$128 billion oil handout amid rising fossil fuel doubts

(Bloomberg) — Global oil demand is hurtling towards an all-time high and some of the industry’s brightest minds are forecasting crude to be $100 a barrel in a matter of months, but US producers are playing the short game and chasing as much cash as possible handed over to investors.

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U.S. oil company shareholders have a $128 billion windfall in 2022, thanks to a combination of global supply disruptions like Russia’s war in Ukraine and mounting pressure from Wall Street to prioritize yield over the pursuit of untapped crude oil reserves harvested. Oil executives, who in years past have been rewarded for investing in gargantuan, long-term energy projects, are now under pressure to funnel money to investors who are increasingly convinced that the end of the fossil-fuel era is near.

For the first time in at least a decade, U.S. drillers spent more on share buybacks and dividends than capital projects last year, according to Bloomberg calculations. The combined $128 billion payout for 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 increase production and ease soaring fuel prices . Refusing direct requests from the US government has perhaps never been more profitable for Big Oil.

At the heart of the divergence is growing concern among investors that fossil fuel demand will peak as early as 2030, avoiding the need for multibillion-dollar mega-projects that take decades to generate full returns. In other words, oil refineries and natural gas-fired power plants — along with the wells that feed them — risk becoming stranded assets if and when they are supplanted by electric cars and battery farms.

“The investment community is skeptical about what asset and energy prices are going to be,” said John Arnold, the billionaire philanthropist and former commodity trader, during an interview with Bloomberg News in Houston. “They would rather have the money through buybacks and dividends to invest elsewhere. Companies have to act on what the investment community tells them or they won’t be in charge for very long.”

The surge in oil buybacks is helping fuel a broader US corporate spending spree, which has seen stock buyback announcements more than triple to $132 billion in the first month of 2023, the highest ever at the start of a year was recorded. Chevron Corp alone accounted for more than half of that total with an open-ended commitment of $75 billion. The White House lashed out, saying the money was better spent on expanding energy supplies. A 1% US tax on buybacks goes into effect later this year.

According to Evercore ISI, global investment in new oil and gas reserves this year is already expected to fall $140 billion short of the minimum needed to keep up with demand. Meanwhile, crude stocks are growing at such an anemic pace that the spread between consumption and production will narrow from 630,000 in 2023 to just 350,000 barrels a day next year, according to the US Energy Information Administration.

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

Management teams at the largest US oil companies reaffirmed the investor returns mantra when they reported fourth-quarter results last week, and the 36% plunge in domestic oil prices since mid-summer has only reinforced those beliefs. Executives across the board now insist that funding dividends and buybacks takes precedence over pumping additional crude to quell consumer dissatisfaction over higher pump prices. This could pose 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-on-year growth in oil supply, but today you don’t see that,” Arnold said. “It’s one of the bull stories for oil – that the supply growth that came out of the US has now stopped.”

The US is vital to global crude oil supply, not just because it is the world’s largest oil producer. Its shale resources can be developed much faster than traditional deposits, meaning the sector is in a unique position to respond to price spikes. But as buybacks and dividends eat up more and more cash flow, shale is no longer the ace up the sleeve of the global oil system.

In the final weeks of 2022, shale specialists reinvested just 35% of their cash flow into drilling and other supply-boosting efforts, down from more than 100% in 2011-2017, according to data compiled by Bloomberg. A similar trend can be seen among the majors, with Exxon Mobil Corp. and Chevron are aggressively ramping up buybacks while limiting capital spending to less than 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 reined in spending.

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

According to the Energy Information Administration, US oil production is expected to rise just 5% this year to 12.5 million barrels per day. Next year, expansion is expected to slow to just 1.3%, the agency says. While the U.S. is adding more supply than the rest of the world, it’s a stark contrast to the heady days of shale oil over the previous decade, when the U.S. added more than 1 million barrels of daily production each year and competed with OPEC and Opec to affect global prices.

Demand and non-supply-side players like the American shale sector or OPEC will be the main drivers of prices this year, Dan Yergin, a Pulitzer Prize-winning oil historian and vice chairman of S&P Global, said during an interview.

“Oil prices, metaphorically speaking, are being driven by Jerome Powell and Xi Jinping,” Yergin said, referring to the Federal Reserve’s rate hike path and China’s post-pandemic recovery. S&P Global expects global oil demand to reach an all-time high of 102 million barrels per day.

With the growing case for higher oil prices, US President Joe Biden has fewer resources to counter the blow to consumers. The president has already tapped the 180-million-barrel strategic oil reserve to bring down gasoline prices as they skyrocket in 2022. Secretary of Energy Jennifer Granholm is likely to stare at the CERAWeek by S&P Global event in Houston March 6 to a frosty reception as she follows Biden’s lead in attacking the industry for giving back too much to investors. This business model “is here to stay,” said Dan Pickering, chief investment officer of Pickering Energy Partners.

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

–Assisted by Lu Wang and Tom Contiliano.

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