- The era of Big Oil could end sooner than its massive profits suggest, analysts told Insider.
- Fossil-fuel companies are under pressure to limit growth.
President Joe Biden can't quit fossil fuels even though he knows he needs to.
Biden, who's made fighting the climate crisis a priority, broke a key campaign promise this month by authorizing one of the largest-ever oil-drilling projects on federal land in an untouched area of Alaska known as North Slope.
Biden's move reflects the fix the world is in after Russia's war in Ukraine sparked global energy shortages that sent oil and gas prices soaring last year. Western oil giants cashed in with a record $221 billion in combined profits, raising what experts told Insider are a pair of trillion-dollar questions: How swift will the transition to clean energy be and when will the era of Big Oil come to a close?
It may come sooner than today's massive fossil-fuel profits suggest, half a dozen analysts said. The industry's long-term trajectory is downward, even if there are more boom-and-bust cycles along the way. They caution that the pace of the energy transition still remains uncertain given that today the world runs on 80% fossil fuels and only 20% renewable energy.
In general, however, oil and gas companies aren't plowing profits into undeveloped drilling sites the way ConocoPhillips is with the so-called Willow project in Alaska, analysts said. In many cases, companies are using the money to try to increase production in existing fields, while also buying back their stock to boost share prices. Oil demand could peak in the early 2030s in part because of the rise of renewables and electric vehicles, while natural gas' horizon is thought to be closer to 2045 because heavy industry doesn't have cleaner fuels to turn to at the scale needed.
"In the grand scheme of the oil industry, Willow isn't that large a project," said Andrew Logan, the senior director of oil and gas at Ceres, a sustainability nonprofit that works with investors.
Willow is expected to max out at 180,000 barrels of oil a day, or about 1.5% of US production, and generate at least 239 million metric tons of greenhouse-gas emissions over 30 years — equivalent to the annual greenhouse-gas emissions of 64 coal plants.
A White House official previously told Insider the government's options to block the project were limited because of leases granted to ConocoPhillips by prior administrations. The official added that ConocoPhillips will give up 68,000 acres of existing leases and drilling was limited to three of five proposed sites.
Willow "understandably looms large" for environmentalists, given where it is and who approved it, Logan added. It also undermines the US's credibility when it asks other counties to crack down on fossil fuels to avert catastrophic levels of global warming.
But the worst-case scenario for the environment — that oil and gas companies reinvest all their extra money to keep growing — isn't happening, Logan said.
"For a variety of reasons, they are under a lot of pressure from investors not to do that," he said. "It's not just climate concerns. In the past, every time there's a boom, companies plowed money into oil and gas projects when costs were high, and returns were poor. So there's been a push for capital discipline."
The role of oil and gas companies in the energy transition is an ongoing debate, analysts told Insider. The industry is split over whether it should use extra cash to diversify into clean energy or stick to its core business, shrink over time, and return excess money to investors.
Where Big Oil profits are going
The European companies BP and Shell are diversifying their businesses into more renewables, while their North American counterparts, like Exxon and Chevron, are shoveling a majority profits back to shareholders, Logan said.
Chevron, ExxonMobil, and BP declined to comment. Shell and TotalEnergies didn't respond to requests for comment.
Even some oil executives acknowledge the best acreage for drilling and fracking is largely used up, including in the Permian Basin, which extends from Texas to New Mexico. Scott Sheffield, the CEO of Pioneer Natural Resources Co., said this month that oil production could peak in the Permian, which is the largest oil field in the US, in five to six years.
But the war in Ukraine means that at least in the short term, the industry will boost production to fill the gap left by Russian supplies, according to Michele DellaVigna, the head of oil and gas research at Goldman Sachs. At least 20 liquefied-natural-gas plants need to be built — mainly in the US, Qatar, and several African countries — to fuel exports, he added, and companies will bring production up by drilling more wells offshore.
"If we don't develop gas, we burn more coal. That's what happened last year, which means higher emissions and an affordability crisis, which isn't consistent with ESG," DellaVigna said, referring to environmental, social, and governance principles that some investors are pressuring companies to adopt.
"The problem is we've underinvested in energy, both oil and gas and renewables," he added. "So now we need investment across the spectrum. Our forecast has renewables growing aggressively, but also oil and gas, although never quite to the peak of 2012 to 2014."
There was a wave of gas-to-coal switching in Asia last year because gas prices were so high, according to the International Energy Agency. The trend helped send greenhouse-gas emissions to their highest levels on record, though the increase would've been worse without the growth in solar, wind, and electric vehicles.
In the long term, however, Russia's war might expedite the transition to renewables, said Hugh Daigle, an associate professor at the University of Texas at Austin. He pointed to the way Europe — which many energy analysts thought was on the verge of a severe crisis this winter — quickly decreased its dependence on Russian gas, in part by building renewables, a model Daigle expects other countries to follow.
"If you're looking to really get energy independence and energy security, you don't want to be relying on other countries whose interests might not align with yours," Daigle said. "You want to be cultivating domestic sources of energy that can provide energy at low cost, both monetarily and environmentally. So I think that's on a lot of people's minds right now in a way that maybe it wasn't a year ago."
The transition to renewables isn't just about building more solar panels and selling more electric vehicles, said Prakash Sharma, the vice president of multi-commodity research at Wood Mackenzie.
"With every step of decarbonization, you need more electricity," he said. "That demand will grow three to four times over the next 30 years over current levels. And it's not just a question of building new supply, like more solar, wind, and EVs, but also building the infrastructure to deliver that power, which is missing today."
That's where national policies like the Inflation Reduction Act — which became law last year in the US — and Europe's plan to reduce its dependence on Russian oil and gas come in. Despite the policies, the transition will be challenging, given long delays in permitting new infrastructure and uncertainty about the availability of critical minerals like lithium, Sharma said.
Critics deride oil and gas companies for not investing more of their windfall profits into the transition, especially after the International Energy Agency in 2021 said that to meet a global goal of net-zero emissions by mid-century there shouldn't be any development of new oil and gas fields.
BP, which is considered a leader in the energy transition, in January announced less ambitious targets to cut oil production and, therefore, its greenhouse-gas emissions. The UK company cited the need for an "orderly" energy transition. BP is boosting spending on both fossil fuels and low-carbon energy, with the latter accounting for about 30% of capital expenditures in 2022 with plans to grow that to 50% by 2030.
That percentage is lower at companies like Exxon and Chevron. Exxon in December said more than 70% of its capital investments in the coming years would flow to oil and gas development in the Permian Basin, Guyana, and Brazil, as well as LNG projects. From 2022 to 2027, Exxon plans to spend $122 billion to $147 billion on capital projects. As much as 14% could go to lower-carbon efforts like carbon capture and storage, cleaner fuels, and reducing methane emissions from oil and gas infrastructure.
Sharma said he didn't see oil and gas companies as an obstacle. The world is quickly plowing through its carbon budget — the emissions it can afford to emit while keeping global warming below catastrophic levels — so technology like carbon capture, storage, and removal that oil majors are investing in is becoming more important.
An EV future can't come soon enough
Patrick De Haan, the head of petroleum analysis at GasBuddy, called the future of Big Oil the "trillion-dollar question." He told Insider the biggest threat facing the industry was the rise of electric vehicles, though De Haan expects it to be decades before most Americans drive EVs.
"To get the US to 25% electric vehicles, it could take 10 to 15 years," he said, adding that reaching 50% could take another 10 to 25 years.
Even if EVs costs continue to fall, and the US manages to build a widely accessible charging network — something Biden is working with Elon Musk and Tesla to expedite — De Haan said broad adoption would take time. While California and Europe are banning the sale of gas-powered cars by 2035, it's likely many Americans will still be pumping gas for years to come. Some 90% of new vehicles sold today still have internal-combustion engines, De Haan noted.
This is among the reasons De Haan doesn't expect US oil demand to decline significantly for at least 15 to 20 years, calling it a "long, slow-moving process." And while Big Oil's finances may begin to show some cracks over the next decade, he doesn't expect them to "suffer financially" for another 25 to 35 years.
He pointed to developing countries that don't have the money a country like the US has to fund the renewable-energy transformation, even if renewables appear to be the cheaper energy source in the long run. They see fossil fuels as their "best bet" for the foreseeable future, he said.
"It's always hard to predict the last boom," Logan said. "If everyone agrees that this is the last one, that helps set up the next boom because underinvestment leads to higher prices, which leads to overinvestment that leads to busts."