Big Oil had a record year in 2022, earning billions from the imbalance between oil and gas demand and supply, and from the massive uncertainty that geopolitical events and decisions in Europe precipitated.
The record profits drove higher dividends and lofty share buyback plans. They are also drawing highly unwanted attention from governments. And this attention might just become more focused this year, just when oil and gas prices are retreating.
“Commodity prices are down across the board relative to record 2022 levels, but it still looks like it’s going to be a very strong year,” according to Kim Fustier, head of European oil and gas research at HSBC, who spoke to Bloomberg. “It could very well be the second best year in history for overall distributions and share buybacks.”
Indeed, Big Oil’s five supermajors were expected to report combined earnings of close to $200 billion for 2022, and although oil and gas are down, they are not down sharply enough to prompt the majors to rethink their plans for the year. But governments may do that.
Windfall profit taxes are already a thing in the European Union and the UK, and the industry has criticized the move as likely to discourage investment in new production just when such new production is urgently needed. According to Bloomberg columnist Lionel Laurent, the windfall taxes might just be the start.
Noting how the U.S. oil industry’s decision to repurchase billions worth of shares amid last year’s oil price surge annoyed the Biden administration, Laurent suggested that European supermajors’ decision to buy back shares and raise dividends might annoy governments in Europe—and lead to more taxes.
If this does happen, then the industry will have an even better motive than it does now to argue against more investments in new oil and gas production. And that’s likely to put it at even sharper odds with governments. Ultimately, it would also limit the growth potential of oil and gas output at a time when forecasts are multiplying that the world will need fossil fuels for decades to come.
Back to the short term, however, this year will likely be very much like last year, despite lower prices. Because forecasts for this year see record oil demand. None other than the International Energy Agency, an outspoken opponent of the oil and gas industry, said earlier this month that China’s reopening after Covid lockdowns would cause a surge in global oil demand to a record high of 101.7 million barrels daily this year.
The IEA also said in the same forecast that oil supply is going to tighten this year as more Western sanctions in Russia come into effect, notably the fuel embargo set to kick in on February 5th. And, like every supply tightening, if this materializes, it would push prices higher, fattening Big Oil’s profits yet again. And this will, in all likelihood, intensify criticism of the industry.
Wood Mackenzie wrote a report earlier this month noting that the different priorities of the oil industry and the governments it operates under will lead to clashes this year. With governments pushing for a transition to less oil and gas, and the industry making billions out of selling these two commodities, a continuation of the already existing conflict is all but inevitable.
Activists are also likely to intensify their attacks on Big Oil in light of its record profits. Follow This’s Mark van Ball told CNBC last week that “What we saw happening in 2022 is that the oil majors used the high oil prices and the energy crisis to convince investors that the energy crisis should eclipse the climate crisis — and that has caused a setback.”
Another climate activist from nonprofit Transport and Energy told the news channel, “They are profiting from the current increase in oil and gas prices, and they are betting on it. And what you see is actually increased investment in oil and gas.”
“I think given that prices of oil and gas are likely to stay up, it’s important for us to reflect on the fact that these profits are going to stay high at the same time as many households are struggling with energy prices,” Agathe Bounfour also said.
In this, governments and activists will be together against Big Oil. But unless someone takes another supermajor to court and forces it to cut oil and gas production, Big Oil will continue focusing on what its shareholders want—and what shareholders want are dividends and buybacks.
“There is still an aversion to big capital expenditure increases, period,” Jeff Wyll, an analyst with asset manager Neuberger Berman Group, told Bloomberg. “The problem the sector got into in the past is doing too many megaprojects at one time. Now it’s much more focused.”
With the industry getting much more focused and cautious with spending decisions, chances are it will continue to annoy governments, giving them a convenient scapegoat for the results of their own energy policies. But it will be a rich scapegoat with happy shareholders.
By Irina Slav for Oilprice.com
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