OIL GIANTS’ FALLING INCOME: CAUSES AND PROSPECTS

Oil and gas majors in Europe, Asia and even the United States are seeing their profits decline, even though many are still producing more oil than before. The reasons include not only the falling cost of oil, but also the decline in oil refining margins.

The world's largest oil companies, which just a couple of years ago were reporting record profits, are now reporting declining revenues. And for some of them, it's very serious.

It would be wrong to attribute the poor results only to the decline in the price of black gold, as many other factors come into play. In addition, they differ slightly in different countries. However, there is a general problem.

The good times are ending

Among the oil majors whose profits fell most sharply was Britain's BP. In the third quarter of this year, the company's profits fell 30% to $2.3 billion, despite oil and gas production increasing 3% compared to the same period in 2023, reaching 2.38 million boe per day.

The main reason for the decline in profits, as the company claims, is the decline in profitability of oil refining and the decline in actual results in oil trading. For this reason, the company's CEO Murray Auchincloss announced the intention to focus on highly profitable activities, moving away from the strategy of his predecessor Robert Looney, which was aimed at developing renewable energy sources. As a result, BP abandoned its main goal of reducing oil and gas production by 2030 and announced the sale of its onshore wind farms in the United States, as well as the possibility of selling a stake in a project to extract energy from seawater.

It is also worth adding here the huge losses, from which BP has not yet fully recovered due to its exit from the Russian market in 2022 (Reuters estimates them at $25.52 billion), when the company announced that it would stop new transactions to purchase oil and gas from Russia.

Profits at other major companies in different parts of the world also fell:

· China's Sinores ' net profit fell to 8.03 billion yuan ($1.1 billion) in the third quarter of 2024 from 17.9 billion yuan a year earlier;

· PetroChina reported a net profit of 43.91 billion yuan (US$6.2 billion) on the stock exchange. In the same period in 2023, the figure was 46.4 billion dollars. In addition, especially for processing, chemicals and new materials, profits fell to 1.7 billion yuan for the quarter from 9.5 billion yuan a year ago;

· Indian Oil Corp reported a nearly 99% drop in profit for the July-September 2024 period to Rs 1.8 billion ($21.4 million).

The reason is the same as that of Britain's BP and China's Sinopec with PetroChina: a reduction in the sales margin of refined petroleum products. The IOC's average gross refining margin for April-September fell to $4.08 per barrel from $13.12 per barrel a year earlier.

· Norway’s Equinor reported a 13% decline in adjusted operating profit in the July-September period;

· British Shell reported a 4% quarterly decline in adjusted net profit to $6 billion, although the result beat analysts' expectations;

· France’s TotalEnergies posted its lowest adjusted quarterly net profit in three years: $4.1 billion.

In the United States, the profitability of oil companies is also not as good as last year and the year before. The energy sector recorded the largest decline (year-over-year) in profits among all eleven sectors of the S&P 500 for the third quarter of 2024, at -27.3%. Therefore, ExxonMobil's financial results are expected to be down tomorrow;

At the same time, American analysts have lowered their EPS (profit per outstanding share) estimates for energy companies starting in the third quarter. And, what is extremely important, among these “leaders” are oil giants: Chevron (down to $2.43 from $2.76), Exxon (down to $1.89 from $2.00) and Marathon Petroleum (down to $0.98 from $2.25).

What is the reason and for how long?

The most obvious factor in the decline in profits among major oil companies is the decline in oil prices on a year-on-year basis. In the third quarter, the average price of oil on the world market was $75, which is almost 8% lower than the price in the same period of 2023. For this reason, in Saudi Arabia, revenue from the sale of black gold fell by 6% in August compared to July, reaching $17.4 billion, the lowest in more than 3 years.

In addition, in the case of Europe and the UK, tax policy and environmental requirements also played a major role. In other parts of the world, there were no major problems with this. But what most cases of falling profits of oil companies in different countries have in common is a decline in the revenues of the oil refining divisions.

In a commentary for NiK, the head of the Center for Strategy and Technology Analysis for the Development of the Fuel and Energy Complex, Vyacheslav Mishchenko, drew attention to the fact that everyone is counting from a very high base of last year or even the last two years when the profits of the majors were unusually high. Here it is more likely to speak of a decrease in the period.

“For many, the decline in oil refining margins played a major role. This happened due to many factors. First of all, the state of downstream (oil refining, distribution and sale of final oil products) and taxes in different countries this year. It is impossible to unify all the reasons due to the specific geography of different companies, their projects and the tax policies of local governments,” the expert says.

He also pointed out that the price of oil also plays a role. The higher it is and the more regulated the market, the lower the margin. These factors coincided in a specific period, so we see a decrease. In some regions it is higher. This is also influenced by environmental standards, which companies in Europe and the United Kingdom have to take into account.

“Oil refining in Europe has already been buried more than once. Even 10 years ago it was in decline, margins were falling. And then, in 2016, the industry boomed again. They predicted a “golden age” of prosperity. Now we are seeing a decline in the region again, but I would not consider it a long-term trend. It's just that the market structure, prices and taxation have created a similar situation for companies for a while,” explained Vyacheslav Mishchenko.

Another expert, Freedom Finance Global's leading analyst Natalya Milchakova, explained that the decline in profits of many large companies is associated, first of all, with the decline in oil prices. In the third quarter of 2024, the price of Brent fell by 16% compared to the second quarter. Secondly, there is a connection with the decline in demand for oil due to the craze for electric cars and "hybrids", especially in China.

“In China, electric vehicle sales grew 43% year-on-year in August 2024, and the combined share of fully electric and hybrid vehicles reached 53% of the market. In Europe, electric vehicle demand is more moderate, mainly due to high inflation. But with most of the global oil demand coming from China and Southeast Asia, it is no surprise that global oil demand as a whole is stagnant.

Oil refining costs in Europe and the United States have increased significantly, mainly due to logistical difficulties and high inflation, as a result refining margins are declining; the factor of high inflation next year will not be as relevant for the global economy as it was this year and the previous two years, so oil refining margins in the United States and Europe may increase in 2025,” the expert explained.

However, oil multinationals, says Natalya Milchakova, may face falling oil prices, which will not affect their revenues and profits any less. And a further decline in oil prices is possible if the geopolitical situation in both Europe and the Middle East is calmer next year.