Shell, Exxon, and BP reverse on climate amid record profits

The oil and gas industry has never been more profitable than in 2022. ExxonMobil, BP, Chevron, Shell, and ConocoPhillips reported a combined total of more than $177 billion.

The interpretation of these large numbers becomes more complicated. Environmentalists say it reflects rising industrial prices during the war, profiting from Russia’s invasion of Ukraine a year ago. Oil executives say it reflects the underlying strategy the business is using: “performing while transforming,” as CEO Bernard Looney put it on BP’s earnings call.

Profits have been able to erase the recent memory of the oil industry 2020 pandemic when, after almost a decade of low prices from the fracking boom, oil and gas prices collapsed as many global and domestic trips stopped. Suddenly, banks are very scrutinizing loans for new drilling projects. And the oil industry is heavily dependent on the Trump administration for taxpayer bailouts and Covid relief.

The industry learned some lessons. Companies today are more focused on paying down debt and returning value to shareholders than in the past decade, so $109 billion in share buybacks benefited the largest investors. And overall, the industry is less focused on expanding and exploring new drilling, preferring to keep costs down.

But while the industry has not forgotten every lesson from the past few years, the biggest companies have ignored the most important ones. Big profits also give companies an opportunity to signal where they can grow by reinvesting in the business. And for more than a century, future growth has always meant more drilling — not a transition to renewable energy.

This is no longer possible, at least not if the world makes an effort to tackle climate change. The International Energy Agency said clearly in May 2020 that the world now has all the proven and probable oil reserves it needs if it has any hope of meeting the global climate goal of limiting warming to 2 degrees Celsius. If this were actually implemented as a policy, the industry would not be investing huge profits in adding new fossil fuels.

But the industry is doing the opposite, backing away from so-called climate spending in order to improve its core business: greenhouse gases.

Big Oil’s record profits mask the real problems ahead

The energy industry used to be inseparable from economic growth, accounting for 28 percent of the total stock market in the 1980s. It fell to 2 percent in 2020, as travel stopped. Even now, it is only a higher share of the total market.

The numbers tell a longer story about oil’s footprint on the economy. It is a fundamental part of climate policy to decouple economic growth from fossil fuels. More than 30 countries have figured out how to do this, lowering their carbon emissions while continuing to grow their economies. This includes the US, where overall carbon dioxide output is still below 2019 levels. Renewable energy now includes more power plants than coal. And transportation – airplanes, trains, and cars – is again the biggest climate polluting sector.

Going forward, the oil industry faces unprecedented competition across all major revenue sectors. Electric vehicles are a small but rapidly growing source of competition for the sector, and more households are switching from oil and gas to energy-efficient electric heat pumps. And gas in the power sector faces competition from cheaper wind and solar.

The oil industry, however, does not acknowledge the fact that the world will need its products sooner or later. “Their normal plans are facing competition that they have never seen before,” said Tom Sanzillo, director of financial analysis for the Institute for Energy Economics and Financial Analysis (IEEFA). “They have no reason to come forward.”

The party won’t last forever

Some experts think the party is over. “They need a very high price to get out of trouble, and a very high price doesn’t work,” Sanzillo said. “Nobody expects those gains to continue.”

Sanzillo points to some recent signs that the market has cooled again for Big Oil. Based on the past few months, prices have stabilized and dropped slightly, and oil returns to underperforming the overall market.

In Europe, countries are also seeking to recoup some of these profits to taxpayers who are suffering from higher prices. The EU is adding new levies on top of revenues that exceed an average of 20 percent over the past three years. While the Biden administration has floated its own version of the income tax, the idea is a nonstarter in a divided Congress, which must approve changes to the tax code. Other ideas the Biden administration has floated include increasing taxes on stock buybacks.

These policies will not harm oil and gas in the long run. What will hurt is increased competition from renewable energy and a renewed focus on energy efficiency to reduce energy costs.

Companies can prepare for this future. They do a lot to advertise – Chevron’s homepage when writing promotes “renewable natural gas.” But in practice, they don’t invest in renewables that can compete with fossil fuels, because they undermine their core business. The industry typically spends just 1 percent of its capital spending on low-carbon investments, a broad category that includes carbon capture and storage to benefit from fossil fuel growth. It rises to 5 percent in 2022, before public companies back out of their renewable commitments.

ExxonMobil is an extreme example after the company generated the largest profit of $56 billion. Asked about the competition on the company’s recent shareholder call, CEO Darren Woods said Exxon “has been very focused on leaning in when everyone else is leaning in.” In what way are they leaning on? More the same. “Continue to create products that society needs today and do it in a variety of products, so think about chemicals, fuel products, and lubricants. Then, at the same time, invest in producing low-emission fuels to meet the low-carbon demand.

Other companies are reducing their limited climate commitments in order to cut back on fossil fuels. BP officially cuts emissions pledge, initially set to achieve 35 to 40 percent lower emissions by the end of the decade, it will be only 20 to 30 percent. Shell plans to invest $3.5 billion in renewable energy, carbon offsets, carbon capture, and biofuels, less than half of the company’s investment in oil and gas exploration and extraction. CEO Wael Sawan said the company’s gas business “continues to grow in a world that needs natural gas now, and I think it will for a long time.”

The oil industry’s small investment in climate change “isn’t what people think,” said Jamie Henn, director of the advocacy group Fossil Fuel Free Media. Exxon, BP, and others’ “low-carbon investments” usually mean making oil operations more efficient, such as modifying existing processes to burn less fossil fuel or using carbon capture and storage for “better oil recovery.” The goal of both approaches is to reduce emissions simply by burning fossil fuels.

Even the marketing budget for Big Oil’s climate campaign can be bigger than the project itself. Working with PR company, Shell pay $57,000 for a company making biofuel from coffee waste, and received over 1,100 media coverages, all to power one London bus for a year. Environmentalists have accused Shell of spending more than 1 percent of its capital expenditure on low-carbon energy sources like wind and solar.

Henn said the recent reversal on climate change is further evidence that “these companies are not serious about the clean energy transition. It’s mostly marketing and greenwashing, a strategy that gets a small commitment here and then an empty promise there. They don’t add up.”