Knowing when to leave is wisdom. The proverb applies well to the big global oil companies that, despite their commitment to decarbonization, remain tied to the extraordinary profits they achieve thanks to oil and gas. The six largest firms globally closed the first half of 2023 with profits of more than 112,000 million euros, 58% above what was obtained in the same period of 2021. In other words, although fuel prices have collapsed After reaching maximums in 2022, profits are reluctant to fall, giving companies renewed reasons to continue their investment in exploration and new deposits.
The biggest example is the American Chevron. The headlines in the last weeks of July, when the oil company presented results, highlighted that the year-on-year drop in its attributable net profit was 29.6% compared to 2022. However, when compared to 2021, the profit is multiplied by three. Something similar happens with ExxonMobil, which also increases its records for that year by 2.8 times. The situation is a little less favorable for European firms, which are still registering some progress. For example, Shell improves its semi-annual profits by 45% when compared this year with 2021, while the British BP does so by 38%.
In the local context, Repsol earns 1,420 million between January and June 2023, 14% more than in the same period of 2021. Something different happens with Cepsa, whose adjusted net profit in the first half of this year was limited to 145 million, far from the 337 million obtained in the same period of 2021. This collapse reflects a lower volume of the exploration and production business after the sale of the assets in Abu Dhabi to the French company Totalenergies to focus on its green transformation.
The experts highlight two explanations for the good results obtained by the companies. On the one hand, in 2021 companies were just recovering from the shock they received after the health crisis, when crude oil reached all-time lows and the US benchmark even went negative.
Today, the reality is very different. A barrel of Brent oil, the benchmark variety in Europe, is trading 16% above its value in mid-August at the same time in 2021, a little above $83 a barrel. Between the beginning of June and the end of July alone, prices shot up 18%, says a Goldman Sachs report. And the rise is expected to continue thanks to supply controls imposed by the Saudi Arabia-Russia alliance and its dominance of OPEC.
“Our balance sheet shows that the market will remain in deficit through 2024. We have kept our forecasts for the rest of the year unchanged. We still expect the price of Brent crude to average $86 per barrel in Q3 2023 and $92 per barrel in Q4 2023,” said Warren Patterson, head of commodities at ING Bank.
On the other hand, the higher prices are accompanied by an unprecedented appetite. “We estimate that the demand for crude oil has reached its all-time high in July with more than 102.8 million barrels per day, which will continue into the remainder of 2023,” says Daan Struyven, Director of Research at Goldman Sachs. According to the US bank, the good data from the service industry and aviation offsets the drop in demand from the industrial sector.
Neither slow nor lazy companies are taking advantage of a gentle environment for business. “Refineries currently benefit from a margin environment that dwarfs almost any period except 2022,” the International Energy Agency (IEA) recently noted in its monthly report. Estimates at the beginning of the year highlighted that European firms such as Repsol could benefit from margins up to five times higher than those obtained in 2021 for their refining activities.
The IEA estimates that investments in traditional energy carriers will increase by around 11% in 2023 to 485,000 million euros. This represents the highest level since 2015.
The reactivation of exploration, especially by the European BP and Shell, reflects a renewed commitment to oil after the great promises in recent years in order to move away from the ‘dirty’ business and bet decisively on the energy transition. In fact, the Anglo-Saxon oil company had split most of the staff from its exploration unit just three years ago. Now, after the hottest month on record, it appears to be backing down on its plans.
On Shell’s side, its new chief executive, Wael Sawan, has promised to cut costs, increase shareholder returns and increase oil and gas spending. The strategy, say the analysts, would go through a large sale of the company’s green portfolio to external investors. “The energy transition is going to need an unprecedented level of alliances,” Sawan slipped a couple of months ago.
The IEA analysis does identify a subtle shift in the oil giants’ bet. Companies, the analysis says, are focusing on smaller, lower-cost projects with shorter production periods to avoid the risk of stranded assets amid environmental and social pressures. Oil remains the cash cow for energy companies, but no one is sure when that will end.
The embrace of funds
Back. BlackRock, the world’s largest fund manager, appears to be backing oil investments again. Larry Fink, the firm’s CEO, has been one of the biggest advocates of investing with an environmental and social focus. However, in July he decided to appoint Amin Nasser, Aramco’s CEO, to his board. A year ago, Nasser had criticized decarbonization efforts, saying they were, on the whole, “flawed.”
Investments. The Common Wealth think tank estimates that BlackRock, State Street and Legal & General, the three largest managers globally, had more than €900 million of ESG fund investment in an oil, gas and coal company. The ‘thinktank’ also analyzed the accounts of BP and Shell and concluded that investments in non-renewable energies multiply by eleven and six, respectively, spending on low-carbon alternatives.
Repsol. BlackRock and Norges Bank, which manages Norway’s sovereign wealth fund, are the two main shareholders of the Spanish energy company. In total they control 10.93% of the company’s titles. The fund managers Vanguard, Schroeders, Invesco and Dimensional Funds are added to the list of funds with participation. BlackRock is also present in Enagas, with 5% of the titles, together with Mubdala Investment Company, the sovereign investment fund of the Government of the Emirate of Abu Dhabi.
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