Are activist investors responsible for high oil prices?

The adage of shareholder return has now become a staple of the American oil industry. Major state-owned oil companies are not increasing production despite rising prices and tight supply. Instead, they return money to shareholders. And it could continue, raising the price cap. From a certain point of view, it is the right thing to do to keep shareholders. The oil industry is currently going through a reputational crisis associated with the rise of the activist investor whose aim is not just to make money, but also to force companies to become more socially responsible. environmental, social and societal.

The ESG trend in investing has accelerated, and quickly. Activist investors with a predominantly E-focused ESG agenda have challenged oil company priorities, and they are increasingly successful. Even Exxon earlier this year announced plans to become a net zero company by 2050. In the meantime, they remain reluctant to ramp up production.

Dan Eberhart of Forbes wrote in a recent article how the ESG trend is affecting the US shale industry’s swing producer status. The telltale sign that ESG is indeed affecting the industry is the distinction between how public companies – under ESG pressure – react to rising oil prices, versus how private companies – which do not. don’t need to make shareholders happy – react.

Citing a study by Evercore ISI, Eberhart noted that private oil companies in the shale play planned to increase their capital spending by up to 42%, while state-owned companies would increase their spending by half. In all fairness, they are still planning to increase capital spending. However, not all may be spent on new oil production.

The European supermajors are also a good example. The pressure on the oil industry in Europe is much stronger than in the United States, and it comes from several directions. As a result, BP, Shell and TotalEnergies are not only expanding into low-carbon energy, but also planning to drastically cut their oil and gas production to make their shareholders – and governments – happy.

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Meanwhile, in the United States, private drillers are the only ones with hopes of supply. In a report last September, IHS Markit provide that US oil production would increase by 800,000 bpd this year, noting that most of the increase would come from private and independent oil companies. These corporations have no shareholders to report to and remit money to.

Right now, oil is much more expensive than it was last September. No wonder then that IHS Markit’s Daniel Yergin in December provide that U.S. oil production could actually increase by almost a million bpd this year.

“The United States is back. For the past year, year and a half, OPEC+ has been running the show, but US production is already coming back, and it will come back more in 2022,” Yergin told CNBC in late December.

Private oil companies, according to EIA data, account for about a third of all US oil production. This means that while US crude oil production certainly has room to grow, that room is limited as public majors are reluctant to return to full growth in the face of ESG pressures from investors.

Yet, over time, these pressures may weaken, at least temporarily, in the face of market performance. Rising oil prices pushed energy stocks higher and prompted the industry to ponder production growth. Bank of America recently forecast that spending on drilling and completions in the United States will increase by 22%, compared to 25% globally. And he also projects that U.S. oil production could add 900,000 bpd this year, all from the Lower 48.

The ESG investing trend is certainly a force to be reckoned with. Some investors are stepping up and leaving the oil industry altogether because of this force. Fortunately for the oil companies, there is always another buyer with perhaps a little lower environmental standards and a little more profit-oriented.

Global oil supply is falling short of demand, and regardless of the morality of fossil fuels, most investors don’t invest because it’s the moral thing to do, but because they want to make money. the money. And such an imbalance between supply and demand for the most used commodity in the world is certainly a context in which a pragmatic investor would like to register. Those who fail to do so will effectively contribute to even higher oil prices.

By Irina Slav for Oilprice.com

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Steve R. Hansen