One of the joys of writing this column is that you can receive unvarnished feedback from readers, unaware of exactly who writes the pieces. This week, however, I am unlikely to get much feedback, unless I bump into Wael Sawan, the future CEO of Shell, or ExxonMobil chief executive Darren Woods, which is unlikely.
The quarterly reporting season has kicked off, with some bumper numbers from big oil. As the value of tech companies has fallen sharply following disappointing results from Meta (the owner of Facebook), Amazon, and Alphabet (the owner of Google), the large oil companies go from strength to strength.
The S&P 500 energy index is up 61 per cent this year, whereas the tech-heavy Nasdaq index has fallen 29 per cent.
So much for those who argued that oil and gas was a dying industry. It may be, but not just yet.
ExxonMobil reported the highest ever quarterly profit in its 152-year history, at just under US$20 billion of net income, while Chevron announced its second-best quarterly result in its history. Big oil is firing on all cylinders as oil prices hover at over US$90 a barrel and gas prices in Europe remain at levels equivalent to over US$200 per barrel of oil. Together, ExxonMobil and Chevron achieved just under US$31 billion in combined net income during the recent three months ending on September 30. That is more than double the profits they produced in the same period a year ago.
ExxonMobil's results show how the results are driven almost entirely by the much higher prices caused by Vladimir Putin's bloody and completely unnecessary invasion of Ukraine. As the body count of Russian soldiers rises to over 70,000 dead, so too the profits of the big western oil companies soar. And Mr Putin is supposed to be a strategic genius?
ExxonMobil's net profits were US$19.66 billion for this year's third quarter, almost triple the prior year profits of US$6.75 billion. Sales and other operating revenues at Chevron in the third quarter of 2022 were US$64 billion compared to US$43 billion in the year-ago period. Chevron's net earnings rose from US$6.1 in the year-ago quarter to US$11.2 billion in the July to September 2022 period.
This surge in profitability happened even as Chevron's net oil-equivalent production of 1.85 million barrels per day in third quarter 2022 was down 56,000 barrels per day from the third quarter of 2021. The decrease was primarily due to the absence of production following the expiration of the Erawan concession in Thailand and of the Rokan concession in Indonesia.
However, ExxonMobil's net revenues rose by more than half to US$112 billion, and its actual oil and gas production rose 1.4 per cent to 3.7 million barrels of oil equivalent per day, against the same period in 2021.
This demonstrates the sweet spot the large oil and gas companies are in – even with just a 1.4 per cent in production volume for the Houston-based company led to a 51 per cent rise in revenues, and a 190 per cent rise in ExxonMobil's profits. This is operational leverage in action.
ExxonMobil's cash flow from operations in just 92 days was US$24.4 billion, up US$4.5 billion from the second quarter. ExxonMobil is even running its two SBM-built FPSOs in Guyana at 15,000 barrels of oil a day production above their design capacity. Don't try that at home!
Shell also reported a bumper cash flow from operations on US$12.5 million in the third quarter, but a net income of "only" US$6.5 million due to a one billion US dollar loss on some derivatives, and a fall in production from 1.92 million barrels of oil equivalent per day in the second quarter to 1.79 million in the third quarter, a decline of seven per cent.
The falling production volumes for Shell were mainly driven by the company's divestment of the Salym project in Russia, a joint venture with international pariah Gazprom in West Siberia, and by supposedly more one-off production problems at the troubled Kashagan Field in the Kazakhstan sector of the Caspian Sea.
To call the Kazakhstan problems a one-off is a little unfair, as Kashagan didn't earn the nickname "Cash All Gone" for nothing.
Shell is a 17 per cent shareholder in the large, but technically challenging, field.
Elsewhere, TotalEnergies' profits were also hit by falling production, both from the problems at Kashagan, in which it is a shareholder, and planned shutdowns on the Icthys gas field offshore Australia.
In fact, TotalEnergies' hydrocarbon production was down five per cent year on year to 2.67 million barrels of oil equivalent per day in the third quarter, even though the start-up and ramp-up of projects including Clov Phase 2 and Zinia Phase 2 in Angola, Mero 1 in Brazil, and Ikike in Nigeria delivered increased production in those countries.
The French major reported a two per cent fall in production simply from the natural decline of its fields, a reminder that the majors can't stand still and sit on their laurels. Oil fields gradually produce less over time, so investment is constantly necessary.
TotalEnergies was also hit by Nigeria LNG suspending its exports due to security issues and then widespread flooding in that blighted land (here) that disrupted gas supply to the LNG plant's six trains. A seventh Nigeria LNG train is under construction and will commence operations in 2024, with an additional 7.6 millions tons a year of capacity. Shell is also a 26 per cent shareholder in that plant.
However, even with the decline in output in the third quarter of 2022, TotalEnergies reported net income of US$6.6 billion after taking into account a new impairment of US$3.1 billion related to the sale of its Russian assets due to sanctions. Cash flow was US$11.7 billion, and return on equity was more than 30 per cent over the past 12 months.
Wham, bam, thank you ma'am!
Whilst TotalEnergies and Shell stumbled in production, Equinor literally "stepped on the gas".
The Norwegian player increased gas production in Norway by 11 per cent compared to the same quarter last year, supported by the ramp up of LNG production at Hammerfest LNG plant. Norway is now Europe's biggest gas supplier.
In Brazil, Equinor's Peregrino oil field also came back in production and ramped up successfully, while the Peregrino phase 2 came on stream in October, taking total plateau production level to 110,000 barrels per day. Equinor continued to generate strong earnings, mainly from increased gas prices, and has produced strong free cash flow year to date of US$21.7 billion. It boasted US$6.72 billion in net income after tax in the third quarter of 2022.
So, the bottom line from the oil majors is that business is good, cash generation is strong, returns on capital are stellar, and their management is more confident than ever before. Well, at least at any time since 2013.
What do these bumper cash flows mean for the wider oil and gas industry?
Currently big oil is enjoying something of a renaissance, as the public realises that the only thing standing between Europeans freezing this winter amid electricity shortages and gas supply outages is production outside Russia. The destruction of the Nord Stream pipelines means that even if Russia raises the white flag of surrender in November (one can only hope) and Mr Putin disappears off for some re-education on a psychiatric hospital, or to an early grave, Russia cannot be a reliable supplier to Europe again in the short term, or even the medium term.
Whilst twenty-somethings with pink hair throw soup at Van Gogh's Sunflowers paintings in the National Gallery in London and glue themselves to the wall as part of the misguided "Stop Oil" campaign, it is very clear that that the world, and Europe in particular, still needs Big Oil. The US has high levels of domestic oil and gas production, and China can lean into Russia as a buyer of last resort, but Europe, Japan, and South Korea have no choice but to rely on international production from Australia, Africa, and the Middle East, often production from the majors.
Equinor, ENI, Shell, TotalEnergies and their peers are the most reliable providers of energy to the developed world, more reliable than Saudi Aramco, Qatar Energy and ADNOC, simply because their production is more diversified and they are largely producing outside the Middle East, which may yet return to its strife-torn past.
Smart observers will have noted that Israel, now allied to the Gulf States, blew up some Il-76 cargo planes loaded with Iranian drones at Damascus airport last week (UAE press coverage here). Neither the Syrian nor the Iranian nor the Russian governments were very happy. Boo-hoo.
Iran remains a rogue state, both in the eyes of the US and in the eyes of many of its people, who are rioting against its repressive and brutal government. Overshadowed by events in Ukraine, the war in Yemen between the Saudi-backed government and the Houthi rebels continues. Tensions eased and humanitarian conditions in the country improved with a UN-mediated cease-fire in April, but the combatants failed to renew the deal after six months, earlier this month (here). Yemen remains unfinished business for both the Saudis and the Iranians.
However, the public acceptance of the oil majors' bumper profits in the west depends on two important caveats – firstly, that they are not seen to be profiteering from the misery of the poor as high prices for energy cause a cost of living crisis and high inflation.
Even in the US, refining bottlenecks mean that diesel is short supply and remains expensive. John Kemp at Reuters reported that American diesel supplies, "are becoming critically low with shortages and price spikes likely to occur in the next six months unless and until the economy and fuel consumption slow. Stocks of diesel and other distillate fuel oils were just 106 million barrels on October 21, the lowest for the time of year since the US Energy Information Administration started collecting weekly data in 1982."
This creates a dangerous context for Exxon's record-breaking results.
TotalEnergies took the message of social solidarity on board after pressure from the French government. Naturellement. The company is rewarding its staff with an exceptional one-month-salary bonus in 2022 to all its employees worldwide, and has offered a fuel price reduction program until the end of the year at TotalEnergies' service stations in France, offering a 20 cent per litre discount until November 15, and then 10 c/l discount until December 31.
Even as the industry pays out record taxes to national governments under its production sharing agreements, pressure for extra taxes and "windfall" levies rises. Being voluntarily generous now may help the sector avoid punitive taxation later.
Secondly, the oil and gas companies have to be seen to be behaving responsibly. This means no more Exxon Valdez type oil spills or Deepwater Horizon blow-outs. Ever again. The public will have no patience with businesses spewing out profits while cutting corners and killing people, coral reefs, or dolphins.
A corollary of this is that maintenance to keep ageing facilities in service needs to be stepped up across the industry, and that some of the price-squeezing and nickel and diming that went on in the downturn need to end. Running facilities into the ground, accepting lower standards, and risking oil spills or accidents has no place when the industry is producing record profits due to a war.
This is good news for construction contractors, boat owners, and inspection and maintenance companies. The majors are going to have to step up their maintenance and improve their operating standards. If they fail, the wrath of the public in the developed world will make the Stop Oil campaign look modest. A large pollution incident would set industry executives up for prison and companies for eye-wateringly large fines.
ExxonMobil's recent problems with its rusting and decaying FPSO Zafiro Producer in Equatorial Guinea suggest that perhaps the world's largest oil company hasn't really understood this message. Years of cost cutting in the face of falling production have left the ExxonMobil facility resembling Safer, the abandoned FSO rotting off the coast of Yemen and that is now subject to a salvage effort paid for by the United Nations and international donors.
Last month, Zafiro Producer "took on water" and many of the crew were evacuated as production was shut-in. Has the company forgotten the lessons of the Exxon Valdez incident? How can a company that no less than the President of the United States says is making "more money than God" leave a facility producing 19,000 barrels a day in such a shockingly bad condition?
Remember that 30 per cent annual return on equity figure that TotalEnergies reported? In the current market, any oil and gas project that the majors can bring on stream will be wildly profitable. So, guess what? Capital expenditure is surging and the urge to drill is finally returning.
Shell leads the way with what it calls "disciplined cash capex," which it expects to be in the range of US$23 billion to US$27 billion in 2022. ExxonMobil invested US$5.7 billion in the third quarter and is now on track for US$21 billion to US$24 billion of capital expenditure in 2022. Total has spent US$12.5 billion on net investments in the first nine months of the year, up 39 per cent on the first nine months of last year.
Everywhere you look, pipelines of projects are being advanced, final investment decisions are being taken, and expenditure is being irrevocably committed by the majors for 2023 and 2024 and beyond. The majors have survived and prospered by being geographically diversified and by splitting their investment between oil and gas, and increasingly renewables, too. This continues.
Shell has the following gas projects under construction for start-up 2022 to 2023: the Arrow-Surat Gas projects and the Gorgon-Jansz backfill in Australia (operated by Chevron), as well as the Oman Gas project, which will deliver 120,000 bopd at peak production.
For 2024, Shell has a 40 per cent stake in trains one and two of the LNG Canada project, train seven of Nigeria's NLNG, the North Field East Expansion project in Qatar, and the development of the Crux field to tie back to the Prelude floating LNG project.
Sitting on the back burner awaiting investment approval from the board in London are the long-awaited Abadi gas project in Indonesia, the East Med Egypt gas project, additional expansion for LNG Canada, the Manatee conventional gas development located in shallow water in Trinidad and Tobago, more backfill production for the North West Shelf and Browse LNG projects, and the greenfield development of Tanzanian LNG in east Africa.
There's a similar list of upstream oil projects for Shell, and every other major is busy filling out its checklist of new developments, too, even as the Aramcos and ADNOCs in the Middle East rush to drill, and as Petrobras attempts to add multiple FPSOs to boosts its deepwater projection to five million barrels per day by 2030.
The oil majors' massive free cash flow generation is coming from oil and gas, but they are also increasingly using it to invest in renewables – even though the returns there are small, compared to the double-digit rates of returns the oil and gas investments are delivering this year.
In the last quarter, TotalEnergies acquired an interest in the development of more than 12 GW of onshore solar and wind projects in Brazil, saw the start-up of Seagreen, Scotland's largest offshore wind farm, and the start-up of the 800MW Al Kharsaah solar power plant in Qatar.
Shell boasts of multiple solar projects totalling around one GW of capacity under construction and/or committed for sale in Australia, India, the Netherlands, and the US, as well as its participation in the Atlantic Shores 1 and Mayflower offshore wind projects in the US, which will have 2.7 GW of total capacity. Shell also has a hydrogen electrolyser under construction in the Holland Hydrogen project, which will provide 200 MW equivalent of capacity, the company says.
All the majors are also reporting strong interest in carbon capture and storage (CCS) projects. The Northern Lights project in Norway is already under construction and will supposedly capture and store 1.5 million tonnes of CO2 per year. Northern Lights is owned in equal shares by TotalEnergies, Equinor, and Shell.
ExxonMobil is pushing ahead with its CCS projects in the Houston area with support by new tax breaks under the US Inflation Reduction Act. TotalEnergies has embarked on a CO2 capture and reinjection programme in its Papua LNG project in Papua New Guinea. Sequestration at the Icthys LNG plant is also under review by TotalEnergies and its Japanese partners in Australia.
For the majors, high oil and gas prices offer redemption. They can satisfy shareholders with large stock buy-backs and generous dividends. They can satisfy demand for progress in green energy and the Net Zero 2050 transformation by buying up renewables companies around the world, and by investing some of the billions of unexpected windfall profits from the Ukrainian war in solar, offshore wind, bio-gas and carbon capture and storage projects. They can outbid pureplay renewables companies like Copenhagen Investment Partners and Ørsted for new renewables projects simply because the majors now have superior cash flows and access to huge quantities of cheap internal finance – if they choose to use it.
There have been other booms in the oil and gas industry. There have been other attempts to diversify into renewables before – most famously by BP under Lord Browne in the early 2000s. In every case, the oil and gas industry ended up squandering the profits of the boom, investing too much when prices were high and costs surged (Kashagan and Gorgon LNG plant being the high tide marks of folly in the last boom), and then taking large write-offs and closing down their renewables investments when the market turned sour.
This time, we are supposed to believe, it will be different.
Hmmm. I'll have to see what Patrick Pouyanné of TotalEnergies and Anders Opedal of Equinor say, should they chat to me about this article. Off the record, of course…
Background Reading
ExxonMobil's third quarter results presentation is here.
Shell's third quarter results presentation is here.
TotalEnergies' excellent presentation on its LNG portfolio is here.
TotalEnergies' third quarter results announcement is here.
To get a better understanding of hydro power, which still produces much more electricity than wind and solar combined, 16 per cent of global power in 2021, I recommend this excellent article here in IEEE Spectrum magazine.
A very informative piece on the compelling economics of offshore wind and the regulatory issues slowing down developments in the US can be found in the Construction Physics substack here.
Original 1980 video for Blondie's The Tide is High is here.