Latest / Energy Economics with Fexingo: Oil Prices, Renewables, and the Cost of Power / How Shell Is Spending More on Shareholders Than on Oil Production
Transcript
- Lucas: So WTI crude is at 96 bucks a barrel as of this afternoon — up more than 10 percent in the last five days. That's the kind of price spike that, historically, would have every oil CEO in the world scrambling to approve new drilling projects. Luna: Right, you'd expect them to be pulling out the old growth playbook. But that's not what we're seeing, is it? Lucas: Not at all. And I want to focus on one company that really crystallizes this shift: Shell. The Anglo-Dutch major reported its first-quarter results back in May, and the headline numbers were strong — adjusted earnings around $9 billion, cash flow from operations over $12 billion. But what they're doing with that cash tells the real story. Luna: Which is that they're sending most of it back to shareholders, not into the ground. Lucas: Exactly. Shell announced a $3.5 billion share buyback for the current quarter — that's on top of a 40 percent increase in the dividend. Their total shareholder distributions for the first half of 2026 are on track to exceed $12 billion. Meanwhile, their organic capital expenditure guidance for the full year is roughly flat at $22 to $25 billion. And within that, the oil and gas production budget isn't really growing. Luna: So at $96 oil, they're choosing not to chase volume. That is a massive strategic pivot from where this industry was even five years ago. Lucas: It really is. And it's not just Shell. BP and TotalEnergies are pursuing similar strategies. The European majors have essentially adopted what I'd call a 'harvest and return' model — they're prioritizing shareholder payouts over production growth. And it's being driven by a combination of factors: pressure from activist investors, uncertainty about long-term demand, and a genuine shift in how management thinks about capital discipline. Luna: Let's talk about that activist pressure. There's a specific example from Shell's own shareholder meeting this spring that I think illustrates the point. Lucas: You're thinking of Follow This, the activist group that filed a resolution demanding Shell set tighter emissions targets. It got about 18 percent support — down from previous years. But here's the twist: at the same meeting, a resolution from shareholders calling for more detail on how Shell is aligning its spending with the Paris Agreement also failed. The board pushed back, and shareholders largely backed management. Luna: Right, so the activists pushing for faster transition lost ground. But that doesn't mean Shell is going all-in on oil. It's almost like they've decided: we'll keep producing, but we won't grow production aggressively, and we'll return the surplus to owners. Lucas: That's exactly the model. And it reflects a deep uncertainty about what the demand picture looks like in ten or fifteen years. If you're Shell's CEO Wael Sawan, you look at the IEA scenarios, you look at European policy accelerating toward electric vehicles, and you probably think: why invest billions in a new deepwater field that might not pay back before demand peaks? Better to give that money back to shareholders and let them decide where to reinvest it. Luna: Which is a pretty different calculus from what the US majors — ExxonMobil, Chevron — are doing. They're still growing production, especially in the Permian Basin. Lucas: That's a critical point. Exxon's capital spending this year is around $27 billion, up from $24 billion last year, and they're targeting three percent production growth. Chevron is similarly committed to growing output. So there's a transatlantic divergence: the European majors are structurally more pessimistic about oil's long-term future, or at least more cautious. And you can see it in the market's valuation — Shell trades at about eight times forward earnings, while Exxon is around twelve times. Luna: That's a meaningful gap. And it suggests investors are pricing in a higher risk of stranded assets for Shell, or maybe just a lower growth trajectory. Lucas: Exactly. And here's where it gets interesting for the broader energy economics picture. If the European majors, which account for roughly 15 percent of global oil production, are effectively capping their output, then supply growth is going to have to come from elsewhere — from US independents, from NOCs like Saudi Aramco, from smaller players. That could mean a structurally tighter oil market in the years ahead, even if demand growth slows. Luna: Which is a bullish argument for oil prices, ironically. The more the supermajors discipline themselves, the higher the floor under crude. Lucas: It's one of those paradoxes. By refusing to chase growth, Shell and BP are effectively supporting prices. And that makes their own cash flows more sustainable. So the strategy is self-reinforcing. Luna: Let me ask a skeptical question though. Is this really a strategic choice, or is it just that they see better returns from buybacks than from drilling? Because if oil stays at $90-plus, at some point the math on new projects starts to look pretty attractive. Lucas: Fair question. And we've seen this movie before — in 2011 to 2014, the majors were spending heavily on growth, and then the 2014 crash destroyed billions in value. So there's a scar tissue effect. But I think there's also a genuine belief that the energy transition is real, even if it's slower than activists want. Shell's own scenarios show oil demand plateauing around 2030. If you believe that, then why build a project with a 30-year payback period? Luna: Right, the investment horizon shrinks. And that's a huge shift for an industry that used to think in decades. Lucas: It really is. And it ties into something we talk about a lot on this show — the idea that capital allocation decisions in energy are increasingly being driven by narratives about the future, not just today's price signals. Shell is making a bet that the future is less oil-intensive, and they're structuring their business accordingly. Luna: I want to come back to something you mentioned earlier — the role of activist investors. Because it's not just climate activists pushing them. There's also a more traditional shareholder activism at play. Lucas: Absolutely. Third Point, the hedge fund run by Dan Loeb, took a stake in Shell back in 2021 and pushed for a breakup — splitting the company into separate legacy and renewable energy businesses. That didn't happen, but it clearly influenced management's thinking. The current strategy — big buybacks, steady dividends, moderate transition spending — is essentially a compromise that keeps both sides reasonably happy. Luna: It's a balancing act. And on that note, I think many listeners appreciate the kind of clear-eyed analysis you bring to these questions. If walking through the economy with us has made something click, well, a couple of dollars a month is genuinely what keeps these going — buy me a coffee dot com slash fexingo, if you've gotten something out of them. Lucas: Yeah, that really does make a difference. It's how we keep the show ad-free and focused on the substance. Luna: Alright, back to Shell. So if this capital discipline persists, what does it mean for the oil market in, say, 2027? Lucas: I think it means we have to recalibrate our assumptions about supply responsiveness. The old model was: high prices lead to more drilling, which leads to more supply, which brings prices back down. But if the majors are structurally unwilling to chase growth, that feedback loop weakens. We could see prices stay elevated for longer than historical models would predict. Luna: So higher volatility, potentially, but with a higher floor. Lucas: Yes. And it also means that the burden of meeting any demand growth falls on smaller players — US independents, national oil companies. Those are different types of producers with different cost structures and different risk tolerances. The Permian Basin is still growing, but even there, we're seeing consolidation — Exxon's acquisition of Pioneer, Chevron's deal for Hess — which tends to slow growth as the integrated majors apply more disciplined capital frameworks. Luna: Consolidation tends to reduce the number of drillers chasing growth. Fewer rigs, more discipline. Lucas: Exactly. And I think this is the single most important structural change in the oil industry that most people haven't fully absorbed. For decades, the mantra was 'grow or die.' Now the mantra is 'return or be replaced.' Shell is not an outlier — it's the leading indicator. Luna: I want to put a number on that. Shell's buyback this quarter alone — $3.5 billion — is roughly equivalent to the entire annual capital budget of a mid-sized independent. That money is going to shareholders instead of into new wells. Lucas: Right. And if you compare that to what they're spending on renewables and low-carbon energy, it's about $3 billion this year — a fraction of total capex. So the narrative that these companies are transforming into energy companies is, for now, overstated. They're still overwhelmingly oil and gas companies that are returning most of their profits to owners. Luna: Which brings us back to the core tension. At $96 oil, the economics of reinvestment look good. But the strategy says no. How long can that discipline hold? Lucas: That's the million-dollar question. If oil stays above $90 through 2027, I think pressure will build — from within the companies, from investors who want growth, from governments who want tax revenue and jobs. But for now, the pendulum has swung decisively toward returns over reinvestment. And that is reshaping not just Shell, but the entire global oil supply picture. Luna: And it's a story that will play out quarter by quarter. For now, Shell's second-quarter results in August will be a key test — will they maintain the buyback pace, or will the board start to waver? Lucas: Absolutely. We'll be watching. And that's a good place to leave it for today.