[Global Focus] Is Net Zero an Illusion... Fossil Fuel Companies Thrive

Major Big Deal Centered on Large Oil Companies
ExxonMobil and Chevron Lead M&A
Last Year Oil Demand Hit Record High
US Expected to Achieve All-Time High Crude Oil Production This Year

Renewable Energy Firms Struggle Due to High Interest Rates
Challenges from Borrowing Costs and Tax Cuts
Wind Power Company Orsted to Lay Off 800 Employees

Although achieving carbon neutrality is a global trend, major fossil fuel companies are actually expanding their size. Mergers and acquisitions (M&A) aimed at securing competitiveness continue under the conviction that oil and natural gas will not disappear. On the other hand, the renewable energy industry is facing a harsh environment. The market is even cheering on energy companies' plans to reduce investments in clean energy, which are not profitable.

Fossil Fuel Companies Expanding Their Size

According to the global investment banking (IB) industry on the 20th, since the end of the second half of last year, big deals have been made in the fossil fuel industry, centered on large oil companies. On the 12th, Diamondback Energy agreed to acquire Endeavor Energy Resources for $26 billion. Endeavor is a company that has secured the largest drilling area in the Permian Basin, a major oil-producing region in Texas, USA. Once the merger is completed, Diamondback Energy, which was ranked 5th among US fossil fuel companies by market capitalization, will become a company comparable to EOG Resources, which is just above it.

The recent M&A trend has been led by the industry's top two, ExxonMobil and Chevron. In October last year, ExxonMobil and Chevron acquired Pioneer and Hess for $60 billion and $53 billion, respectively. In December of the same year, Occidental Petroleum acquired CrownRock for $10.8 billion, and in January, Chesapeake agreed to acquire Southwestern Energy for $7.4 billion. The reason why major fossil fuel companies are engaging in big deals is the judgment that oil demand will remain strong. Renewable energy cannot perfectly replace petroleum products such as aviation fuel, and the adoption speed is slowing down.

The United States is expected to produce a record amount of crude oil this year. Energy consulting firm Rystad Energy predicted that US crude oil production will reach a historic high of 13.6 million barrels per day this year. The International Energy Agency (IEA) also revised upward the global oil production forecast to 103.8 million barrels per day in its world oil outlook released on the 15th, reflecting the production increase forecast of non-OPEC+ countries led by the US.

Global oil demand reached an all-time high last year. The Wall Street Journal (WSJ) evaluated that "the persistence of global demand for fossil fuels has been confirmed." Goldman Sachs recently mentioned the 7 billion oil users at the Energy, Cleantech and Utility Conference and predicted that global total energy demand will continue to surge.

The profits of oil giant companies are also soaring. ExxonMobil and Chevron achieved operating profits of $36 billion and $21.4 billion last year, respectively. This is the highest level in the past decade, excluding 2022 when energy prices surged due to Russia's invasion of Ukraine. Large sums of money also flowed into shareholder dividends. Last year, ExxonMobil and Chevron paid dividends of $32 billion and $26 billion, respectively. This is the largest dividend amount among US companies excluding major big tech companies such as Apple and Microsoft (MS).

The fact that the industry still receives massive subsidies from oil-producing country governments also strengthens the growth theory of fossil energy. The International Monetary Fund (IMF) estimated that oil, gas, and coal companies received about $7 trillion in direct and indirect government support in 2022.

Harsh Winds for the Renewable Energy Industry

On the other hand, the situation of the renewable energy industry, including offshore wind and solar power, which was expected to benefit from achieving net zero by 2050, is not favorable. The industry has been struggling due to increased borrowing costs from high interest rates, rising raw material costs, and cuts in various tax benefits. This industry situation is also reflected in stock prices. While the S&P 500 index rose 24% last year, the S&P Global Clean Energy Index (SPGTCLEN) fell more than 20%. It has fallen 7% so far this year.

In particular, the recent situation faced by Ørsted, Europe's largest wind energy company, is seen as reflecting the overall reality of the renewable energy industry. On the 7th, Ørsted announced plans to lay off up to 800 employees and to cut an additional 250 employees within a few months. It also announced a temporary suspension of dividend payments, aiming to resume payments from the 2026 fiscal year.

Earlier, Ørsted shocked the market by declaring the suspension of two wind projects off the US East Coast. At that time, Ørsted suffered a loss of 26.8 billion Danish kroner ($3.86 billion) from this business and set aside a bad debt provision of 9.6 billion Danish kroner ($1.39 billion). The company also canceled a power supply contract for another US offshore project last month.

BP, the UK's largest oil company and one of the most proactive in green energy transition, also suffered a loss of $1.1 billion last year from its offshore wind projects on the US East Coast. Investors believe that BP's lukewarm stock performance is due to various renewable energy investments. In response, BP hinted at a U-turn in oil investment during its Q4 earnings announcement on the 6th, stating, "As demand for fossil energy is increasing, we will increase related investments," attempting to reassure investors.

There are also cases where the market responds with stock purchases to energy companies' declarations of withdrawing from clean energy businesses. When US Eversource Energy announced plans to sell its offshore wind and hydroelectric businesses on the 13th, its stock price jumped 8% intraday the next day. This was the largest increase since April 2020. CEO Joe Nolan said, "We are reducing operations considered less important to the company's core business." The sale, expected to be completed around June, is valued at approximately $1.1 billion.

Continued Weakness in Renewable Energy... "The US Will Not Abandon Oil"

It is uncertain how long the sluggishness of renewable energy, which has been stalled in growth, will continue. Negative impacts such as reduced industry investment due to high interest rates, delays in various projects, and increased corporate debt are expected to persist for the time being. The loss of momentum in green energy transition due to conflicts of interest among countries worldwide also strengthens the optimistic outlook of existing fossil fuel companies. At the 28th UN Climate Change Conference (COP28) held in Dubai, United Arab Emirates (UAE), at the end of last year, more than 190 governments agreed on "transitioning away" from fossil fuels but failed to include the phrase "phase-out" in the agreement.

Some predict that the end of the fossil energy era will not come until oil is depleted unless the United States abandons the fossil fuel industry. One foreign media outlet forecasted, "The United States will remain the world's largest player in the fossil energy industry."