Tonreward At the end of World War II, Franklin D. Roosevelt was present at a defining gathering of world leaders that helped shape the course of geopolitics for decades. No, not the Yalta summit.Immediately afterwards RooseveltChurchill and Stalin divide the world into spheres of influence, and the US president slips into one us Navy ships quietly meet with King Abdulaziz ibn Saud of Saudi Arabia. To protect the Saudis’ sovereignty in the holy land, the monarch agreed to allow US oil companies to use his country’s oil.
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Anglo-Persian Petroleum Company (now bp), the Saudi-US alliance formed an oil axis, leading Western powers to eagerly look first to the Persian Gulf and then to other distant longitudes.The five largest private oil companies in the world for decades – ExxonMobil in the US and Chevron in the UK bp and Shell – and France’s TotalEnergies – have drilled from South America to Siberia. Now, a maelstrom of geopolitical, economic, and environmental factors is causing these “superpowers” to increasingly focus on North and South rather than East and West.
The correction comes after two years of sky-high energy prices (see chart) in oil majors’ coffers. On Feb. 2, Shell reported an annual net profit of $42 billion for 2022, more than double what it was a year earlier and the highest for a public company in more than a century. This was followed by ExxonMobil announcing a record annual net profit of $56 billion. Its main domestic rival, Chevron, reported that its own net profit more than doubled to $37 billion. bp and TotalEnergies joined the ranks on February 7 and 8, respectively.
All told, the five supermajors made about $150 billion in profits last year and could make as much again in 2023. Part of that bonus will go to shareholders; in January, Exxon said it would pay its owners a total of more than $35 billion this year and next. Some of the proceeds will be used to pay down debt. Most of the rest, though, will be reinvested.
After stifling oil and gas investment, the result of pandemic-induced demand destruction and climate-related policy hostility, oil majors are once again spending money to find oil and pump it. small&P Global upstream capital spending across the industry was around $450 billion last year, research firm Global estimates, up from a 15-year low of around $350 billion in 2020. It could be even higher this year.
latitude offset
All this new money isn’t going to the same old places. Citigroup’s Edward Morse says the West’s oil majors are undergoing a “fundamental shift in thinking”. U.S. companies are struggling to retreat from far-flung “frontier” areas where political risk is high, infrastructure is lacking to bring hydrocarbons to market as cleanly as possible, or both. Their less risk-averse European rivals are shying away from some of their own U.S. projects in favor of new developments in Africa that have the potential to be more climate-friendly. In both cases, the result was a realignment of the oil business along the warp.
For the U.S. supermajors, that means less interest outside the Americas. Like most Western companies, Exxon left Russia after invading Ukraine. It is also selling — or looking to sell — assets in countries including Cameroon, Chad, Equatorial Guinea and Nigeria. Chevron has sold projects in the UK and Denmark (as well as Brazil), and has not renewed expiring concessions in Indonesia and Thailand.
James West of investment bank Evercore sees Chevron and ExxonMobil shifting much of their capex to South America and the continental United States. ExxonMobil is investing heavily in new oil fields in Guyana. Chevron intends to spend more than a third of its capital spending this year on U.S. shale and another 20 percent on the Gulf of Mexico. Last month, it also restarted some crude trading in Venezuela, an authoritarian regime long on the U.S. naughty list, with the backing of President Joe Biden.
European oil majors are also reducing their exposure to the east and west. bp Shell, like ExxonMobil, withdrew from Russia, resulting in writedowns of up to $25 billion and $5 billion, respectively. Shell is also getting rid of its shale assets in Texas, reportedly putting some shale assets in the Gulf of Mexico up for sale. bp It is in the process of divesting its Mexican oil assets and is expected to pull out of Angola, Azerbaijan, Iraq, Oman and the United Arab Emirates. TotalEnergies is pulling out of Canada’s oil sands.
Instead, Europeans are looking south, just like their American counterparts. In January, Claudio Descalzi, boss of Italian non-supermajor Eni, called on Europe to look to Africa as it seeks to replace Russian energy. Such a “north-south axis”, he argues, would boost Europe’s access to traditional fossil fuels as well as cleaner alternatives such as renewable energy and hydrogen, which could be transported north by sea or by pipeline. On January 28, Eni announced that it had signed an $8 billion gas deal (including a small amount for carbon capture and storage) with Libya’s state-owned NOC. Shell and Norway’s state oil company Equinor have signed a deal with Tanzania to build a $30 billion LNG (liquified natural gas) at the docks of the East African country. TotalEnergies is investing in natural gas projects in Mozambique and South Africa.
There are two main reasons for this adjustment. The first is the number one concern for Americans and has to do with risk and reward. In the previous era of high oil prices, oil bosses spent money, in the words of one man, “like drunken sailors”. In the years of vigorous development, too much investment and insufficient cost control have resulted in huge waste and overproduction. In the years leading up to the covid-19 pandemic, oil projects from the Caspian Sea to the Permian Basin lost billions of dollars. Tens of billions of dollars in shareholder value have been wiped out.
Investors are now demanding more capital discipline from oil bosses. Bosses are listening. Total capex for the industry, while higher than recent troughs, remains below its 2014 peak of nearly $800 billion. As for the money the supermajors are spending, it’s being deployed more wisely. Much of this is in “short-cycle” investments that generate returns over five years rather than ten or more. “I’ve been in this industry since the 1990s and I’ve never seen such a focus on efficiency,” marvels Julie Wilson of consultancy Wood Mackenzie. This quest for efficiency means less venture capital in inhospitable regions such as the Arctic or the deep seabed, and more projects in familiar jurisdictions where political and geological conditions are less daunting.
Of course, for American companies, there is no place more familiar than the United States. They also know about South America. Parts of their backyard they don’t know much about, like Guyana, whose long-rumored oil resources were not confirmed until 2015 and, perhaps counterintuitively, are less politically risky in important respects. Many of their fellow resource-cursed dictatorships cannot imagine a future without oil, while politicians in places with newly discovered resources are more cautious about their prospects. As a result, they tend to offer better terms to oil companies to bring hydrocarbons to market faster; in Guyana, ExxonMobil went from first discovering deep-sea oil to production in just a few years.
To Europeans, African countries, which often maintain reasonable relations with their former colonial powers, look attractive for similar reasons. As for their retreat from the US, European companies are uncomfortable with their ties to the US oil industry, which has an unapologetically brown reputation. In 2021, TotalEnergies withdrew from the American Petroleum Institute amid lobbying groups opposing electric vehicle subsidies, carbon pricing and stricter rules on emissions of the potent greenhouse gas methane.
In doing so, European companies are responding to increasing pressure from consumers, policymakers and investors to start decarbonizing their portfolios – a big reason why Europeans are geographically classified . They are looking for new locations to invest because such investments using the latest technology tend to be more efficient and less carbon-intensive than legacy assets that rely on leaky, aging infrastructure. Moreover, oil companies, especially in Europe, are looking beyond fossil fuels. James Thompson of JPMorgan Chase found that for 11 large private energy majors, the historical correlation between high oil prices and high capital spending on oil and gas has been broken — a phenomenon he puts in part Attributed to large corporations pouring more money into low-carbon projects.
Such projects are indeed popping up, especially among European companies – and in many of the same places as their new hydrocarbon ventures. Last May, Eni entered into an agreement with Algeria’s state oil company Sonatrach to develop green hydrogen from renewable resources. bp TotalEnergies is doing the same in Mauritania, and TotalEnergies supports renewable energy production in South Africa. Looking north, Shell spent almost $2 billion last year to acquire Denmark’s “renewable” natural gas producer Nature Energy (random number generator) are made from things like agricultural waste. Oswald Clint of broker Bernstein predicts that European giants will lead an “era of mega-mergers” in green energy. Last year alone, the oil majors signed 22 renewable energy deals, with the five largest deals totaling $12 billion. Mr Clint estimates that by 2030, large European companies collectively could spend around half of their capital expenditure on low-carbon initiatives.
Vertical integration
The north-south reorganization of the supermajors is far from complete. blood pressure It’s still making some investments in the Gulf of Mexico, and in December it closed its $4.1 billion acquisition of U.S. manufacturer Archaea. random number generator. Shell and TotalEnergies bet on Qatar liquified natural gas. ExxonMobil is doubling down on investments in natural gas projects in Mozambique. Chevron is expanding an oil project in Kazakhstan and is reportedly resuming talks with the Algerian government over the country’s vast shale reserves. But these businesses are increasingly looking like the exception, not the rule. The future of energy exploration looks leaner, greener — and vertical. ■
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