The five largest global oil and gas supermajors – ExxonMobil, Chevron, Shell, BP and TotalEnergies – have reported their results for the second quarter of this year. For oil bulls, the headlines were a disappointment, with all five companies reporting falling revenues and slimmer profits, stemming from a decline in global oil and gas prices.

‘Collectively, the supermajors’ disappointing financial results teach three key lessons about the cloudy prospects for the oil and gas business model,’ says IEEFA.

Firstly, they clearly show that oil and gas supermajors need high prices to thrive. If oil and gas prices are too low, they simply can’t produce enough money to keep dividends high, debt low, cash reserves healthy, executive compensation attractive and exploration budgets amply funded.

Compared to 2Q2022, the price of oil fell by a third and the supermajors’ collective free cash flows – the cash generated by their operations, minus capital expenditures – fell by 56%. ‘Investors were none too happy at the news, because free cash flow is what companies use both to pay down their debt and to reward shareholders,’ notes IEEFA.

It adds: ‘As troubling as the year-over-year results were, the longer-term trends were perhaps more disconcerting. As an example, compare last quarter’s results with 3Q2021: Oil prices were slightly higher last quarter than they were in late 2021, but the supermajors’ free cash flows fell by more than a fifth. The industry made less money despite selling their wares for higher prices.’

Falling cash flows amid rising prices highlights a serious problem in the supermajors’ long-term business model. To thrive going forwards, these enterprises need oil and gas prices to rise. However, at heart, oil is an inflationary commodity, and signs of flagging demand growth, coupled with the falling costs of alternative energy sources, are keeping a lid on expectations for long-term prices. Furthermore, having long since exploited the cheapest and most abundant underground deposits, oil companies must forever chase smaller, harder to reach, and higher-cost barrels.

Meanwhile, the ‘Ukraine dividend’ has faded. Financially speaking, Russia’s invasion of Ukraine was the best thing to happen to the oil and gas industry in over a decade. In the waning months of 2021, amid Russian troop movements and escalating anti-Ukraine rhetoric from the Kremlin, speculators bet on the possibility that Russia would use energy as a weapon to pursue its territorial ambitions.

In February 2022, Russia’s full-scale invasion of its neighbour sent oil prices skyrocketing across the globe over fears of supply disruptions and potential sabotage – fears that materialised in late 2022 with the destruction of the Nord Stream gas pipeline. International sanctions against Russian oil created still more chaos, as the world’s oil importers were forced to reorganise global supply chains virtually overnight.

The supermajors benefited handsomely from consumers’ pain related to the high prices, and from the havoc and devastation wreaked on Ukraine and its people. Oil prices spiked to their highest level since 2008, and oil industry profits and cash flows spiked to their highest level ever. For the first time in decades, the supermajors generated enough spare cash that they could boost payouts to shareholders, retire some debt and stockpile cash, all at the same time.

Nearly a year and a half later, that financial bonanza has ended. Global oil markets have largely adjusted to Russia’s chaos. Despite Saudi Arabia’s attempts to stem price declines by trimming output, oil prices have fallen back to earth over the past two quarters. The supermajors have seen their cash flows dwindle as a result. ‘For now, the oil industry’s Ukraine dividend has evaporated – suggesting that talk of a long-term rebound in the oil industry’s prospects was mostly just talk,’ comments IEEFA.

Rising North Sea oil and gas decommissioning costs 
In other news, inflation and increased competition for resources from offshore renewables have raised the cost of decommissioning redundant oil and gas infrastructure in the North Sea by billions of pounds, according to the latest analysis from the North Sea Transition Authority (NSTA) which now estimates the total cost to be around £40bn, up from last year’s £37bn estimate.

On the upside, this could benefit local contractors, with approximately 70% of the work expected to be undertaken by UK-based firms, notes the NSTA. Over the next decade, about £21bn is projected to be spent on removing wells, pipelines, and platforms, while £8bn has already been spent between 2017 and 2022.