Shell, Exxon, and BP contrast climate amid record profits

The oil and gas industry has never been more profitable than in 2022. ExxonMobil, BP, Chevron, Shell, and ConocoPhillips collectively reported profits of more than $177 billion.

Interpreting these huge numbers becomes more complicated. Environmentalists say they see the industry’s value rise during the war while profiting from Russia’s invasion of Ukraine a year ago. Oil executives say they are working on the fundamental strategy of the business: “Performing while transforming,” as CEO Bernard Looney put it on BP’s earnings call.

The gains have helped erase recent memories of the oil industry’s 2020 pandemic calculations when, after nearly a decade of lower prices from the cracking boom, global and domestic travel ground to a halt as oil and gas prices crashed. Suddenly, banks were heavily scrutinizing loans for new drilling projects. And the oil industry is leaning heavily on the Trump administration for taxpayer bailouts and Covid relief.

The industry has learned some lessons. Companies today are more focused on paying down debt and returning shareholder value than in past decades, translating to $109 billion in stock buybacks that benefit the largest investors. And overall, the industry prefers to keep costs low, focusing less on new drilling expansion and exploration.

But while the industry hasn’t forgotten every lesson of the past few years, the biggest companies have neglected the most important ones. Big profits give a company an opportunity to signal where it sees growth by reinvesting in the business. And for more than a century, future growth has always meant more drilling — not a transition to renewable energy.

This is no longer possible, at least not if the world makes any effort to address climate change. The International Energy Agency made clear in May 2020 that the world now has all the proven and potential oil reserves it needs if it has any hope of meeting the global climate goal of limiting warming to below 2 degrees Celsius. If this is actually implemented as policy, the industry will not invest any of its huge profits to scale up new fossil fuels.

But the industry is doing just the opposite, moving away from so-called climate spending to grow their core business: Greenhouse gases.

Big Oil’s record profits mask the real problem ahead

The energy industry was integral to economic growth, leading 28 percent of the total stock market in the 1980s. It fell to a new low of 2 percent in 2020, as travel stagnated. Even today, it is only a slightly higher share of the total market.

The numbers tell a long story of oil’s shrinking footprint on the economy. Decoupling economic growth from fossil fuels is a fundamental part of climate policy. More than 30 countries have figured out how to do this, reducing carbon emissions while continuing to grow economies. This includes the United States, where overall carbon dioxide output is still below 2019 levels. Renewable energy now comprises a larger share of electricity generation than coal. And transportation – planes, trains and automobiles – was again the biggest climate-polluting sector.

Looking ahead, the oil industry faces competition like never before in all its major profit sectors. Electric vehicles are a small but rapidly growing source of competition for the sector, and more households are moving away from oil and gas in favor of fuel-efficient electric heat pumps. And gas in the power sector is facing effective competition from cheap wind and solar.

The oil industry, however, is not accepting the reality that sooner or later the world will need less of its products. “Their conventional plans are facing competition they’ve never seen before,” said Tom Sanzillo, director of financial analysis at the Institute for Energy Economics and Financial Analysis (IEEFA).

The party won’t last forever

Some experts think the party is already over. “They needed very high prices to get out of the crisis, and very high prices are destabilizing,” Sanzillo said. “No one expects these gains to continue.”

Sanzillo pointed to some recent signs that the market for Big Oil is already cooling again. Based on the past few months, prices have stabilized and fallen slightly, and oil has returned to underperforming the overall market.

In Europe, countries have tried to recover some of these profits for taxpayers who have suffered under higher prices. The EU has added a new tax on profits that is above the average of 20 percent over the previous three years. Although the Biden administration has adopted its own version of a windfall profits tax, the idea is a nonstarter in a divided Congress, which must approve any changes to the tax code. Another idea the Biden administration has is raising taxes on stock buybacks.

These policies won’t really hurt oil and gas in the long run. What it will do is increase competition from renewables and a renewed focus on energy efficiency to reduce energy consumption.

Companies can prepare for this future. They’re doing a lot to advertise it — Chevron’s homepage promotes “renewable natural gas,” as written. But in reality, they have invested little in renewables that can seriously compete with fossil fuels, because it hurts their core business. The industry has typically spent just 1 percent of its capital expenditures on low-carbon investments, a broad category that includes carbon capture and storage to facilitate fossil fuel growth. That rose to 5 percent in 2022 before corporations publicly backed away from their renewable commitments.

ExxonMobil stands as an extreme example after the company made $56 billion in profits in its biggest year ever. Asked about the competition on the company’s recent shareholder call, CEO Darren Woods said Exxon “has been very focused on leaning in when others have leaned in.” Which way are they leaning? More of the same. “The products that society needs today are constantly being manufactured and doing so across a very diverse slate of products, so think chemicals, fuel products and lubricants. And then, at the same time, investing in producing low-emission fuels to address low-carbon demand.”

Other companies are reneging on their limited climate commitments to double down on fossil fuels. BP has officially reduced its emissions commitments, Originally set to reach 35 to 40 percent lower emissions by the end of the decade, to just 20 to 30 percent. Shell plans to keep its investments in renewables, carbon offsets, carbon capture and biofuels at $3.5 billion, less than half of what the company invests in oil and gas exploration and extraction. CEO Wael Sawan said the company’s gas business “continues to grow in a world that desperately needs natural gas right now, and I think for a long time to come.”

The modest investment the oil industry promises to tackle climate change is “not what people think,” said Jamie Henn, director of advocacy group Fossil Fuel Free Media. “Low-carbon investment” by Exxon, BP, and others typically refers to making oil operations more efficient, such as tweaking existing processes to burn less fossil fuel or using carbon capture and storage for “enhanced oil recovery.” Both methods aim to reduce emissions by burning more fossil fuels.

Even marketing budgets for Big Oil’s climate campaigns can be larger than the projects themselves. Working with a PR firm, Shell to pay $57,000 for a company to make biofuel from coffee waste, and over 1,100 media coverages, all to power a London bus for a year. Environmentalists have accused Shell of spending only 1 percent of its capital expenditure on low-carbon energy sources such as wind and solar.

Henn said recent changes in climate change serve as further evidence that “these companies are not serious about a clean energy transition. It’s mostly marketing and greenwashing, tactics that get a small promise here and then an empty promise. They’re not adding up.”