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Surging oil and gas prices in 2021 delivered billions of dollars
in profits to top oil companies, in stark contrast to the
previous year when energy prices collapsed as the coronavirus
pandemic hit travel and economic activity.
Typically, companies would invest the lion's share of that cash
in long-term projects to boost oil and gas production and
reserves after the previous year's deep cuts.
But unlike any other time in their history, BP, Royal Dutch
Shell, TotalEnergies, Equinor and Italy's Eni are focusing on
returning as much cash as possible to shareholders to keep them
sweet as they begin a risky shift towards low-carbon and
renewable energy.
"All of the large oil companies are managing decline to a
degree," by shifting to fields that provide larger investment
returns for shareholders and leaving more mature assets behind,
said Ben Cook, portfolio manager with BP Capital Fund Advisors.
The growing pressure from investors, activists and governments
to tackle climate change means that European oil giants are
turning off the taps on spending on oil even as the outlook for
prices and demand remains robust.
The two-pronged strategy of reducing oil output and boosting
shareholder returns was underscored when Shell sold its Permian
shale oil business in the United States for $9.5 billion in
September, promising to return $7 billion to investors.
Investors in U.S. companies can also expect their payouts to
rise to record amounts, but Exxon Mobil and Chevron, the top
U.S. oil and gas companies, plan to continue ploughing money
into new oil projects, encouraged by White House calls for more
oil output to tackle high energy prices and inflation.
In 2022, European firms are set to return to investors a record
$54 billion in dividends and share buybacks, according to
analysis by Bernstein, while Exxon and Chevron are set to pay
more than $30 billion combined.
Graphic: Big Oil is shrinking, https://graphics.reuters.com/OIL-MAJORS/akvezeoqkpr/chart_eikon.jpg
SMALLER OIL
As investments in new oil projects dwindle, oil production by
Europe's top five energy companies is set to drop by over 15% to
below 6 million barrels per day (bpd) by 2030 after reaching a
peak of around 7 million bpd in 2025, data from Bernstein
Research showed.
Britain's BP has said it will cut its oil output by 40%, or
roughly 1 million barrels per day, by 2030 from 2019 levels.
Shell has said its oil output peaked in 2019 while Eni said its
output will plateau in 2025. Graphic: Bringing it back home,
https://graphics.reuters.com/OIL-MAJORS/znpnelxbmvl/chart_eikon.jpg
With the energy transition entering full swing, investors have
welcomed the renewed focus on their returns. Having trailblazed
oil and gas extraction for over a century, from drilling in the
Middle East to pioneering deepwater production, oil majors have
a history of pouring billions of dollars into huge, complex
projects which ran over budget and behind schedule, leading to a
decade of poor returns after 2010.
"Strategies for the energy transition are becoming more defined,
but investors won't buy a story given the failures of the past,
so the companies will need to prove they can deliver on these
strategies effectively and profitably," said Alasdair McKinnon
of the Scottish Investment Fund.
HARVEST TIME
Some oil production will remain a key fuel in the energy
transition and natural gas output is set to increase as
countries such as India and China look to substitute gas for the
most polluting fossil fuel - coal.
At the same time, European oil majors are diverting spending to
renewables such as wind and solar power, promising that returns
from their low-carbon businesses will match or even grow beyond
those of oil and gas in the long run.
That is in contrast to U.S. companies, where Exxon and Chevron
have largely stayed away from renewables. Chevron Chief
Executive Mike Worth has said renewables "don't generate the
double digit returns that investors want."
The sharp drop already seen in investments in new oil
developments by European companies in recent years has helped
push long-term oil prices higher on the expectation of supply
falling short of demand.
"Such caution could underpin hydrocarbon prices, since energy
demand looks set to continue to grow... and supply could be
restrained, especially as renewable and alternative sources of
power do not yet look ready to take up the baseload slack," said
Russ Mould, investment director at online platform AJ Bell.
Demand for oil is expected to peak around 2030 according to the
U.S. Energy Information Administration.
"Oil executives are aware of public pressure, their
environmental responsibilities and the opprobrium that any major
new work could bring," Mould said, adding that companies will
resist the temptation to ramp production back up.
Shell's Chief Executive Officer Ben van Beurden said the company
is looking longer term and while it wants to enjoy the strong
oil prices, "we are not minded to invest in a big way in a
rising market because we believe that by the time we can start
to harvest it, we will be beyond that peak again."
Europe's strategy will be a test case, said BP Capital Fund's
Cook.
“It is hard to say who is right in the pace of the transition.
Time will tell if Europe went too fast.”
(Reporting by Ron Bousso and Sabrina Valle;Editing by Elaine
Hardcastle)
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