Outlook: Energy Producers Affected by Geopolitical Trends, Windfall Taxes & US-China LNG Scenarios

In case you didn’t already know, Equinor was one of the saviors during the European energy crisis when company increased production to 1.4 billion cubic metres (bcm) ahead of summer 2022. This was in response to soaring energy prices and security concerns as a result of the Russia-Ukraine conflict.

The Norweigan-based Equinor’s move was also somewhat controversial given that one of the European Union’s biggest energy companies had vowed to invest more in a renewable energy strategy.

Most of the media sources consistently report that Equinor’s hydrocarbon output will decline after 2026, reaching about 2 million barrels per day (bpd) of oil equivalent by 2030, thus ensuring that the company’s intentions are on a renewable energy future.

For instance, Equinor CEO Anders Opel told investors at a meeting in London: “We want to be creating value on the way to net zero.”

On the way, the company raked in some interesting P&L figures: a net income rising from $8.5 billion in 2021 to $28.7 billion in 2022, while posting a consistent loss of $136 million in 2021 to $184 million in 2022 from renewable energy businesses.

Speaking at Davos 2023, Opel told reporters that Europe’s energy crisis is directly related to the Russia-Ukraine conflict, noting that the situation around investment in news sources of gas will cause electricity bills to stay higher for many consumers.

According to Kpler, Norway is now Europe’s primary source of gas supplies, and the government approved Equinor’s plans to increase production from the Osberg field. This plan comes with €1 bn of investments by Equinor to upgrade the gas infrastructure so that more gas and oil reserves can be recovered for export markets. Two new compressors at the Osberg Field Center were announced 1 December 2022.

Osberg forms part of the critical North Sea Field complex, shared with the United Kingdom, which has recently come under the hot seat due to windfall taxes.

For British Petroleum (BP) the world is headed for a sustainable energy future that should be affordable and secure — known as the energy trilemma.

BP CEO Bernard Looney has been very vocal about the company’s enhanced view of the Energy Transition on the company’s future outlook on oil and gas investments. According to figures reported by Upstream, the company’s capex of $16.3 billion comes with a 30% share in so-called transition growth engines. This percentage comes dangerously close to the company’s massive increase in the tax rate from the UK’s EU’s windfall taxes.

At a rate of 34%, the company had to pay $15.1 billion on the company’s global operations in the oil and gas sector. This includes $700 million in windfall taxes paid for its North Sea operations alone. It’s no wonder that UK’s biggest energy company is seeking to invest $60 billion in its energy transition over the next six year. It’s clear that the company’s oil and gas operations simply would not be able to thrive under the new windfall tax regulations in the UK and EU.

One way to successfully track the company’s progress on Environment, Social, Governance (ESG) frameworks, would be to look at how those investments in Energy Transition and Clean Energy Technologies are being spread out for domestic production (in the U.K.) versus other global energy production investments.

For example, Shell found that its offshore discovery in Brazil was not commerically viable. Because of the failure in locating hopeful oil and gas deposits, the company returned the Saturno production area, located in Brazil’s lucrative Santos Basin Pre-Salt Block.

This circumstance highlights the ongoing risks associated with oil and gas drilling, not only because of external factors like the ones mentioned in TotalEnergies’ African projects, but also because of issues related to commercial interests. In this case, Brazil’s Floating, Production, Storage and Offloading (FPSO) market is a tremendous attraction to the world’s biggest energy producers. This means that hitting discoveries in offshore Brazil has a promising return on investment (ROI) because of the country’s developed FPSO market.

Equinor’s plan to invest €1 bn to upgrade the gas infrastructure in its North Sea Field operations, on the other hand, is seen as a lower risk for the European supermajor to explore and produce more oil and gas reserves that can be recovered for export markets.

These are the high-low risk scenarios to consider going forward for energy production investments around the globe. If the world is headed toward a more sustainable energy future, then European oil and gas supermajors are operating on the precipice of climate change action and shareholder values.

China is on the radar of oil and gas producers. The International Energy Agency (IEA) has been warning about coal since July 2022, when they released a Coal Market Update explaining a surge in gas-to-coal switching as a result of high costs for natural gas imports. This scenario is largely an issue of China’s and India’s industrial production. As the two countries continue to compete for foreign direct investment (FDI) and export market share.

This is probably why analysts are pointing to China’s mad rush for LNG as a sign of the future dilemmas for global energy demand.

Statistics cited by Global LNG Hub show that since China has invested in its LNG infrastructure, that the amount of imports have increased from 50 billion cubic metres (bcm) in 2017 to 91 bcm in 2020. Following this uptrend, China became the world’s largest LNG importer by volume in 2021, only to be surpassed by Japan, formerly the world’s top importer before 2021, due to China’s covid-19 restrictions on economic recovery.

But China’s LNG push as a carbon reduction strategy is still in full swing. For example, Bloomberg reported that because 15% of new long-term LNG contracts belonged to China that it would gain significant market share over LNG import competition. Argus also highlighted how China continues to invest in LNG terminal capacity, which indicate how seriously the country is taking into consideration the future of gas imports as a main source of the country’s overall energy composition. Thus establishing the link between infrastructure investments and future industrial production.

This is a trend that is picking up some speed with the United States’ Inflation Reduction Act (IRA), not to mention China’s Belt and Road Initiative (BRI) which is all about providing for the developing world’s infrastructure needs that would supposedly facilitiate new pathways for global trade. (This is my personal interpretation of BRI; it doesen’t mean I necessarily agree with the facts or outlook.)

The biggest story for LNG in 2022 was the China-Qatar supply deal — touted as the world’s largest-ever LNG supply deal at $60 billion over a total of 27 years.

Upon the news of this landmark deal, the Carnegie Endowment for International Peace published an in-depth report about its significance to global energy dynamics and geopolitical trends. One of the key points mentioned in the report is that this deal brings China much closer to Qatar, and forms part of the country’s “multifaceted engagement strategy to expand its economic and geopoltical footprint.”

Two of the United States’ biggest LNG producers are Cheniere Energy and Freeport LNG. These two companies have played the biggest role in what is being called a First and Second Wave of US LNG production.

Now, a Third Wave has been cited by Wood Mackenzie is one of its latest research findings. The title of the report is Third wave US LNG: a $100 billion opportunity.

They argue that the US position as a world-leading LNG producer will be a boon for carbon reduction strategies worldwide. With new final investment decisions (FIDs) commencing around the US, long-term deals for US LNG supply are likely to increase substantially for energy security as well.

Cheniere Energy made a total revenue of $33.42 billion in 2022. This was mainly attributed to an increased demand form European countries in light of the fallout with Russia over the gas price cap and sanctions. It’s clear that the European Union (EU) views LNG as a stable supply for its energy security needs. In addition, it is a force multiplier as a carbon reduction strategy on the continent. Just look at the overall trends toward LNG from some of the world’s largest producers: Freeport LNG is resuming natural gas exports in March; Chevron is increasing shale production in the Gulf of Mexico; and Shell is calling for more investments in liquefactions projects over the next decade.

I will further illustrate by looking at one of Australia’s biggest energy companies: Woodside Energy.

This company has went under the radar, and I don’t know why. Because they landed one of the biggest deals in the energy sector during a time when all of the attention has been focused on energy demand and security.

In November 2021, the Perth-based Woodside Energy announced its FID on the Scarborough offshore gas project in Western Australia. This deal was finalized after the company successfully acquired BHP Group’s petroleum division of the project through a binding share sale agreement to merge with BHP’s oil and gas venture in the Scarborough gas field. According to a report by Energy Flux, this merger will create the largest company in Australia in terms of market capitalisation at A$41 billion.

Australia was the world’s largest LNG exporter in 2021 when revenues hit $35.3 billion in 2021. This was due to China’s rise as the world’s largest importer, of which 31.6 million tonnes of the country’s LNG imports came from Australia.

At a time when Australia’s market share over LNG exports is projected to start declining vis-a-vis Qatar and United States, Woodside Energy dominated LNG production in 2023. According to The Sydney Morning Herald, Woodside made more than $1 million an hour in profits due to the rising demand for natural gas. It also reported that Woodside made $6.50 billion in net profits for the year of 2022, since the BHP merger was taken into account.

In conclusion, the issues around areas of production investments and the dilemmas facing producers in the global energy demand scenarios are critical to geopolitical trends in the global economy at present. But what does this mean for future industrial policies?

Although LNG is one of the most important indicators for carbon reduction strategies, energy producers like Woodside Energy are taking Net Zero projects a step further, especially in advantageous markets like the United States, where the company announced it would launch a hydrogen project — H2OK — in Oklahoma at the Westport Industrial Park in Ardmore.

These diverging and converging scenarios around Coal, LNG and clean energy technologies, will put into perspective for the oil and gas industry how The Long-Game of Oil & Coal Production Could Force the Momentum in Carbon Reduction Strategies.

One way to successfully track the company’s progress on Environment, Social, Governance (ESG) frameworks, would be to look at how those investments in Energy Transition and Clean Energy Technologies are being spread out for domestic production versus other global energy production investments.

In the UK, Equinor’s plan to invest €1 bn to upgrade the gas infrastructure in its North Sea Field operations, for example, is seen as a lower risk for the European supermajors to explore and produce more oil and gas reserves that can be recovered for export markets. On the other hand, I offer that Shell’s “risk-adjusted returns” ethos will see the company exit many of the geopolitical flashpoint cases, especially in Southeast Asia, where competition with China in the energy sector is going to be fierce.

These are the high-low risk scenarios to consider going forward for energy production investments around the globe. If the world is headed toward a more sustainable energy future, then oil and gas supermajors are operating on the precipice of climate change action and shareholder values.

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