What to watch for in this quarter’s Big Oil earnings

Hello and welcome back to Energy Source.

The US is exporting record amounts of crude and fuel, new data showed yesterday. It poses a tricky dilemma for president Joe Biden.

His administration has urged the industry to rein in the exports to help rebuild inventories at home and cool prices. The administration has even threatened export controls, which the industry is clearly ignoring.

The US’s emergence as a premier fossil fuel exporter also sits awkwardly alongside Biden’s climate push. Yet the president has positioned the US as a fuel supplier of choice for countries in Europe and elsewhere weaning themselves off Russian oil and gas. For now, exports are likely to continue surging, but if prices spike higher again, they could come into the political crosshairs.

In today’s newsletter, I look at the big issues facing Big Oil as the companies unveil another set of bumper profits amid tumult in global energy markets. And Amanda saves you 500 pages or so of reading to pick out the key themes in the International Energy Agency’s flagship World Energy Outlook.

Thank you for reading. –Justin

Questions to ask ahead of Big Oil’s earnings season

Big Oil is unveiling its latest round of quarterly profits this week amid Russia’s continuing war in Ukraine, tumult in global energy markets and sniping between Washington and Riyadh after Opec+ said it would slash supplies. The results are expected to show a continuing gusher of cash for the industry. Here are four issues I’ll be paying attention to:

How big will the bonanza be?

Big Oil is set for another mega cash haul after last quarter’s record earnings, even as consumers struggle with high fuel costs and fears mount of an economic slowdown.

ExxonMobil, Chevron, Shell, BP and TotalEnergies raked in more than $60bn in profits last quarter, smashing records.

They are not expected to match that this time round, but it may not be far off. Wall Street’s early estimates point to a combined $52bn in profit this quarter, led by Exxon’s expected $17.2bn.

That would make it the second-highest total after last quarter and put the industry on a path to its most profitable year ever. It is a remarkable turnround for an industry that was almost completely written off two years ago.

High commodity prices are clearly the big driver here. But nearly as important: unlike previous high-price eras, oil supermajors have kept a tight leash on spending — with investment levels still far below the pre-pandemic era. The strategy has yielded big profits, but also generated blowback as the world contends with tight fuel supplies.

What do they plan to do with the cash?

I’ll be asking what the oil majors plan to do with the windfall, especially now that the companies are fixing their spending plans for next year.

One particular question I have: for months oil industry executives have pinned high prices in large part on “under-investment” in fossil fuels. The pandemic inflicted an enormous financial toll on the industry and sapped its ability to spend on production. But tens of billions of dollars in profits later, the industry can no longer cry poor. So is Big Oil ready to start investing in growth again?

With that said, I expect investors to continue pressing the oil supermajors to put the cash windfall towards more share buybacks and higher dividends, which have helped fuel a big run up in the companies’ share prices this year.

How will high prices impact US politics?

This round of big profits is going to land less than two weeks before the US midterm elections in which petrol prices have played a starring role. For months, Republicans have attacked Democrats and Biden over rising fuel costs. The price at the pump has been as reliable an indicator in voter sentiment as any poll.

Biden and Democrats in Congress have sought to shift the blame for high fuel prices, which have become deeply intertwined with Americans’ perceptions of the health of the broader economy, on to the oil and gas industry.

The president has called the industry’s high profits “not acceptable” during a “time of war”. Biden called Chevron’s chief executive Mike Wirth “sensitive” after Wirth criticised the administration’s energy policy.

Earlier in the summer, he hit out at Exxon for “making more money than god” this year, and said he’d be contrasting those sky-high profits with the pain drivers are feeling at the pump. That’s sure to happen just before the election.

Signs of spending on low-carbon tech?

It has been several months since Congress passed the Inflation Reduction Act, the biggest climate bill in US history.

It includes a raft of incentives for things such as hydrogen, renewable fuels and carbon capture and storage (CCS) where Exxon and Chevron, in particular, are placing their bets in the energy transition — and which they lobbied for.

Will the new incentives, along with the financial firepower from bumper oil and gas profits, spur more spending and dealmaking on low-carbon businesses from the majors? Exxon announced a new CCS project earlier this month. BP recently spent $4.1bn to acquire Archaea Energy, a landfill-to-natural gas specialist. Earlier this year, Chevron spent $3.15bn on Renewable Energy Group, which turns out biofuels. I’ll be watching for signs of the IRA and other climate initiatives shifting more cash into the majors’ low-carbon businesses. (Justin Jacobs)

Four takeaways from the IEA’s World Energy Outlook

The International Energy Agency released its World Energy Outlook this morning, its first comprehensive forecast since Russia’s invasion of Ukraine upended global markets and sent Europe into a painful scramble to secure enough fuel supply ahead of winter.

Here are our main takeaways from the report:

1. ‘Definitive peak’ for fossil fuel demand in sight

For the first time, the IEA forecasts fossil fuel demand to peak or at least plateau under current policies. The agency expects oil demand to increase less than 1 per cent per year before peaking in 2035 at 103.2mn barrels per day, largely driven by the rapid deployment of electric vehicles.

Coal use peaks in the next few years after a shortlived resurgence, while natural gas — despite its rapid growth in the 2010s — is expected to plateau by the end of the decade at 4,400bn cubic metres through to 2050. The IEA reduced its mid-century projection by 750bn cubic metres from last year, citing new policy measures such as the US’s Inflation Reduction Act, which accounted for a third of this downward revision.

Still, the IEA warns fossil fuel use will have to decline much faster to align with Paris climate targets. Under the agency’s net zero scenario, oil demand never reaches pre-pandemic levels and falls to 75mn b/d by the end of the decade, while natural gas declines by 20 per cent in the same period.

2. Energy crisis will hit emerging markets the hardest

Soaring energy prices stemming from Russia’s war in Ukraine will disproportionately hurt the most vulnerable. The agency predicts the share of the global population without access to electricity and clean cooking will increase this year for the first time in a decade. Sub-Saharan Africa is at risk of losing nearly all the progress it has made advancing energy access since 2013.

Globally, the IEA estimates electricity will become unaffordable for roughly 75mn people who recently gained access to it, and 100mn people will revert to dirty fuels such as firewood for cooking.

3. End of era for Russia’s position in the energy market

There are “no easy options” for Russia to make up for the loss of European demand. The IEA expects Moscow to remain in a “much diminished” position following its invasion of Ukraine that reoriented global energy flows.

Russia’s fossil fuel exports never return to 2021 levels in any of the IEA’s modelled outlooks. Under current policies, net oil exports from the Kremlin are expected to fall 25 per cent while gas exports are expected to fall by more than half by 2030.

“Energy markets and policies have changed as a result of Russia’s invasion of Ukraine, not just for the time being, but for decades to come,” said the IEA’s executive director Fatih Birol.

4. Clean energy revolution requires more money

Birol suggested the energy crisis could mark a “historic turning point” for clean energy. Landmark climate legislation this year such as the Inflation Reduction Act and RePowerEU will raise annual clean energy investments to $2tn by the end of the decade — more than double current levels.

Still, that’s not enough, the IEA says. Clean energy investment must reach $4tn by 2030 to achieve net zero, with financing gaps largest in developing economies.

This problem of climate financing will be a major source of contention between developed and developing economies at the upcoming COP27 climate conference in Egypt. According to a recent analysis by the OECD, developed economies have only delivered $83.3bn of the $100bn promised for climate finance to developing countries. (Amanda Chu)

Power Points

• Saudi Arabia says it will pump more oil if the energy crisis worsens.

• West Texas gas prices fall below zero as Europe contends with soaring prices for the fuel.

• On this episode of our Behind the Money podcast, we look at how US Republicans weaponised ESG investing ahead of the midterm elections.

• Countries are failing to meet their climate commitments ahead of COP27. (NYT)