happy to help while it invests in that new energy capacity that will be up and running in five years thanks to government subsidies.
By Irina Slav for Oilprice.com
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