Distributing $128 billion in oil as doubts grow over fossil fuels

(Bloomberg) — Global oil demand is hurtling to a record high and some of the industry’s smartest minds are predicting crude at $100 a barrel in a few months, but U.S. producers are playing the short game and looking to return as much money as possible to investors.

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US oil company shareholders have reaped a windfall of $128 billion in 2022 thanks to a combination of global supply disruptions such as Russia’s war in Ukraine and mounting pressure from Wall Street to give the priority to yields rather than the search for untapped crude reserves. Oil executives who in years past have been rewarded for investing in huge, long-term energy projects are now under pressure to funnel money to investors who are increasingly convinced that the sunset the age of fossil fuels is approaching.

For the first time in at least a decade, U.S. drillers last year spent more on stock buybacks and dividends than on capital projects, according to Bloomberg calculations. The combined $128 billion in payments across 26 companies is also the highest since at least 2012, and it came in a year when US President Joe Biden unsuccessfully appealed to the industry to ramp up production and relieve soaring fuel prices. For Big Oil, denying direct demands from the US government has perhaps never been more profitable.

At the heart of the divergence, investors are increasingly concerned that demand for fossil fuels will peak as early as 2030, obviating the need for multi-billion dollar megaprojects that take decades to produce full returns. In other words, oil refineries and natural gas power plants – and the wells that power them – risk becoming so-called stranded assets if and when they are replaced by electric cars and battery banks.

“The investment community is skeptical about what energy assets and prices will be like,” John Arnold, the billionaire philanthropist and former commodities trader, said in an interview with Bloomberg News in Houston. “They’d rather have the money through buyouts and dividends to invest elsewhere. Companies must respond to what the investment community tells them to do or they won’t stay in the driver’s seat for long.

The upsurge in oil buybacks is helping to heighten the US corporate spending spree that has seen share buyback announcements more than triple in the first month of 2023 to $132 billion, the highest on record at the start. of year. Chevron Corp. alone accounted for more than half of this total with an open-ended commitment of $75 billion. The White House went wild and said the money would be better spent on expanding energy supplies. A 1% US tax on redemptions will come into effect later this year.

Global investment in new oil and gas supplies is already expected to fall below the minimum needed to meet demand of $140 billion this year, according to Evercore ISI. Meanwhile, crude supplies are expected to grow at such an anemic rate that the margin between consumption and production will narrow to just 350,000 barrels per day next year from 630,000 in 2023, according to the US Energy Information Administration. .

“Companies have to respond to what the investment community tells them to do or they won’t be in charge for very long.” — Billionaire John Arnold

The management teams of America’s biggest oil companies re-engaged with the investor return mantra as they released fourth quarter results last week and the 36% plunge in domestic oil prices since mid-summer didn’t only reinforced these beliefs. Leaders on all sides are now insisting that funding dividends and buyouts take priority over pumping in additional crude to assuage consumer discontent over rising prices at the pump. That could be a problem in a few months as Chinese demand picks up and global fuel consumption hits an all-time high.

“Five years ago you would have seen very significant year-over-year oil supply growth, but you don’t see that today,” Arnold said. “That’s one of the bullish stories for oil – that the growth in supply that had come out of the US has now stopped.”

The United States is crucial to the world’s crude supply, not only because it is the world’s largest oil producer. Its shale resources can be tapped much faster than traditional reservoirs, meaning the sector is uniquely positioned to respond to price spikes. But with buyouts and dividends gobbling up more and more cash flow, shale is no longer the ace of the global oil system.

In the last weeks of 2022, shale specialists only reinvested 35% of their cash flow in drilling and other efforts to increase supply, compared to more than 100% in the 2011 period. -2017, according to data compiled by Bloomberg. A similar trend is evident among the majors, with Exxon Mobil Corp. and Chevron aggressively increasing buybacks while limiting capital spending to levels below pre-Covid levels.

Investors are driving this behavior, as evidenced by the clear messages sent to domestic producers over the past two weeks. EOG Resources Inc., ConocoPhillips and Devon Energy Corp. fell after announcing higher than expected 2023 budgets, while Diamondback Energy Inc., Permian Resources Corp. and Civitas Resources Inc. all grew while controlling spending.

In addition to shareholder demands for cash, oil explorers are also grappling with higher costs, declining well productivity and shrinking portfolios of prime drill sites. Chevron and Pioneer Natural Resources Co. are two prominent producers revamping their drilling plans after weaker-than-expected well results. Labor costs are also rising, according to Janette Marx, CEO of Airswift, one of the world’s largest oil recruiters.

US oil production is expected to grow only 5% this year to 12.5 million barrels per day, according to the Energy Information Administration. Next year, the expansion is expected to slow to just 1.3%, according to the agency. While the United States is adding more supply than most of the rest of the world, it’s a marked contrast to the heady shale days of the previous decade, when the United States was adding over a million barrels of daily production each year, competing with OPEC and influencing world prices.

Demand, rather than supply-side players like the U.S. shale industry or OPEC, will be the main driver of prices this year, said Dan Yergin, a Pulitzer Prize-winning oil historian and vice president of S&P Global, during an interview.

“Oil prices will be determined, metaphorically speaking, by Jerome Powell and Xi Jinping,” Yergin said, referring to the Federal Reserve’s rate hike trajectory and China’s post-pandemic recovery. S&P Global expects global oil demand to hit a record high of 102 million barrels per day.

As the case for higher oil prices grows stronger, US President Joe Biden has fewer tools at his disposal to counter the blow to consumers. The president has already tapped the strategic oil reserve to the tune of 180 million barrels in a bid to bring down gasoline prices as they soar in 2022. Energy Secretary Jennifer Granholm is expected to receiving an icy welcome at the CERAWeek by S&P Global event in Houston. watch March 6 if she follows Biden’s lead and attacks the industry for giving too much back to investors. This business model is “here to stay,” said Dan Pickering, chief investment officer of Pickering Energy Partners.

“There will be a time when the United States will have to produce more because the market is going to demand it,” Pickering said. “This is probably when investor sentiment turns to growth. Until then, the capital return seems like the best idea.

–With help from Lu Wang and Tom Contiliano.

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