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International oil companies are sitting on cash piles worth billions of dollars but still not prepared to invest in oil and gas anymore. They are paying back dividends to their shareholders, and buying back shares. They are leaving the investment part to the OPEC-Plus countries and companies to do so, while knowing quite well that the supply situation is tight, and demand is surging. ExxonMobil reported its highest earnings of $7 billion in the second quarter since 2017, with cash generation of $12 billion. Chevron, the second largest American company, generated cash of $6 billion and reduced its investments by 22 percent.
The same is the case with European oil companies, which are investing more in renewable energy and electricity, with Shell at $6 billion in free cash flow and facing some revolt of being divided into two companies. However, the big question is that, in case of division of international oil companies, what will they do with fossil oil? Will they maintain low investments, and seek government’s financial assistance, despite the fact that it will take years to find a viable longterm alternative in the face of the surge in the oil price at today’s level of $80 and above? The sudden market surge in oil demand, coupled with higher oil prices reaching the current level of $80 and above after COVID-19, shocked, or rather surprised, energy analysts and consultants.
The surge, and call for, and purchase of any item in the market, plus the saving of cash by the consumers have resulted in such a situation. Lockdown, and limited travel and transportation led to the increase in the demand for energy beyond everybody’s expectations. As the surge in oil demand is not enough, the critical situation of gas supply and standoff between Europe and Russia have fueled the market, with the arrival of winter season. This has forced the switch to oil from gas, putting added pressure on oil and gas markets at the same time.
There is an additional requirement of 500,000 barrels to an already tight supply. OPEC+ however is adhering to its commitment of adding 400,000 barrels per day. Nevertheless, the oil producing countries are still being blamed, while the non-OPEC-Plus countries and international oil companies are making surplus cash amounts, despite the reluctance in investing and putting more money in their core business. Meanwhile, shareholders are forcing diversification and investing in non-fossil energy, while they are not sure themselves how long it will take and if it is actually feasible in the first place. Final consumers of oil and gas are urging for more investments in both in order to ease pressure on oil prices, which is hurting their pockets. International oil companies are in between two hard directions with splits within, while oil is generating dividends awash with cash flow, given that they have many options to choose unlike the past.
By Kamel Al-Harami Independent Oil Analyst