WSJ: Big Oil Gushes Cash Because It Doesn’t Know Where to Invest

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Oil-and-gas companies are still trying to figure out where to invest for the energy transition. The resulting hiatus makes for great shareholder returns, but not a long-term strategy.

The hot topics at CERAWeek by S&P Global, an annual industry gathering in Houston, are the impact on global energy markets of the Ukraine war and new opportunities from the Biden administration’s Inflation Reduction Act. In a bad sign for the European Union, many executives find the U.S. initiative more appealing, even after Europe sketched the outlines of a rival policy.

One buzzword at this year’s conference is the need for an “orderly” energy transition. Chevron Chief Executive Officer Mike Wirth warned that moving away from fossil fuels before renewable alternatives are ready to take over will lead to higher prices: “You have to be very careful about switching off system A too early.” OPEC Secretary-General Haitham al-Ghais also pointed out the risks of underinvesting in hydrocarbons.

While these are fossil-fuel producers talking their books, the argument carries more weight after last year’s gas-price spike. However, it also means spending money on new oil and gas production, which big listed energy groups have been reluctant to do. Pressure to hand cash back to shareholders means the industry is neither investing enough to meet current fossil-fuel demand trends, nor cutting enough to meet net-zero targets.

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The problem is that energy companies are getting conflicting messages from all sides. Demand for fossil fuels isn’t falling and politicians in countries including the U.S. are pressuring them to drill more. At the same time, windfall taxes are discouraging spending on new projects in parts of Europe: TotalEnergies will cut its investments in British North Sea oil and gas projects this year because of new U.K. levies, for example. The long-term demand outlook is also murky as countries pledge to cut their carbon emissions.

Oil-and-gas producers could funnel more profits from fossil fuels into renewable energy to hedge their bets. That would please policy makers: To hit net-zero targets, investment in renewables will need to be about nine times that in fossil fuels by 2030, up from just one-and-a-half times today according to CGEP.

But it isn’t yet clear which technologies will come out on top in the energy transition. Excitement about clean hydrogen is high, especially as tax credits in the U.S. climate bill mean it can be produced more competitively. Returns on many renewables projects look disappointing, though. BP recently said it is targeting returns on investment of up to 8% for renewables like solar and wind, compared with up to 20% for fossil-fuel projects.

Energy companies would ideally like more time to figure out which way to jump with new technologies, and reap handsome oil-and-gas profits in the meantime. But governments that want to reduce their reliance on imported fossil fuels and cut emissions are pushing in the opposite direction, including with hard cash. Today’s outsize shareholder returns may soon have to give way to a new era of investment.

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