After years of prioritizing returning cash to shareholders, oil supermajors are about to do something few expected: turning to growth as a top priority. The reason: contrary to dominant expectations, oil and gas will continue to be needed for decades.
For years, analysts from some of the most reputable organizations have been predicting a pending decline in oil demand specifically, but also gas demand. The predictions, notably from the International Energy Agency, were based on projections about a widespread adoption of electric vehicles that would undermine demand for fuels, and a steady and accelerating shift to wind and solar for power generation, undermining demand for natural gas. Only none of these projections materialized.
EV adoption happened at a massive scale only in China, thanks to a steady and abundant flow of subsidies. Yet even that massive adoption of EVs did not lead to peak oil demand in China. It only contributed to a slowdown in demand growth. Elsewhere, EVs have struggled, with carmakers incurring tens of billions in losses—so now some are bringing back diesel models.
Last November, the International Energy Agency walked back its prediction that crude oil demand growth would peak before 2030. Because the IEA’s reports are so closely followed, one could say that the game for Big Oil changed overnight—although in fairness, it had been changing for a while already, as bold transition prediction after bold transition prediction failed. The industry was already pivoting away from its low-carbon experiments and quietly, or not so quietly, refocusing on its core business. Now, it seems the time has come to start thinking big again. And shareholders are fine with it.
“We think investors are likely to focus more on growth than distributions going forwards,” RBC Capital analyst Biraj Borkhataria said in a recent note, as quoted by the Financial Times. The key theme for Big Oil this quarter, the analyst also said, was expanding their oil reserves in order to be able to expand production—despite the persistent near-term forecasts of oversupply.
The reserve replacement issue has been on the backburner in the past few years. That was because the supermajors were trying to reinvent themselves as low-carbon energy suppliers and traders, although their overall success in these ventures has been mixed. All this was done because the global analyst community saw no long-term future in oil and gas. Now, reserve replacement is once again in the spotlight, because oil and gas do, in fact, have a long-term future.
“If I were to look back, I wish we had not walked away from Guyana when we did. That is the honest truth,” Shell’s chief executive Wael Sawan said during this quarter’s earnings call. Now, Shell is “hungry for growth”, according to its top executive—and it is not the only one. Once again, the U.S. majors are better positioned, not just in Guyana but elsewhere as well. This is mostly the result of the different pace of growth in climate-related policies in European countries and in the United States, which gave Exxon, Chevron, ConocoPhillips and the rest of the industry more freedom in choosing where to invest their money.
Yet now that the European majors have also realized they need to show their shareholders a sustainable business model rather than just keep boosting dividends, there are going to be some changes in investment decision-making there. Shell’s Sawan is talking about acquisitions, because that’s the fastest way to expand your reserve base. Fellow supermajor BP has been making new oil discoveries, the latest announced just this month, in Angola. Norway’s Equinor is planning a major international expansion to boost its reserves.
When the latest earnings season began, media rushed to warn their readers that Big Oil was about to report its weakest results in years as oil prices shed a cumulative 20% last year. That was bound to be reflected in annual financial results. And it was—but it did not seem to lead to shareholder outrage and demands for a reversal of the current course.
“The last thing they [Big Oil] will do is cut dividends. They will reduce the buybacks if they have any buybacks and they may have to taper their capital program.” That’s what one senior S&P Global analyst, the chief energy strategist of S&P Global Energy, told CNBC.
In fact, it appears that the last thing Big Oil would do is keep prioritizing shareholder returns at the expense of growth—the shareholders themselves are demanding growth as a means of ensuring the long-term flow of those dividends that analysts joked in recent years were the only thing keeping any investors in Big Oil companies. They are not joking anymore.
“A year of upstream energy abundance lies in store in 2026, but with potential bottlenecks downstream,” Rystad Energy said in its predictions for this year. It then went on to add, “We can thus expect to see depressed primary energy prices, albeit with potential for healthy margins in some energy carrier and storage segments. However, the deeper primary energy prices fall in 2026, the more they will rebound in 2027 and 2028.” The supply squeeze seems to be on its way.
By Irina Slav for Oilprice.com
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