The Energy Production Race: Why European Oil Majors Are Falling Behind

The energy landscape is rapidly evolving, and for European oil and gas companies, keeping pace with American rivals has become increasingly difficult. The second quarter results from major players like Exxon Mobil and Chevron reveal a significant production gap, raising questions about the future strategies of European firms.

Robust Production Numbers from U.S. Giants

In the second quarter, Exxon Mobil reported a staggering output of 4.63 million barrels of oil and gas equivalent per day (boed), marking a 6% increase from the previous year and a record for this period. This growth is largely attributed to successful acquisitions, particularly the $60 billion purchase of Pioneer Natural Resources, and the expansion of operations in the low-cost Permian shale basin in Texas and offshore Guyana.

Chevron followed suit, achieving its highest-ever quarterly production of 3.4 million boed, a 3% increase year-over-year. This boost was fueled by enhanced production in the Permian region and Kazakhstan. Moreover, Chevron anticipates an increase of up to 500,000 boed in the upcoming third quarter following the completion of its acquisition of Hess, which had been embroiled in legal conflicts with Exxon.

European Players Struggling to Keep Up

Contrasting sharply with their U.S. counterparts, European energy majors like Shell and BP are witnessing declines in production. Shell’s output fell by 4.2% to 2.65 million boed, the lowest it has been in over two decades. This downturn is a result of recent asset divestments and a strategic shift away from fossil fuels.

Similarly, BP faced a 3.3% decline, bringing its production down to 2.3 million boed. The lower investment levels from recent years have directly impacted its output, underscoring a fundamental challenge for the company. On a slightly positive note, TotalEnergies did manage to increase production by 3.6%, but at 2.5 million boed, it still lags behind its American rivals.

A Narrowing Window for Growth

For these European giants, the pathway to significantly ramping up production seems to be closing. The capital-intensive nature of the oil and gas industry means that developing new projects can take years. To complicate matters further, competition from OPEC’s rising output adds another layer of challenge. The long-term outlook for oil demand remains uncertain, particularly amid an ongoing energy transition.

Modest Growth Targets for European Companies

In light of the current landscape, the growth targets set by European oil producers appear relatively conservative. TotalEnergies, which exhibits the most consistency among the trio, aims for a modest annual increase of 3% in production from 2024 to 2030. BP, which abandoned its previous plans for significant output reductions, now seeks to stabilize production between 2.3 and 2.5 million bpd. Meanwhile, Shell has set a goal of only 1% annual growth in output through 2030.

Shell also plans to keep its upstream and integrated gas capital expenditures steady at $12 billion to $14 billion annually between 2022 and 2028. The company hopes to launch around five new upstream projects by 2027, but limited reserves may necessitate acquisitions to sustain growth.

BP has been navigating turbulent times after leadership and strategy shifts that began in 2023, leading to several planned upstream projects in regions like Iraq and the Gulf of Mexico. Recently, BP made headlines with a significant oil discovery in Brazil, but capitalizing on this find will require substantial investment and time.

Evaluating Value vs. Volume

While higher oil and gas production typically signals positive growth, it does not automatically equate to increased shareholder returns. Upstream operations have historically been the primary profit generators for these companies. Current financial metrics bear this out; Exxon’s price-to-cash flow ratio stands at 8.2, compared to Chevron’s 7.7. In contrast, European firms’ metrics—Shell at 5.1, TotalEnergies at 4.6, and BP at 3.6—fall significantly behind.

The entire energy sector faces a battle for dwindling capital. Currently, it comprises less than 5% of the S&P 500 index, a drop from its peak of 16% in 2008. Years of inconsistent returns, energy price volatility, and increasing environmental pressures have contributed to this downturn.

Shifting Strategies in a Challenging Environment

In this challenging environment, Europe’s energy majors are focusing intensely on cost reduction and operational efficiency while moderately increasing upstream production. This recalibration comes after many years of lower investment, driven by the need to transition toward more sustainable energy strategies.

However, even if European firms enhance their production rates, they must contend with the formidable growth of Exxon and Chevron, who are unlikely to slow down anytime soon. The race in the energy sector isn’t just about catching up; it’s about addressing fundamental shifts that could redefine the industry for years to come.