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Hello readers,
It may not have been the biggest news item last month, but the landmark judgement from Germany’s courts that high-emitting companies can be held liable for the damage their emissions cause is possibly the most consequential. While the case was dismissed due to the assessment of low flooding risk to the claimant’s home, the landmark legal precedent opens the door to more cases seeking compensation from fossil fuel companies.
What has been driving the headlines is OPEC+’s massive supply increases, the resulting drop in oil prices and what this means for the industry. Western international oil companies are holding to their production plans, but their finances are being squeezed. US producers are cutting spending, and the US shale boom might even be over. All that and more in this round-up of the most important developments in the oil and gas industry last month.
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Thanks,
Murray
Oil and gas in the transition
Fossil fuel company litigation
I’ll start this month’s edition with the news of a historic and unprecedented win in efforts to hold big emitters accountable for their climate impacts, ironically enough through a court defeat. A decade-long court battle between a Peruvian farmer and German energy company RWE over the risk of glacial flooding caused by the company’s carbon emissions concluded with the court dismissing the claim. However, the court only dismissed the claim because it assessed that the farmer’s property was not at risk. On the law, it found – for the first time – that major emitting companies can be held responsible for the impacts of climate change, including the financial costs associated with the risks of future impacts. The judge was emphatic in countering the claims made by RWE in its defence, stressing that the distance between the emissions and impact, and RWE’s legal supply obligations, did not prevent the company from being accountable for the impact of its actions. The case cannot be appealed, but it sets a groundbreaking precedent for future cases seeking financial compensation for the impacts of climate change from major emitters.
In another major development, major oil and gas companies, including ExxonMobil, Chevron, Shell and BP, are being sued for the first time for wrongful death as a result of the impacts of climate change. The case focuses on the death of Juliana Leon, who died during a heat dome in the Pacific Northwest. Her daughter is now bringing the case against seven fossil fuel companies, claiming that they knew about the impacts of climate change and funded campaigns to undermine the scientific consensus on climate change.
OPEC is turning on the taps and crashing the oil price
OPEC+ has once again decided to increase its oil supplies by 411,000 barrels a day in June and July, with the block on track to raise production by a total of 2.2 million barrels per day by the end of September. With the International Energy Agency forecasting demand growth of just 740,000 barrels per day this year, the OPEC+ rise sets the stage for a massive oversupply of oil. As a result, oil prices dropped to the low USD 60 per barrel range throughout May.
Saudi Arabia, a key driving force in OPEC’s decision-making, has briefed allies and experts that it is no longer willing to accept the big production cuts it has voluntarily made in recent years to prop up prices, and is now happy to live with lower oil prices. No one is certain why Saudi and OPEC are doing this – not least as it hurts government finances – but it looks like they are willing to sacrifice some short-term pain to get a greater share of the oil market.
In spite of the huge surge in OPEC production and the likely oversupply of oil to the market, almost all of the big western oil companies maintained their investment plans when reporting their first-quarter financial results. ExxonMobil, Chevron, Shell and TotalEnergies all kept their plans for new oil production, despite lower oil prices.
For anyone hoping for more demand to suck up the huge supplies coming to the market, India looks set to disappoint. The rapidly developing, most populous country in the world has long been seen as the next big growth market for oil after China, as its growing middle classes were expected to follow China and the West in their demand for oil. Yet this growth is not happening. Over the last three months oil demand in India has fallen, and this year’s growth may be the lowest for a decade outside of the pandemic. With sales of electric two-wheel vehicles booming, India may not be the growth market the oil industry has been hoping for.
The end of the US shale boom?
Despite Trump’s promises to “drill, baby, drill” on the campaign trail, the US oil industry is having such a tough time that its leaders are questioning whether the US fracking boom is now over. The chief executive of Diamondback Energy, one of the largest producers in the prolific Permian basin in the US, said that “it is likely that US onshore oil production has peaked and will begin to decline this quarter.”
Oil companies are now cutting spending and reducing activity in the face of increasing supplies from OPEC+ and falling prices. US oil output is forecast to fall by 1.1% next year, a sharp reversal from years of rapid growth. US oil companies’ share prices have fallen the hardest of any sector since Trump’s ‘liberation day’ tariffs, drilling activity has fallen and, despite the fall in oil prices, gasoline prices – the key target of Trump’s energy policies – are actually up 6 cents a gallon since he took office.
Europe’s Russian gas uncertainty
The European Commission proposed a new plan for ending the imports of Russian fossil fuels; however, crucially, they haven’t said how this can be achieved. Gas importers in Europe face major compensation claims if they break their existing contracts with Russia. Sanctions would provide legal cover, but the EU doesn’t have the required unanimity among member states to impose them.
If the ban does go ahead, the US stands to be the major beneficiary in the short term. EU gas demand is falling rapidly, but it’s still likely to need a few years of additional US LNG to fill the gap. However, if the plan doesn’t work and there is even a small return of Russian pipeline gas to Europe, USD 120 billion of investment in the US LNG industry would be at risk. For now, German Chancellor Friedrich Merz has publicly said that he is backing a proposed EU ban on the Nord Stream pipeline, which would bring Russian gas to Germany.
No more new gas power before 2030?
One major development which hasn’t received the media attention it deserves is the big bottleneck slowing the deployment of new gas electricity generation. There is now such a huge backlog in orders and along the global supply chain that it’s unlikely a company could order a gas power turbine now and have it operational before 2030. Supply chains aren’t the only problem. Wood Mackenzie analysts have also found major stumbling blocks for increasing gas power across major markets. In the US, construction costs have risen while power prices are below the cost of new gas generation, in Asia imported gas is too expensive, and in Europe climate goals are limiting the space for more gas power. This is all making some of the gas industry’s bullish projections for gas demand growth look a lot more questionable.
Pacific LNG exporters eye growth, but will China’s demand for gas keep pace?
The Australian government has extended the operating lifetime of the North West Shelf LNG project to 2070, set to result in 6 billion tonnes of greenhouse gas emissions. Canada is set to begin its first LNG exports in June, according to Shell, the developer of the west coast project. Both Australia and Canada are relying on growing Asian demand as the destination for their LNG. Yet in China, Asia’s largest LNG importer, demand growth remains elusive. A few years ago, demand was forecast to keep rising, yet imports remain below 2021 levels and are expected to drop by 11% this year. Slower economic growth, cheap renewables, domestic gas production and pipeline imports have all sapped the country’s demand for the super-chilled fuel. If the trend continues, a lot of the industry’s hoped-for future demand may fail to materialise.
Energy transition strategies
Oil and gas company finances are under significant pressure from the drop in oil prices. Most of the big companies presented their financial plans for this year based on the assumption that oil would be USD 70 per barrel, when it’s now much more likely that prices will be closer to USD 65 or even USD 60. The majors have all said they are well prepared for a downturn in prices, but as a Bank of America analyst told the Financial Times, “ten years into an efficiency drive that has made a lot of companies a lot thinner, the scope to offer more [budget cuts] is much reduced”. Analysts Wood Mackenzie have already forecast that the five supermajors will cut investment by nearly 5% this year as a result of the lower oil price.
BP for sale?
Speculation is rife that Shell is considering buying its rival BP, with the latter’s shares having dropped by a third over the last year. Publicly, Shell is denying any interest in a megamerger, stating that it wants to focus its cash on share buybacks, which it is spending USD 3 billion on every quarter. Chevron, ExxonMobil, TotalEnergies and Adnoc are also reportedly assessing the prospects of buying the company, according to reporting in the FT. However, despite the apparently attractive current valuation of BP, each potential buyer has major hurdles to being willing or able to complete the deal. Exxon and Chevron are focused on ongoing court battles with each other over drilling in Guyana, the UK government may try and block any effort by Adnoc to buy BP, and TotalEnergies might not be interested in keeping enough of BP’s operations for a deal to be worthwhile.
Shell under pressure from investors and threats of legal action
Shell has plenty of other challenges to focus on; more than a fifth of its shareholders backed a resolution at its AGM questioning the company’s bid to become the world’s biggest supplier and trader of LNG. The motion called on Shell to disclose more information about its LNG and gas business and goals, and questioned how the proposed gas expansion was compatible with the company’s climate goals. Shell also faces the prospect of another lawsuit in the Netherlands led by the Dutch non-profit Milieudefensie. This new case, which comes after courts overturned the previous effort to impose an emissions reduction obligation on Shell, would instead seek to block Shell from opening new oil and gas fields.
Saudi feeling the strain of low oil prices
Saudi Aramco and the Saudi government are feeling the pinch from the drop in global oil prices. Aramco has already cut its dividend by around a third, yet it still couldn’t afford to cover the cost of those payments from its revenues in the first quarter of this year. With the Saudi government and sovereign wealth fund owning 97% of Aramco’s shares, the state is the main loser from the dividend reduction. As a result, the country is now running an increased budget deficit and is reassessing its planned investments to diversify the economy’s reliance on oil exports.
Clean energy investments
Equinor’s USD 5 billion Empire Wind project in New York will now go ahead, after the Trump administration u-turned on the order it imposed the previous month to stop construction on the project. The decision is a reprieve for the project, but not for the wider US offshore wind industry, which still faces the pause in permitting for new wind projects implemented in January. Elsewhere, Equinor and Polish utility Polenergia have secured EUR 7.2 billion in financing to go ahead with two wind farms off the coast of Poland, which together will generate 1.4 GW of electricity from 2028.
Hydrogen and ammonia
The European Commission has announced EUR 992 million in funding for 15 renewable hydrogen projects, which together will be capable of producing 2.2 million tonnes over ten years. Though the 0.2 million tonnes per year (mtpa) these projects offer is a big step up from the EU’s current 0.02 mtpa capacity, it’s still a long way from the EU’s target of 10 mtpa by 2030, and according to Wood Mackenzie “it is unlikely all of the awarded capacity from this round materializes by 2030.”
While the clean hydrogen industry in Europe is struggling to grow, in the US it is facing an “existential threat” from Trump’s ‘Big Beautiful Bill’. The proposed legislation, which passed through the House of Representatives in May, would end the tax credit for low-carbon hydrogen production – both from renewables and natural gas with CCS. Analysts at Wood Mackenzie estimate that 95% of announced green hydrogen projects in the US are at risk if the tax credit is terminated.
An example of the implications of this is what happens to ExxonMobil’s agreement inked in May to supply Japan’s Marubeni with 250,000 tonnes a year of low-carbon ammonia. The deal is dependent on Exxon making an investment decision on the proposed Baytown hydrogen facility in Texas, a decision that relies on the low-carbon hydrogen tax credit.
