One after another, oil companies in Canada and around the world are releasing their latest financial results, showing that 2022 was the most profitable year in the history of the oil spill.
Commodity prices have fallen at the start of 2023, but this year looks almost as rosy as demand for gasoline, diesel and other fuels remains resilient and could rise even further in the coming months.
There are many ways the sector could spend those high yields, but so far companies don’t seem willing to deviate from their primary strategy of paying down debt and passing a good chunk of those profits back to shareholders.
The industry currently faces a bit of a conundrum, said Jeremy McCrea, managing director of energy research at financial services firm Raymond James: The world’s energy use is rising, but companies are reluctant to increase spending to dramatically boost oil and natural gas production.
Instead, they enjoy the jumbo wins – as long as they last.
“I suspect that we will continue to see these results in the future,” said McCrea, who is based in Calgary. “Since these companies are seeing these gains, there’s no reason to suddenly say, ‘Let’s spend a bunch of money here now and maybe not make these gains for the next few years.'”
Big money for Big Oil
This week, Canadian oil sands heavyweights Suncor Energy and Cenovus Energy were the latest companies to report exorbitant levels of earnings as both Calgary-based companies have reported strong oil prices throughout the past year.
Overall, global industry profits last year totaled about $4 trillion, according to the International Energy Agency (IEA), compared to an average of $1.5 trillion in recent years.
The organization expects oil consumption to skyrocket in 2023, mainly due to China’s economy regaining momentum as restrictions for the COVID-19 pandemic are lifted. According to the IEA, world consumption will increase by two million barrels per day to an average of 101.9 million barrels per day.
“Following Beijing’s turnaround in late 2022 on its tough anti-COVID restrictions, we expect Chinese oil demand to pick up speed quickly,” the agency said in a recent report.
At the same time, Russia’s oil production could fall as financial sanctions are tightened following its invasion of Ukraine on February 24, 2022. These are some of the reasons some in the industry believe oil prices will remain high this year.
“We still believe that we are in a constructive pricing environment,” Suncor interim president and CEO Kris Smith said during a conference call with analysts. “Apparently, [it’s] will not be what we have seen in terms of 2022 records.”
A barrel of West Texas Intermediate, the North American benchmark, traded above $75 this week, compared to an average of around $95 last year.
Rising oil patch revenue and profits
How to spend profits
The sector is under pressure to use these gains in a variety of ways. There are calls to invest more in renewable energies and to take much more sensible measures to combat climate change by reducing emissions.
At the same time, some political leaders want the sector to boost production to lower energy costs for consumers and for companies to pay higher taxes to help countries address affordability problems.
In Canada, these gains could also be used to address environmental pressures as tens of thousands of aged oil and gas wells need to be rehabilitated and tailings ponds in the oil sands continue to grow.
For most oil patch companies around the world, financial priorities for the year ahead are unchanged from 2022 as they keep spending in check, deleverage and pass much of the excess cash to investors.
Last year, Suncor reduced its debt by more than $2.5 billion (leaving a balance of $13.6 billion) while giving investors more than $8 billion through dividends and stock repurchases .
However, it is also such profits that are leading politicians in several countries to consider or introduce windfall taxes for oil companies.
I seek Ottawa’s help
Canadian oil and natural gas production was broadly flat last year, despite calls from the federal government to turn on taps to help ease Europe’s energy crisis following Russia’s invasion of Ukraine.
According to the Calgary-based ARC Energy Research Institute, production is expected to increase by about four percent in 2023.
According to ARC’s latest research report, total Canadian oil field profits are expected to reach about $78 billion this year, which would only be surpassed by an estimated $120 billion in 2022 over the past decade.
Industry spending levels are expected to increase as drilling activity picks up, although the increase will be modest.
“We have restrictions across North America,” said Jackie Forrest, Executive Director of ARC. “The oilfield service industry has now gone through a couple of back-to-back downturns and people have left the industry. Even if the companies wanted to spend more money, I don’t think there is enough equipment or people in the field,” she said.
The windfall isn’t stopping the oil sands companies from turning to the federal government for more funding to cut emissions.
Executives in Ottawa are advocating a stronger commitment to subsidizing the cost and operation of carbon capture and storage facilities, similar to the financial assistance offered in the United States.
“I’m optimistic that if it’s not in the budget speech, we’ll get not only clarity but a resolution soon after – so we can move forward with these projects,” Brad Corson, Imperial Oil’s president and CEO, said last month . on wanting more federal and provincial government support before oil sands companies decide to spend billions of dollars on a proposed carbon capture plant in Alberta.
Some critics, including Federal Environment Secretary Steven Guilbeault, say the oil patch already has plenty of money left over and is not moving fast enough to address climate change. Some would therefore prefer to have industry profits taxed by the federal government and invest directly in environmental projects.
The tar sands account for about 11 percent of Canada’s total greenhouse gas emissions, while the rest of the oil industry and the total natural gas industry account for 15 percent.
CLOCK | Alberta unhappy with Ottawa’s Just Transition Bill:
