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Irina Slav

Irina Slav

Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.

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Big Oil Is Flush With Cash, But Doesn’t Know Where To Spend it

  • Oil majors are considering a change in strategy for Europe because of windfall taxes.
  • Oil majors want to spend more on upstream oil and gas, but need long-term demand for their products in order to do so.
  • Underinvestment in oil and gas may have serious consequences for the oil market in general.
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Exxon is considering a change of strategy for Europe because of the windfall taxes governments are using to get some of the money Big Oil made from last year's oil and gas price rally. Shell is warning that Europe should stop relying on luck with its energy security and invest in new gas infrastructure to replace lost Russian supply. Relying on luck, according to CEO Wael Sawan, is not a good strategy.

Chevron, along with Talos Energy, have updated their plans for a carbon capture and storage hub in Texas. They are now eyeing a facility three times as large as the original idea.

All oil majors are urging governments to facilitate the development of a hydrogen industry, especially the production of low-carbon hydrogen from nuclear and wind and solar.

This is just a portion of the news coming out this week from Houston, where the industry and other decision-makers gather every year to discuss energy, politics, and the future. What does not seem to be on the table is talk about investments in more of these companies' core businesses.

"Summary of CERAWeek from an oil industry perspective: 'The market is underinvested, someone needs to invest more, not us but definitely someone else, have I mentioned what we're doing on hydrogen and carbon capture?'"

This tweet, by S&P Global Commodity Insights' Energy and Natural Resources group director Karim Fawaz, seems to summarize quite succinctly the state of affairs in the oil and gas industry right now.

Producers, even the biggest ones, appear torn between changing the direction of their business strategy in line with government pressure and sticking to their core business, which brought them record profits last year. And while they are torn, they distributed hundreds of billions of dollars to shareholders.

Related: Norway Isn’t Worried About An Oil Buying Cartel

The total amount of money that the oil industry distributed as dividends last year hit $170 billion, with share buybacks costing another $140 billion, the Wall Street Journal reported this week, citing data from Columbia University's Center on Global Energy Policy.

Investments in the same year amounted to $310 billion—an amount equal to that distributed as dividends and buybacks combined. The sum may look impressive, but it's not, as the WSJ points out, the $580 billion it could have been if oil companies had been less generous with dividends and buybacks.

The problem is that nobody appears to be certain it is worth investing more—not publicly, at least. It is quite likely that Shell's Sawan, Exxon's Woods, Chevron's Wirth, and BP's Looney, are well aware that the world needs more investments in oil and gas in order to meet current and future demand. Yet that pressure from governments and activist shareholders to not produce more oil and gas is countering the reality of global energy demand.

That pressure—and associated legislation and court decisions—are making decisions that at any other time in history would have made the simplest and most obvious sense seem difficult and risky.

There's also the windfall profit element, which has further discouraged oil and gas producers from doing the obvious thing. So oil companies are not making the decisions that reality dictates, instead opting for largely paying lip service to the transition.

For all that confusion, with governments telling the oil and gas industry they need to produce more—but just for a short while because we are transitioning away from fossil fuels—while taxing them additionally because of high oil and gas prices, there is a silver lining. The industry is becoming bolder in stating the obvious.

"You have to be very careful about switching off system A too early," Chevron's Mike Wirth said at CERAWeek, referring to the switch from fossil fuels to alternatives.

BP's Bernard Looney, who had embraced the transition enthusiastically two years ago, now admits the company's shift to renewables did not pay off as expected and says that the transition would benefit from more oil and gas investment.

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"Reducing supply without also reducing demand inevitably leads to price spikes, price spikes lead to economic volatility, and there's a risk that volatility will undermine popular support for the transition," the executive said at the recent International Energy Week.

Shell's Sawan, for his part, said outright that cutting the production of oil and gas now is not healthy. In an interview for British Times Radio, the executive said, "I am of a firm view that the world will need oil and gas for a long time to come. As such, cutting oil and gas production is not healthy."

Perhaps this newfound courage to state the obvious may sooner or later lead to courage in investment decision-making. The problem is that, according to OPEC officials and international energy analysts alike, the balance in the oil markets is already compromised by underinvestment, and the shortage may be just a matter of time.

By Irina Slav for Oilprice.com

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