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Oil majors fail to come to the rescue as world faces energy shortages

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Through Kevin Crowley and Laura Hurst to 10/31/2021

HOUSTON (Bloomberg) – The world’s largest energy companies have been producing the most money in years, but don’t expect them to spend it on oil and natural gas to tackle shortages in Europe and China this winter.

Exxon Mobil Corp., Royal Dutch Shell Plc and Chevron Corp. confirmed this week that for the most part they will spend their windfall profits on share buybacks and dividends. Capital spending will rise next year, but the increases come from the exceptionally weak base of 2021 and within frameworks established before the recent spike in fossil fuel prices.

This is a radical departure from previous energy rallies, such as the early 2010s, when the emergence of shale deposits in the United States and fears about fossil fuel shortages resulted in a massive increase in capital spending. This boom ended painfully for the industry, with overproduction and a lack of cost control. This time around, Big Oil appears to be content to take the money and hand it over to shareholders, who are both weary of the poor returns of the past decade and concerned about the significant climate risk for companies.

Fuel shortage

“It wasn’t that long ago that they were skimmed off by the collapse in prices, so it’s no surprise that they are a little scared of capital spending,” said Stewart Glickman, new analyst. yorkais at CFRA Research. “It’s almost like they’re stuck between two extreme populations – the ESG crowd and the cash-hungry shareholders.”

Producers can satisfy both groups by simply not increasing spending on fossil fuels. But that’s a bad omen for consumers who are clamoring for more supply. Europe and Asia are currently competing for natural gas, sending prices to record highs, while the United States and India have asked OPEC + to produce more oil. China called on state-owned enterprises to secure energy supplies at all costs.

Chevron is perhaps the best example of a company turning away from the punch bowl. The California oil giant generated the most free cash flow in its 142-year history in the third quarter, but intends to keep capital spending 20% ​​below pre-Covid levels. next year while increasing share buybacks. Its 2022 investment budget will be in the lower end of its $ 15 to $ 17 billion range, according to CFO Pierre Breber, around 60% below 2014 levels.

Low carbon pivot

“Over time, the vast majority of excess cash will flow back to shareholders in the form of higher dividends and buybacks,” he said on a conference call with analysts on Friday.

Even Exxon, until last year the poster child for doubling down on fossil fuels, is now more reluctant with its money. The Texas-based energy giant on Friday announced a surprise share buyback and blocked long-term annual spending of around $ 20 billion, a reduction of more than 30% from before the pandemic .

In addition, nearly 15% of Exxon’s budget will go to low-carbon investments, a significant departure from its previous strategy and just months after activist investor Engine No. 1 persuaded investors to replace a quarter of its board of directors. Spending on clean energy provides “an option and strengthens the resilience of our plans,” said CEO Darren Woods.

Shell – which is also under pressure from an activist investor after Dan Loeb’s Third Point LLC revealed this week that it has taken a stake in the company – is even more reluctant to spend on its traditional oil business. Less than half of its capital spending will go to oil, with the bulk going to gas, renewables and electricity.

“We will not double the consumption of fossil fuels,” Shell CEO Ben Van Beurden said this week.