Oil And Gas Profits Very High Once Again – What This Feels Like To Energy Consumers.

Third quarter (Q3) profits have been released and, for oil and gas companies, the numbers are stunning. In Q2, bp made $8.45 billion dollars and only a little less in Q3: $8.2 billion. If these are extrapolated to an annual basis the number would be $33.4 billion per year.

The five super-majors are Exxon Mobil, Shell, Chevron, TotalEnergies, and bp. Their annualized profits (based on Q2 and Q3 numbers extrapolated) average to $45.2 billion per year and are 35% higher than bp.

How do these upscale profits compare with recent history? Between Q2 in 2003 and Q1 in 2015, the five super-majors averaged a profit of $25 billion/quarter. That’s $100 billion/year or $20 billion/year for each company (on average). These are hefty profits and remarkable because they were fairly consistent over a golden period of 12 years.

But more surprising is the 2022 annualized $45.2 billion/year of the super-major’s average which is more than double the $20 billion/year from 2003 to 2015. We shouldn’t forget, though, the industry has just come out of some very lean years of 2019-2021.

Other companies.

As the table shows, the super-major’s oil company profits are currently up in the thin air of the most profitable companies like Apple and Microsoft. But historically they’ve been much closer to everyday companies like Walmart.

Several things account for the lofty profits. One is the oil and gas companies have reduced funds allocated to expansion of drilling into new areas. Capital expenditures (CAPEX) have gone down after investors realized their return on investment was less than competing industry sectors. CAPEX is now only about half what it was in 2013, said Bloomberg. The pandemic price dropout, as well as an imminent world recession, are troubling.

Second, efficiency of operations became a new goal after 2016. Drilling efficiency lowered the cost of long horizontal wells which are central to shale oil and gas plays. Fracking people squeezed their costs for materials such as fluids and proppant-sand, and optimized pumping time. Engineers analyzed the data they were collecting, such as frac pressure recorded in neighboring wells, to better diagnose where a hydraulic fracture was spreading and how effective it was.

A third reason is higher prices of oil and gas. In Q2, it was crude oil, natural gas, and refining margins that boosted profits. This quarter, Q3, it has been higher gas prices which offset weaker refining margins, and exceptional gas marketing.

A massive rise in natural gas prices took place in Europe and Asia — increases by 11-18 times over the past two years. This was due to low inventories plus Russia cutting gas supplies to Europe.

Overall, US gas futures are close to $6/MMBtu and still up about 60% so far this year. Disruptions in gas supplies from Russia, and sanctions linked to the war in Ukraine, have led to much higher global gas prices. Recently, gas was trading at $37/MMBtu at the Dutch Title Transfer Facility (TTF) in Europe and $29 at the Japan Korea Marker (JKM) in Asia.

The shale revolution has kept prices lower in the US. It led to the US being self-sufficient in gas and oil production. LNG exports have soared and made the US number one exporter in the world in 2022. The majority (68%) of LNG exports went to Europe a month ago, but has declined since, to help reduce their gas disruption.

Tension between huge oil and gas profits and rising energy costs for consumer.

What many consumers of energy see is a huge disparity between their frugal purchase of energy at higher cost and the enormous profits being made by oil and gas companies that produce this same energy. This leads to cries for a windfall profits tax.

UK has a windfall tax in place but the new Prime Minister, Rishi Sunak, has promised to address this again by May.

One must be careful. A previous and helpful criterion for installing such a tax was that it must be based on several years of profit history. This is because periods of low profits, even negative profits, in 2019-2021 should be included in a reasonable analysis.

US President Joe Biden called it “war profiteering” if major oil companies don’t use these profits to increase oil production. His motive was to lower prices at the gas pumps, and to lower inflation.

BP insisted they paid $5 billion in tax around the world in Q3 at a rate of 37%, their Chief Financial Officer said.

But some people are asking whether some kind of profit-sharing scheme could be set up with deprived people in the EU whose gas from Russia has been cut off? Or with people who have to buy LNG at a premium price from super-majors who make enormous profits from producing the same gas then tankering it to Europe.

Or could some of these profits be shared with Ukrainians whose electricity blackouts in a third of the country’s power plants are hitting hard as the country sinks into a dark, cold winter. These are families who need diesel generators to fight the cold but don’t have the money to buy them while the super-majors make profits from producing oil that is used to make that very same diesel. Note that the US is now exporting record levels of crude oil.

These are awkward questions that should be asked, and which could be discussed until tangible means of assistance are found.

Tension between huge oil and gas profits and alternative renewable energy sources.

Some consumers say, “I’m concerned about global warming and climate change, while the companies that cause it are making excessive profits.” The basis is that burning oil and gas contributes roughly 57% of world energy use, while it also causes about 50 % of global greenhouse gas (GHG) emissions.

For believers in climate change, it’s hard to condone, or even support the enormous success of the oil and gas industry.

In their defense, one company, bp, are committed to renewables that are 40% of their total energy production by 2030.

bp also paid $5 billion in taxes around the world, in just the third quarter of this year. The whole year will include $800 million in a 25% windfall tax imposed by the UK government.

BP is increasing the number of drilling rigs in shale basins and in the Gulf of Mexico to boost output. BP has said they will designate 60% of their excess cashflow for shareholder returns. Refining margins are expected to remain high due to sanctions imposed on Russia.

Trends in data are important to decipher the future. In one respect, it looks like renewables are catching up fast to fossil energies. The graphs here¹ show year-on-year increases in electric power generation according to source. Coal is volatile, but the trend is falling. Natural gas is less volatile, but still falling. Renewables, like wind and solar, are on a clear exponential increase.

If we eyeball a trend for the average data, coal is now at ~200, natural gas also at ~200, while wind and solar are now at ~500 terawatt hours. Wind and solar are 500/900 or 56 % of total electricity production world-wide. Note: this is only one sector, the power sector, of the global economy, and the other major sector, the transport sector, will be different.

References:

1. Nathaniel Bullard, November 3, 2022, Even conservative estimates see fossil fuel use peaking soon. From Bloomberg Green Sparklines.