By Mauro Meggiolaro – Domani
Europe’s six largest oil companies reportedly generated $74.55 billion in excess profits in the first half of 2022 alone, thanks to the surge in oil and gas prices exacerbated by the Ukrainian crisis. This is shown by research carried out by the NGO ReCommon, in collaboration with Merian Research, which Domani newspaper obtained exclusively.
“We compared the profits generated by Bp, Eni, Equinor, Repsol, Shell and TotalEnergies in the first half of 2022 with those of the same period in 2019, in order to strip the numbers of the immediate effects of the pandemic,” explains Antonio Tricarico, from ReCommon. The excess profits were also measured in terms of free cash flow, i.e. the cash actually generated once investments have been financed: more than USD 46 billion from 2019 to 2022. A real boom for fossil fuel producers.
Norway smashes all the records
Equinor, a 67 per cent subsidiary of the Norwegian government, generated excess profits of USD 28 billion: 38 per cent of the total excess profits of the six companies analysed. Between 2019 and 2022, the ‘exploration and production’ segment (of oil and gas) in Norway grew by 450 per cent, while the weight of gas in total revenues more than doubled.
In the second quarter of 2022, Equinor increased gas production by 18 per cent compared to the same period in 2021, making Norway the largest supplier in Europe after Russia cut its supplies. It is not surprising, therefore, that the Oslo government in recent days has positioned itself sharply against the EU’s imposition of a cap on gas prices.
In all the other companies analysed, the excess profits are also explained by a surge in profits in the ‘exploration and production’ sector (+108 per cent for Italy’s Eni) and, in some cases, in refining. All this in the presence of a general reduction in hydrocarbon production over the last three years. Since 2019, less oil and gas has been extracted (-13.5 per cent on average) but prices have risen so much that profits have still skyrocketed.
An avalanche of dividends
Extra-profits were followed, in almost all the cases analysed, by very generous shareholder remuneration schemes, through dividends and, above all, share buyback plans. While dividends grew moderately, ‘share buyback’ plans reached exceptional volumes.
The British company BP declared that it would use 60 per cent of its surplus cash to buy back its own shares (USD 3.9 billion in the first half of 2022). Eni increased its buyback commitment to EUR 2.4 billion in July this year. Shell surpasses all, with an $8.5bn share buyback plan for the first half of 2022, to which a new $6bn scheme has been added, to be completed by October.
By buying back their own shares on the market for billions of euros, companies drive up their price and shareholders can sell them, pocketing high capital gains. A feast for private shareholders, among which the big fund managers such as BlackRock, Amundi or Vanguard stand out. According to the research, in the first half of 2022 the major European oil companies distributed USD 31 billion to shareholders, corresponding to 42 per cent of the excess profits in terms of profits and 67 per cent of them in terms of free cash flow.
Investments unchanged, decarbonisation on hold
The distribution of excess profits to shareholders seems to be, for the time being, the only strategy contemplated by European oil majors to deploy surplus cash. Indeed, investment plans for the future have remained unchanged in most cases while, from 2019 to 2022, the volume of investments fell by an average of 17 per cent, with the sole exception of TotalEnergies, which increased them by 54 per cent (-9 per cent for Eni).
Investments in the energy transition, which, to read the ambitious plans of almost all European oil bigwigs, should lead to net-zero CO2 emissions by 2050, also remain on hold.
“Supposed to be green investments range from 10 per cent of Equinor’s total investment to 25 per cent for Eni, with an average of 19 per cent,” explains Antonio Tricarico of ReCommon. “The excess profits have not yet pushed any oil company to accelerate the energy transition”.
To understand what the real priority of the European oil bigwigs is at the moment, one figure is enough. It emerges clearly from the research: in total, the six companies analysed will invest around USD 9 billion in green technologies by 2022, while in the first half of the year alone they have already distributed USD 31 billion in excess profits to shareholders. Almost three and a half times more.
“Oil companies have a common problem: in recent years they have been besieged by shareholders, who want as much capital returned to them as possible. Nobody is investing any more in exploration and production, let alone refining, because of the energy transition. Shareholders want to grab the surplus cash before it is too late. It is a trend that predates the war in Ukraine,’ Mario Seminerio, an institutional investor, explained to Domani.
Shareholders’ greed for capital was clearly seen on 28 July, when TotalEnergies announced a new share buy-back plan of up to USD 2 billion for the third quarter of 2022. This was too modest and conservative for investors, who had expected an increase of 3 billion. On the same day, Total’s stock was punished on the stock exchange with a flurry of selling and closed the day at -3 per cent.
If massive investments in new extraction projects are no longer an option, neither would renewables be a viable route in the short term. “Green investments are not so easy to implement,” Guido Hoymann, head of equity research at Bankhaus Metzler, a historic private German bank based in Frankfurt, explained to Domani. “The oil companies came in late and are facing astronomical entry prices. In addition, there is a shortage of large projects in the short term”.
Meanwhile, some states have thought of introducing extraordinary forms of taxation, with very different strategies. In Italy, the tax on extra-profits has been designed on the balance of VAT transactions. For Eni, according to the recalculation made known by the company itself at the beginning of September, it is expected to cost 1.4 billion euro (against the 546 million euro initially planned), which is in addition to the 230 million estimated for activities in the United Kingdom, affected by the ‘Energy Profits Levy’, the British extra-tax, which increases the main tax rate on profits from 40 per cent to 65 per cent.
In Spain, where a 1.2 per cent surtax on energy companies’ turnover has been initiated, Repsol could end up paying up to EUR 1 billion, according to ReCommon research estimates. While in Norway there has already been an additional tax on oil revenues since 1996, now at 56 per cent. In France, Total has so far managed to avoid extraordinary taxes by applying discounts on fuel at the pump, but will still pay around USD 500 million for its activities in Great Britain.
With the exception of Equinor, whose profits are already taxed in Norway at overall rates of more than 70 per cent, the total weight of the extraordinary taxation of extra-profits in the various European countries will in any case be very limited. According to ReCommon’s estimates, it could eventually amount to less than 5 per cent of the generated extra-profits, little more than a tip for large corporations.
A meagre consolation for citizens overburdened by energy and gas prices that are now out of control, in the face of the hypocrisy of European governments who, after endless discussions, are putting their hands on general taxation, if not new deficits, to subsidise the payment of bills and avoid social uprisings.
It remains to be seen whether the proposal to tax energy companies in the new package, announced on Wednesday 14 September by the European Commission, will provide any remedy.
