Fracking: billions invested in fracking | WWN

US energy companies invested massively last year: Exxon took over Pioneer for almost $65 billion and Chevron bought Hess for $60 billion. Occidental was a little more modest: Crownrock snapped it up for twelve billion. Despite the climate crisis, at least US companies seem to be focusing on growth. What all three deals have in common is that they involve investments in… Fracked oil from the USA. Thanks to this technology, the USA is now the largest oil producer in the world, ahead of Russia and Saudi Arabia. At the same time, the world’s largest oil company, Saudi Aramco, canceled its planned expansion: The company had planned to increase its production capacity to 13 million barrels, 159 liters each. It will now remain at its existing capacity of twelve million barrels.

Climate crisis affects oil demand

Why do companies have such different strategies? Everyone is aware of the market environment: the climate crisis requires a rapid exit from coal, oil and gas and this is now at least becoming apparent. Sales of cars with internal combustion engines already peaked in 2017. Back then, 86 million combustion engines were sold; today there are still 70 million. There is only growth in electric cars. This is central to oil demand because road transport is responsible for half of oil consumption. The rest is distributed between the petrochemical and other industries, oil heating and aviation and shipping. Some of these areas will demand more oil in the future, but whether this will offset the decline in road traffic is questionable.

The head of the International Energy Agency (IEA), Fatih Birol, therefore warns against further investments in oil production: “Continuing as before is neither socially nor ecologically responsible,” said Birol last year. An IEA report also clearly states: “The $800 billion currently invested annually in the oil and gas sector is twice as much as what would be needed in 2030 if warming were limited to 1.5 degrees .” Instead of $2.5 billion, corporations should invest $400 billion in renewables if the goals of the Paris Agreement are to be achieved. So are the corporations betting that the goals will be missed? Not necessarily, because it also seems clear to US companies that they are in for a roller coaster ride when it comes to oil prices.

This is what the focus on fracking suggests. Fracking requires relatively little capital compared to a large oil field and can be ramped up and down flexibly depending on where the oil price is at the moment. “After three major oil price falls in 15 years, it is widely accepted that another one is likely to happen,” said Alex Beeker of energy consultancy Wood Mackenzie.

The cheap alternative

For this reason, companies are trying to reduce production costs to $25 to $30 per barrel. That’s about half as much as ten years ago. So they’re investing in fracking while also getting rid of older and more expensive oil fields. They also return a lot of money to their shareholders in the form of dividends or stock buybacks. Last year they paid out over $100 billion again, even though their profit was almost halved compared to 2022.

The fact that the large oil and gas companies are now suffering from consumption is also reflected in their valuation: While ten years ago they accounted for 14 percent of the market capitalization of the S&P 500 index of the world’s largest companies, this share is now 4.4 percent shrunk. From the perspective of the capital markets, energy companies have lost two thirds of their importance in just ten years. Thanks to the rapidly falling costs of batteries and renewables, this process will continue over the next few years. Ultimately it’s about who is the last one standing in the ring. Low costs and great flexibility are crucial in this phase. US companies also seem to have understood this and are optimizing their portfolios accordingly. They will still continue to shrink.