Wall Street pressures and spike in demand undermine US call for more oil

Joe Biden wants American oil companies to increase production. Two powerful forces are working against the president’s call.

Wall Street wants oil companies to rain billions in profits on investors rather than spend freely on new supplies. And the International Energy Agency has warned that oil demand will peak by the middle of the next decade, undermining the case for massive new investment.

Those tensions came to the fore last week as ExxonMobil and Chevron reported net profits that, over the past two quarters, hit their all-time highs.

Both US oil supermajors said they would funnel cash to shareholders in the form of higher dividends and share buybacks. They didn’t say they would spend more to increase production.

Goldman Sachs has argued that the sum of these decisions, echoed in junior oil companies in the US shale play, will be a long period of oil prices above $100 a barrel. West Texas Intermediate crude settled at $90 a barrel on Wednesday.

Biden on Monday accused oil companies of “war profiteering” after Russia’s full-scale invasion of Ukraine and threatened them with new taxes if they did not ramp up production. “I think they have a responsibility to act in the interest of their consumers, their community and their country to invest in America by increasing production and refining capacity,” the president said in a speech.

But investment by US supermajors, which remain more committed to their core oil and gas businesses than their European rivals, is down about 30% from their pre-pandemic plans.

In 2019, Exxon said it planned to spend $30-35 billion a year on its business, but is now aiming for around $23 billion a year. Chevron had reported annual capital expenditures of about $19 billion to $22 billion before the pandemic, but is now looking at $15 billion to $17 billion.

Both companies will update their spending plans in December, but neither said it planned to raise its medium-term targets as requested by the Financial Times last week. Chevron aims to increase oil and gas production by 3% per year and Exxon by about 2% per year, largely from investments made years ago.

Pavel Molchanov, an analyst at Raymond James, said: “Oil companies could drill more, but they don’t want to because their shareholders have pushed them to invest less and pay more dividends and share buybacks – and their stocks in many cases are not high at all.

Exxon shares have risen 79% this year even as the broader S&P 500 index has fallen 21%. This is a remarkable turnaround from a company that 18 months ago lost a historic proxy battle, in part because of what activist investor Engine No. 1 called excessive spending by the oil supermajor.

Chevron is up 52% ​​in 2022. “The signals from our investors don’t suggest they want to see more investment in production,” chief executive Mike Wirth told the Financial Times last month.

Darren Woods, chief executive of Exxon, last week defended the company’s heavy spending on dividends at a time of high fuel prices for consumers.

“There have been discussions in the United States that our industry will return a portion of our profits directly to the American people. In fact, that is exactly what we do in the form of our quarterly dividend,” a- he told investors after Exxon reported quarterly net profit of $19.7 billion.

Independent U.S. shale producers, which over the past decade have provided much of the growth in global oil supply, are also keeping spending steady. Scott Sheffield, CEO of Pioneer Natural Resources, told analysts last week that his company’s “low reinvestment rate” would “moderate oil production growth” but generate free cash flow that could be paid out to shareholders.

Column chart of quarterly earnings ($ billions) showing soaring profits for the biggest oil groups

Just days before the industry’s latest windfall earnings, the IEA said for the first time that it had seen “definitive” signs that demand for oil would peak under current government policies. He said crude demand would likely grow by less than 1% a year before peaking in 2035, though he still forecast demand to remain high through 2050.

Wirth and other oil executives say investors don’t want them to invest in part because of policies and rhetoric in the United States and Europe aimed at moving the economy away from fossil fuels to fight climate change. climate change.

“Background music is important,” Wirth said. “When you ask investors, do you want me to take the money that might be coming back to you and put it back into this company that the decision makers have said they want to see go? Investors say, ‘oh, I’m going to take the money ‘.

Despite the expected slowdown in consumption, the IEA said the industry would still need to invest about $470 billion a year in oil and gas production projects this decade to meet demand, or about 50% more than in recent years.

Goldman Sachs argued that “structural supply underinvestment” in the oil industry could support a sustained period of crude prices above $100 even if the economy slows.

The market may need “a steady rise in oil prices in the coming years given the reluctance to invest in oil during the energy transition,” analysts at the bank said.

Additional reporting by Derek Brower in San Ramon, CA

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Carol N. Valencia