Oil’s $128 billion handout as doubts grow over fossil fuels

(Bloomberg) — Global oil demand is racing to an all-time high and some of the brightest minds in the industry are predicting $100 a barrel of crude in a matter of months, but U.S. producers are playing short game and looking to transfer as much money as possible to investors.

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Shareholders of US oil companies benefited from a $128 billion windfall in 2022 thanks to a combination of global supply disruptions such as the Russian war in Ukraine and growing pressure from Wall Street to favor yield over finding untapped crude oil reserves. Oil executives who in recent years have been rewarded for investing in giant long-term energy projects are now under fire for funneling money to investors increasingly convinced that the doom of the fossil fuel era is near.

According to Bloomberg calculations, US drilling companies spent last year for the first time in at least a decade more on share buybacks and dividends than on capital projects. The combined payouts of $128 billion to 26 companies are also the highest since at least 2012, and they came in a year when US President Joe Biden unsuccessfully called on the industry to halt production and curb rising fuel prices. light up. For Big Oil, turning down the direct requests of the US government may have never been more profitable.

At the heart of the divergence is growing concern among investors that demand for fossil fuels will peak as early as 2030, obviating the need for multibillion-dollar megaprojects that take decades to deliver full returns. In other words, oil refineries and natural gas-fired power plants — along with the resources that feed them — are at risk of becoming so-called stranded assets if and when they are replaced by electric cars and battery farms.

“The investment community is skeptical about what assets and energy prices will be,” John Arnold, the billionaire, philanthropist and former commodities trader, said during a Bloomberg News interview in Houston. “They would rather have the money through buybacks and dividends to invest elsewhere. The companies have to respond to what the investment community is telling them or they won’t be in charge for long.”

The increase in oil buybacks is helping to boost broader US corporate spending, with share buyback announcements more than tripling in the first month of 2023 to $132 billion, the highest ever at the start of a year. Chevron Corp. alone accounted for more than half of that total with an outstanding commitment of $75 billion. The White House lashed out, saying the money could be better spent expanding energy supplies. A 1% US tax on redemptions will take effect later this year.

According to Evercore ISI, global investment in new oil and gas resources this year is expected to fall short of the minimum needed to keep up with demand by $140 billion this year. Meanwhile, crude oil inventories are growing at such a slow pace that the margin between consumption and output will shrink from 630,000 in 2023 to just 350,000 barrels per day next year, according to the U.S. Energy Information Administration.

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

Management teams at the largest U.S. oil companies recommitted to the investor returns mantra when they announced fourth-quarter results last week, and the 36% drop in domestic oil prices since mid-summer has only reinforced those beliefs. Executives across the board are now pushing that financing dividends and buybacks take precedence over pumping additional crude oil to quell consumer discontent over higher pump prices. This could become a problem within months as Chinese demand accelerates and global fuel consumption reaches record highs.

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

The US is crucial to the global supply of crude oil, not just because it is the largest oil producer in the world. Shale resources can be tapped much faster than traditional reservoirs, meaning the industry is in a unique position to respond to price spikes. But with buybacks and dividends increasingly eating up cash flow, shale is no longer the trump card of the global oil system.

In the waning weeks of 2022, shale specialists reinvested just 35% of their cash flow into drilling and other efforts aimed at boosting inventories, up from more than 100% in the period 2011-2017, according to data compiled by Bloomberg. A similar trend is visible in the majors, with Exxon Mobil Corp. and Chevron are aggressively ramping up buybacks while limiting capital spending below pre-Covid levels.

Investors are driving this behavior, as evidenced by 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 rose as they kept spending in check.

On top of shareholder demands for cash, oil explorers are also grappling with higher costs, lower well productivity and shrinking portfolios of prime drilling locations. Chevron and Pioneer Natural Resources Co. are two high-profile producers reorganizing drilling plans after weaker-than-expected drilling 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 just 5% this year to 12.5 million barrels per day, according to the Energy Information Administration. Next year, expansion is expected to slow to just 1.3%, the agency says. While the US is adding more supply than most of the rest of the world, this is in stark contrast to shale’s heady days in the previous decade, when the US added more than 1 million barrels of daily production each year, in competition with OPEC and influence world prices.

Demand, rather than supply-side actors like the U.S. shale industry or OPEC, will be the main price driver this year, Dan Yergin, Pulitzer Price-winning oil historian and Vice Chairman of S&P Global, said in an interview.

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

As arguments for higher oil prices intensify, US President Joe Biden has fewer tools at his disposal to counter the blow to consumers. The president has already tapped into the Strategic Petroleum Reserve to the tune of 180 million barrels in an effort to lower gasoline prices as they peak in 2022. Energy Secretary Jennifer Granholm is likely to get a frosty reception at the CERAWeek by S&P Global event in Houston starting March 6 if she follows Biden’s lead and attacks the industry for giving too much back to investors. That business model is “here to stay,” said Dan Pickering, chief investment officer of Pickering Energy Partners.

“There comes a point where the US has to produce more because the market demands it,” Pickering said. “That is likely when investor sentiment shifts to growth. Until then, returning capital seems like the best idea.”

–With assistance from Lu Wang and Tom Contiliano.

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