Final Winner: Oil Tycoons? ... Growing Debate on Windfall Tax [Climate Policy at a Crossroads②]

Record High Oil Company Profits Amid Rising Crude Oil and Gas Prices... EU Proposes 195 Trillion Won 'Windfall Tax'
Oil Companies Expand Green Investments... Shell CEO "Taking Time to Review Major Green M&A"

[Photo by Reuters Yonhap News]

[Asia Economy Reporter Park Byung-hee] Following the Ukraine war, international oil and natural gas prices have surged, leading oil and gas companies to record unprecedented profits. Until the end of last year, these oil tycoons, who had been sidelined due to heightened interest in climate change, have now established themselves as the biggest winners this year.

With their increased cash reserves, they are diversifying their businesses to include eco-friendly renewable energy.

The two major U.S. refiners, ExxonMobil and Chevron, posted record net profits of $17.85 billion and $11.62 billion respectively in the second quarter. British oil company Shell recorded a record net profit of $9.1 billion in the first quarter of this year, then surpassed it with $11.5 billion in the second quarter. As investors flocked, Shell's stock price has risen more than 40% since the beginning of the year.

While the world suffers from inflation due to soaring crude oil and gas prices, only oil and gas companies are making enormous profits. Accounting firm Deloitte expects U.S. oil and gas companies to generate $275 billion in free cash flow this year and next.

There is growing demand worldwide to impose a so-called 'windfall profits tax' on the massive profits of oil and gas companies to help those suffering from soaring prices.

On the 14th (local time), Ursula von der Leyen, President of the European Union (EU) Commission, announced in a speech to the EU Parliament plans to collect 140 billion euros (approximately 195 trillion won) through windfall taxes and other means from energy companies that have made huge profits from oil and gas prices, and to invest the proceeds in alleviating the energy crisis.

U.S. President Joe Biden also criticized on June 6, saying, "ExxonMobil is making more money this year than God."

Oil and gas companies are increasing investments in renewable energy based on their surged cash reserves.

In April, Shell acquired Indian renewable energy company Sprng Energy for $1.55 billion. In May, French oil company Total acquired a 50% stake in U.S. renewable energy firm Clearway Energy Group for $2.4 billion, and in June, BP announced it secured a 40% stake in an Australian renewable energy business without disclosing the amount. Earlier in February, Chevron acquired Renewable Energy Group for $3.15 billion.

However, there are criticisms that investments in renewable energy are not substantial compared to the increased cash reserves.

Jim Peterkin, an analyst at Swiss investment bank Credit Suisse, explained that the reason large-scale mergers and acquisitions have not occurred is that the value of renewable energy companies is not yet high. He noted that since renewable energy companies are still smaller than traditional fossil fuel companies and their profit structures are uncertain, large oil and gas companies are concerned that pursuing large-scale M&A could potentially dilute corporate value.

In this regard, Shell CEO Ben van Beurden stated that they are postponing large-scale M&A until the renewable energy sector is recognized with a more acceptable value.

Consulting firm PricewaterhouseCoopers (PwC), in a recent report analyzing energy industry M&A trends in the first half of this year, noted that M&A activity was less than expected at the beginning of the year but predicted that M&A would become more active in the future due to increased cash holdings and the acceleration of the transition to green energy.