Europe is racing to build LNG import terminals despite setting increasingly ambitious emission reduction targets. India cannot get enough coal, and it's not the only one. And Big Oil shareholders have become less inclined to vote for climate change commitments. 2022 is truly a year of radical changes in the energy world.
During the last two years, while the pandemic locked down entire countries and destroyed demand for oil with the expected consequences for Big Oil share prices, emission reduction resolutions tabled by activist investors did well.
In fact, they did very well, with 58 percent of Conoco shareholders voting for the company to set emission cut targets and 21 percent of BP shareholders voting for the supermajor to speed up its transition, per Reuters figures. At Exxon, activist investor Engine 1 won three seats on the company's board, which was hailed as a big win for the ESG investment trend. This year, things look different.
For starters, Big Oil is raking in cash thanks to the rally in oil prices. BP booked an underlying profit of $6.2 billion for the first quarter of 2022, although it suffered a $20.4-billion loss from its exit from Russia and Rosneft. Exxon booked a profit of $5.5 billion for January to March. Conoco reported net income of $5.76 billion, and Shell booked $9.13 billion in profits for the same period. Such results are normally enough to whet investors' appetite, but there's more: all the oil majors are still buying back stock as they maintain the shareholders-first course of action they embarked on the moment the pandemic's fallout began to let go last year and prices began to rise. And then the energy crisis began.
Demand for oil and gas rebounded more quickly than expected by pretty much everyone after the lockdowns ended. It then continued to increase while investment in oil and gas production growth lagged far behind it, because of the pandemic and because of the growing worry in the industry that ESG legislation and investment trends will hurt their long-term survival chances. Russia's invasion of Ukraine put the finishing touches to a picture of more demand for hydrocarbons than there was supply.
This picture put energy security in the spotlight, replacing climate change alarm—at least temporarily. Indeed, energy security is a lot more immediate problem for everyone who has to pay for electricity or gasoline, so it was only natural that it would rise to the top of the agenda of hundreds of millions.
Oil prices have remained above $100 for more than two months now, bar a short dip for West Texas Intermediate when the Biden administration announced the biggest strategic petroleum reserve draw, of 180 million barrels, to counter rising retail fuel prices.
OPEC+ cannot cope with its own production quota, with some large producers from the cartel actually seeing their output decline instead of increasing in line with the group's agreement from last year. Saudi Arabia and the UAE, the two members with lots of spare capacity, have flatly refused to pump more.
Russia's oil is being sanctioned by the West, and exports are falling. Back in March, the International Energy Agency forecast that the current quarter could see a loss of more than 3 million bpd of Russian oil and fuel exports. Now, because of lockdowns in China, the IEA says the world won't feel the loss of this supply because demand is on the decline, too. Judging by oil prices, it will be some time yet before demand falls enough to have an impact on them.
In other words, the world is still thirsty for oil and for gas. It has also become a much more uncertain place for investors, thanks to persistent inflationary pressures in much of the world. As a result, investors are reorienting themselves from ESG to safe-havens. One of these safe havens appears to be the commodity sector, according to a recent Bloomberg report.
Oil and gas, the report noted, provide a natural defense against inflation, and this is particularly true of energy inflation, of which we have seen a lot in the past couple of months. The S&P 500 Energy Index, Bloomberg said, was up 45 percent since the start of the year, while the broader S&P 500 was down 14 percent. Investors once again love oil and gas.
"It might be that Big Oil has convinced some investors the energy crisis overrides the climate crisis," Follow This's Mark van Baal told media in comments on the new trend emerging at this year's Big Oil shareholder meetings.
In fact, Big Oil might not have needed to convince shareholders of anything. The effects of the energy crisis are plain to see and, it bears repeating, a lot more immediate in their impact on the average household than climate change. Hence the rearrangement of priorities. It's safe to say that while the energy supply situation remains tight, the security issue will remain at the top of the agenda, and climate change will remain at number two.
By Irina Slav for Oilprice.com