Historic profits in oilpatch on track to continue as global oil demand set to jump yet again
Companies want to target debt, pay shareholders rather than spend on new projects
One by one, oil companies in Canada and around the world are releasing their latest financial results, which show 2022 was the most profitable year in the history of the oilpatch.
Commodity prices have softened to start 2023, but this year is already shaping up to be nearly as rosy as demand for gasoline, diesel and other fuels remains robust and could soar even higher in the months ahead.
There are many ways the sector could spend those hefty returns, but so far companies seem unwilling to waver from their primary strategy of paying down debt and passing on a good chunk of those profits to shareholders.
The industry currently faces a bit of a conundrum, said Jeremy McCrea, managing director of energy research with financial services firm Raymond James: The world's energy consumption is rising, but companies are reluctant to ramp up spending to dramatically boost oil and natural gas production.
Instead, they are enjoying the jumbo profits — while they last.
"I suspect we're going to keep seeing those results going forward," said McCrea, who is based in Calgary. "As these companies see these profits, there's not a motivation to suddenly go and say, 'Let's go spend a bunch of money here now and potentially not make these profits over the next few years.'"
Big money for Big Oil
This week, Canadian oilsands heavyweights Suncor Energy and Cenovus Energy became the latest companies to post exorbitant profit levels, as both Calgary-based firms rode towering oil prices throughout last year.
In total, the global industry's profits last year reached about $4 trillion US, according to the International Energy Agency (IEA), compared with an average of $1.5 trillion in recent years.
The organization expects oil consumption to jump in 2023, mainly the result of China's economy revving up as COVID-19 pandemic restrictions are lifted. World consumption will climb by two million barrels a day, the IEA said, to an average of 101.9 million a day.
"Following Beijing's late-2022 about-turn on its stringent anti-COVID restrictions, we expect Chinese oil demand to quickly pick up steam," the agency said in a recent report.
At the same time, Russia's oil production may decline as financial sanctions increase following its invasion of Ukraine on Feb. 24, 2022. Those are a few of the reasons why some in the industry expect oil prices to remain strong this year.
"Our view is that we're still in a constructive pricing environment," Kris Smith, Suncor's interim president and CEO, said during a conference call with analysts. "Obviously, [it's] not going to be what we saw in terms of the records of 2022."
A barrel of West Texas Intermediate, the North American benchmark, traded above $75 US this week, compared with an average of about $95 last year.
How to spend profits
The sector is facing pressure to use those profits in a variety of ways. There are calls for increased investment in renewable energy and to take much more meaningful action on climate change by cutting 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 cope with affordability concerns.
In Canada, those profits could also be used to address environmental liabilities as tens of thousands of old oil and gas wells are in need of reclamation, and tailings ponds in the oilsands continue to grow.
For most oilpatch companies around the world, the financial priorities for the year ahead are unchanged from 2022, as they keep expenses in check, pay down debt and give much of the spare cash to investors.
Last year, Suncor cut 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 buying back shares.
It's those kinds of profits, however, that also have politicians in several countries eyeing, or implementing, windfall taxes on oil companies.
Seeking Ottawa's help
Canadian oil and natural gas production was largely unchanged last year, despite calls by the federal government to turn on the taps to help alleviate Europe's energy crisis following Russia's invasion of Ukraine.
Production is expected to increase by about four per cent in 2023, according to the ARC Energy Research Institute, based in Calgary.
Total profits in the Canadian oilpatch are expected to reach about $78 billion this year, which over the last decade would only be topped by an estimated $120 billion in 2022, according to ARC's most recent research report.
The level of spending by the industry is expected to climb as drilling activity picks up, although it will be a modest increase.
"We have constraints all over North America," said Jackie Forrest, ARC's executive director. "The oilfield service industry has been through a couple of successive downturns now and people have left the industry. So even if companies wanted to spend more money, I don't think there's enough equipment or people in the field," she said.
The cash windfall is not dissuading oilsands companies from approaching the federal government for more funding to reduce emissions.
Executives are lobbying Ottawa for a more robust commitment to subsidize the cost and operation of carbon capture and storage facilities, similar to the financial support offered in the United States.
"I'm optimistic that if it's not in the budget speech, it will be soon thereafter that we will get not just clarity but resolution — so we can move forward on these projects," Imperial Oil president and CEO Brad Corson said last month, about wanting more federal and provincial government support before oilsands companies decide to spend billions of dollars on a proposed carbon capture facility in Alberta.
Some critics, including federal Environment Minister Steven Guilbeault, say the oilpatch already has plenty of spare cash and isn't moving fast enough to address climate change. That's why some would prefer the federal government tax the industry's profit and invest directly in environmental projects.
The oilsands represent about 11 per cent of Canada's total greenhouse gas emissions, while the rest of the oil industry and all of the natural gas industry account for 15 per cent.
With files from the CBC's Meegan Read