Resurgent profits pose questions oil and new

OPINION: The oil majors are still under the cosh from environmental campaigners over carbon emissions and are taking the blame in some quarters for “fuel poverty” but investors appear to have rediscovered their affections for the sector.

ExxonMobil, Shell and BP have all seen their shares rise by over 50% year on year as Brent crude pushes towards $100 per barrel, economies reopen after Covid lockdowns and fear of war in Ukraine grips the West.

In some European nations, such as the UK and Spain, there is talk of imposing windfall taxes on the soaring profits of oil companies.

But while rising energy prices bring some political heat for oil executives, they have also boosted investor confidence and provided cash for share buy-backs, and debt deleveraging.

Investors can be seen rushing into high-yield energy bonds, putting concerns about environmental, social and governance factors “on the backburner”, as the UK’s Financial Times puts it.

ExxonMobil unveiled earnings of $21 billion in 2021, compared with a loss of almost the same figure in 2020, while Chevron had its most profitable year since 2014.

Some companies are at pains to show that high earnings will help them boost investments in low-carbon projects.

On the back of $13 billion annual profits, BP chief executive Bernard Looney says his company will up the stakes on the energy transition and shift the focus to delivering on promises after completing what he described as “the largest restructuring in the company’s history”.

About half of BP’s annual spend will be concentrated on lower-carbon transition growth businesses by 2030, rising from 40% in 2025.

With capital expenditure currently running at about $15 billion, the UK company is expected to spend as much as $6 billion on offshore wind and hydrogen by 2030, compared with $1.6 billion last year.

But oil companies remain more focused on keeping their shareholders happy than worrying about what the politicians and the environmentalists say.

Modest returns

This is hardly surprising considering the relatively modest returns from renewables investments compared with the risked bonanzas that oil can offer.

The trend is even more marked in those oil companies showing little interest in reducing dependence on fossil fuels to become clean energy companies.

ExxonMobil, for instance, is talking about capital spending of up to $24 billion, compared with its own previous estimates that the figure would be as much as $35 billion.

With low-carbon activities taking a bigger share of a shrinking cake, investments are actually falling far short of where they need to be to meet the Paris climate targets.

But it will not be easy to shrug off customer concerns around “fuel poverty” in the political arena and such cries may become even louder than the environmental campaigners.

Rising prices, gas shortages and the Ukraine crisis have made the public and politicians more aware of the importance of energy to the economy and home life.

Some policymakers are pushing for the energy transition to slow down, others for it to speed up.

Green deal

The European Commission says its Green New Deal to obtain carbon neutrality by mid-century is the antidote to rising commodity prices and over-reliance on Russian gas imports.

High commodity prices may encourage some oil companies to step up their acquisitions of renewable-energy companies, such as TotalEnergies’ grab for US solar PV group SunPower.

But others may be inclined to cash in on the present oil and gas boom, merely putting off any energy transition for another time.

And deep financial problems at blue-chip Italian services company Saipem — partly stemming from cost overruns on wind schemes — have highlighted the perils of these disruptive times.

Going green or not, the oil rally has reminded the majors of their strengths, but also their weaknesses.