A handful of investors own big oil: what to do about it
ONLY AVAILABLE IN ENGLISH ORIGINAL (below) – References available at the end
Each of five oil Supermajors- EXXON, Chevron, TotalEnergies, BP, and Shell — is controlled by only 25 institutional investors, holding between 38% and 50% of the stock. They aren’t always the same 25, but there is tremendous overlap, with US firms Blackrock, JP Morgan Chase, and Vanguard always in each ownership cabal.[1] Thus a handful of essentially the same owners effectively control the world’s oil industry. Since the 25, or even a material percentage of them, could easily break top management simply by agreeing among themselves to dump the shares, it is hard to imagine that top management is not focused on them and what they want. What would be a good response to effective control of the oil supermajors by 25 institutional shareholders each?
Why is the handful of owners a problem?
First, these oil companies exercise enormous political influence, globally. Although this is well documented, a recent event perfectly illustrates it. Donald Trump gathered some two dozen top oil executives for dinner at his Florida estate in April of this year and asked for $1 Billion in Presidential campaign contributions; if elected, he would throw out Biden’s Inflation Reduction Act and other efforts to stop global warming and environmental pollution. Whatever else Trump may or may not know, he does know where the money is, and the political influence it can buy.[2]
Second, this ownership structure is, in my opinion, literally preventing the oil majors from transforming into renewable energy companies. Although some of the 25 Fund managers may be right-wing ideologues, most of them probably have more or less only one interest—raking in for “the shareholders,” i.e., their funds, all the money generated by the oil companies not needed to pay their bills or drill more holes to maintain their oil reserves. The oil companies represent a more or less sure source of money; all those cars, trucks, airplanes and ships burning some product extracted from oil, and all those items in the petro-chemical industry, especially plastic, make oil as close to a sure-thing as there is. The oil supermajors guarantee this sure-thing by constant share buybacks to keep up the stock price as best as they can in the face of unstable oil prices, and pay out fat dividends, sometimes special dividends. So very little of the free cash generated by the oil sure-thing goes into renewable energy. Please note, nobody needs to be a crazy ideologue or greedy monster for this to be true; top management simply preserves their jobs by delivering for the shareholders (i.e., the 25) and the shareholders (i.e., the 25) are simply delivering for their investors. In other words, everybody is simply being responsible to somebody else.
Third, these financial owners apparently are not focused on saving the world from the immediate crisis of global warming, if we look at the implications of the words of Heather Zichal, Global Head of Sustainability at JPMorgan Chase & Co, one of the 25 controlling shareholders in each of the five Supermajors: “There are a lot of things that we, as a bank, can control, but there are things that we can’t…We’re focused on what we can control—facilitating capital,” she said in a Bloomberg interview during Climate Week in September, 2024 in New York City.[3] As we have seen, her bank, along with another 24 institutional investors, are facilitating their capital into the controlling stake in oil stocks, and the oil companies are then handing essentially all their free cash flow to these owners, instead of using a material part of it to convert out of oil and into renewable energy.
Fourth, the oil Supermajors are in a spectacular position to help save the world from global warming by converting to or materially contributing to renewable energy—they have much of the offshore knowledge and even equipment to create huge fleets of floating wind turbines. One, not a Supermajor, but a big company nonetheless, Equinor, has actually started to do that—regrettably in order to produce more offshore oil![4] So this is either a significant green move for an oil company or very high-end greenwash. Another, also not a Supermajor, Danish Oil and Natural Gas, changed its name to Orsted, and is now the world’s biggest developer of offshore wind farms. Perhaps not incidentally, on October 7, 2024, Equinor announced it was buying nearly 10% of Orsted, but would not seek any management changes or board seats and it supported Orsted’s current strategy.[5]
Orsted is majority owned by the Danish government. Equinor is 67% owned by the Norwegian government.
The Norwegian government’s revenue from Equinor goes into the Government Pension Fund Global, run by Norge Bank. Their website states, “these deposits account for less than half the value of the fund. Most of it has been earned by investing in equities, fixed income, real estate and renewable energy infrastructure.”[6]
The fund helps to finance a very successful, egalitarian social welfare state.[7] That said, the Fund, in addition to its revenue from Norwegian oil and natural gas, owns material percentages of Shell, TotalEnergies, Chevron, and Exxon.[8] So, although the fund helps to make Norway perhaps the only country in the world to escape “the curse of oil,” it also helps to inflict the curse of global warming on the rest of us, and themselves.
What should be done about this?
There is so much inertia in the global financial system that any idea of addressing the concentration of ownership, the issue of the 25 itself, however bad it may be, is likely a fantasy.
The divestiture movement has addressed this issue of ownership, but as a moral issue, and regrettably without great success. Can it be more successful if it is made a financial one? Maybe the goal should not be to get the investors out of oil, but to get the oil companies themselves out of oil.
The stock buyback tax has a Robin Hood effect, but with problems
We know from the gilet jaune response to a tax on diesel, that a targeted carbon tax which can be easily portrayed as one that disproportionately hits those who think of themselves as the poor is politically a really bad idea. But a tax on carbon profits might be perceived to have a Robin Hood effect–taking from the rich to give to the poor–and gain wide political support.
But, how to impose a carbon tax on the 25? Biden’s Inflation Reduction Act (IRA) may show how, if it can be adapted to France, and more widely in the EU. It has been a huge success in the US on industrial investments and electric cars (but not on, for example, rooftop solar). The IRA imposes a 1% tax on stock buybacks—on all companies, including oil companies.
One possible solution is for France, but preferably all the EU, to impose a bigger tax on fossil fuel company stock buybacks—maybe 10%, 20%, or even higher. It could be refined to mirror the percentage of the company’s gross investment in renewable energy infrastructure, as stated in the companies’ own financial filings. Thus if one of the Supermajors started to materially invest in renewable energy, it would reduce its tax on stock buybacks by its relative percentage of investment from its free cash flow. Essentially the same idea could be applied to dividends and special dividends. Whatever is the company’s percentage of investment of its free cash flow into renewable infrastructure, that would be the percentage of reduction of the special tax on fossil fuel dividends. The goal in this case is not to raise revenue, but to get the company to switch out of fossil fuel as fast as possible. If completely successful, the tax would raise no money.
There may be, in France, a legal problem with a tax on dividends. Les Echos of October 4, 2024 noted an earlier problem with that kind of tax, describing the “censorship of a 3% tax on dividends, adopted under François Hollande but invalidated by the Constitutional Council.”[9]
Assuming the tax is legally possible in France, could the stock buyback tax be restricted to fossil fuel companies? In the US, it is not restricted, but it certainly could be. Oil companies in the US currently enjoy specific tax advantages, supposedly because of their importance to industry. So, why couldn’t they have specific tax disadvantages, given their lethal role in global warming? And why couldn’t France or the EU do the same thing? The reason in the US for the continued tax advantages is without doubt due to the political campaign contribution power of the oil lobby, as we saw earlier with the Trump meeting. France may not suffer from this same corrupting influence.
The most obvious problem is that, of the five Supermajors, only one, TotalEnergies, is a French headquartered company, and thus the only one that would be directly in reach of the French tax laws. That said, a stock buyback tax is already under serious consideration by the French government.[10]
Appealing as these tax proposals may be to those concerned about global warming, the taxes might actually have the unintended effect of chasing companies away from France to a jurisdiction which did not impose them. In fact, at this moment TotalEnergies is attempting to convert its American Depository Receipts (ADR) traded on US markets into a full listing on the NY Stock Exchange. [11] [An ADR is a certificate issued by a bank or other financial institution saying that it holds the number of shares–usually one–on a foreign exchange (e.g., TotalEnergies in Paris) equivalent to the number on the ADR. The holder of the ADR gets whatever dividend may be issued by the company, and can trade the ADR as is if it is a regular share.[12]]
The carrot may work better than the stick
The US Inflation Reduction Act gives, for a wide range of renewable energy investments, a 30% investment tax credit.[13] A tax credit is a dollar for dollar subtraction from the bottom line of the tax calculation, i.e., the amount the company owes in taxes after calculating all expenses and deductions. The IRA also offers, for other capital investments, such as wind farms, a 2.6 cents per KWh production tax credit for the electricity it produces and sells. This works out to $26 per MWh. Since the cheapest new onshore wind projects (i.e., put in the best areas) come in at $27 per MWh, they are calculated by investment bank Lazard as essentially zero cost.[14] Both types of tax credits can go a bit higher under certain circumstances, such as if the capital investments are made in areas with abandoned factories, or on American Indian land. If the company does not have the income to make use of the tax credit, the US law allows the tax credits to be sold to those who can use them.
The success of this law has been close to astonishing. In the two years since its passage it has produced roughly $126 Billion in announced investment.[15] Sixty percent of these investments have so far been realized or are underway—forty percent have been delayed, largely to see who wins the US Presidential election[16]. The law has also produced, at least during the construction phase of the factories, some 109,000 jobs. Most of the investment has been in factories for electric cars, batteries and in solar power installations.
A similar law in France might work very well in rapidly transforming TotalEnergies into a renewable energy company with a legacy fossil fuel division. At the EU level, it could do the same for BP and Shell. Interestingly, the US oil Supermajors, Exxon and Chevron, have hardly budged into renewable energy. Each of them is also controlled, like TotalEnergies, BP and Shell, by 25 institutional shareholders. The oil political lobby in the US is simply much bigger than in the EU. Because of fracking (and, obviously, natural resources), the US has simply become the world’s biggest oil producer.[17]
Would the 25 institutional investor funds sell their oil stakes if they were no longer the oil sure-thing? For TotalEnergies, probably not all of the funds, and for several reasons. First, given the politically symbolic significance of TotalEnergies in France, as in effect the national oil company, at least some of the funds might suffer enormous reputational damage if they did sell, and they might well worry that they could suffer with some of their other investments or financial operations. They could be trapped into holding by the simple fact that they are so big.
Second, TotalEnergies has an employee’s ownership fund that holds 6.6% of the company. That’s likely enough to gather some other funds to continue to hold the stock.
Third, TotalEnergies is already making a material effort in the green direction. According to a Bloomberg.com article of 26 September 2024, TotalEnergies is “reducing the sale of petroleum products and directing €5 billion a year — about a third of its annual investments — into clean power and sustainable fuels.”[18] So some fund managers have already decided to stick with them. Making a bigger green effort would undoubtedly make it easier for those fund managers. Recall, they are by and large not bad persons, just persons trying to hang onto very high paying jobs. So a major tax incentive for the oil companies might also make it easier for some other fund managers to join the herd.
Fourth, at least in the EU, renewable energy will simply be a good investment. This seems especially likely from the recent decision by the EU, supported by France, to impose heavy tariffs on Chinese electric cars with the aim of furthering the domestic EU electric car industry. The tariffs, which add to existing 10% tariffs, go up to 35.3% for some manufacturers.[19] So the effective tariffs may be as high as 45%.
The EU tariffs are still not as high as Biden’s recently announced US tariffs of 100% on Chinese electric cars,[20] simply pricing the low end Chinese cars out of the US market. But the EU tariffs are bound to further build the green lobby in the EU by producing electric car factories and jobs there. The jobs and the multiplier effect of the money spent in the EU instead of shipped to China are both major forces for further developing the green lobby. But there is another perhaps equally important one; for many persons, their automobile is their second biggest purchase, after their house. If the car is an electric car, they can tell themselves, and anyone else who will listen, “I’ve done my part to hold back global warming, now it’s everyone else’s turn.” Millions of person saying some version of that line will constitute a very powerful political force. They’ll want the electricity to charge their batteries to be green too.
Fifth, maybe a tax incentive to switch to renewables will stop the global warming suicide now being committed by some of the oil majors and Supermajors. Right now, TotalEnergies is building a heated, potentially environmentally ruinous oil pipeline from Uganda through Tanzania.[21] Perhaps not to be outdone in an environmental catastrophe race, EXXON has raised international controversy by massively drilling in the waters off Guyana,[22] which, incidentally, are disputed by Venezuela as part of its territory, and Equinor is drilling in Arctic waters in the Barents Sea.[23]
A tax on stock buybacks, and, more importantly, production and investment tax incentives, perhaps with the help of some strong tariffs to prevent dumping, may be the best strategies to move the world out of oil despite the grip of a handful of institutional investors.
[1] https://www.lemonde.fr/idees/article/2024/08/28/chacune-des-cinq-majors-du-petrole-est-controlee-par-pas-plus-de-25-actionnaires-institutionnels_6297602_3232.htmlhttps://www.lemonde.fr/en/opinion/article/2024/08/28/each-of-the-five-oil-majors-is-controlled-by-no-more-than-25-institutional-shareholders_6722836_23.html
[2] https://www.washingtonpost.com/politics/2024/05/09/trump-oil-industry-campaign-money/
[3] https://www.bloomberg.com/news/articles/2024-09-25/bankers-say-the-quiet-part-out-loud-at-climate-week?cmpid=BBD092524_GREENDAILY&utm_medium=email&utm_source=newsletter&utm_term=240925&utm_campaign=greendaily&sref=XVZ2svL2
[4] https://www.lemonde.fr/idees/article/2023/11/01/les-grandes-compagnies-petrolieres-et-gazieres-utilisent-l-energie-eolienne-et-solaire-pour-produire-encore-plus-de-petrole_6197647_3232.html
[5] https://www.bloomberg.com/news/articles/2024-10-07/orsted-shares-jump-after-equinor-buys-stake-in-wind-giant?srnd=homepage-europe&sref=XVZ2svL2
[6] https://www.nbim.no/en/the-fund/about-the-fund/
[7] https://www.tekna.no/en/career/a-career-in-norway/social-welfare-in-norway-the-nuts-and-bolts/#:~:text=The%20Norwegian%20welfare%20state%20is,the%20more%20taxes%20you%20pay.
[8] https://www.nbim.no/en/the-fund/investments/#/2024/investments/equities
[9] https://www.lesechos.fr/economie-france/budget-fiscalite/impots-comment-sera-calculee-la-surtaxe-des-grandes-entreprises-en-2025-et-2026-2123348 “censure d’une taxe de 3 % sur les dividendes, adoptée sous François Hollande mais invalidée par le Conseil Constitutionnel.”
[10] https://www.lefigaro.fr/conjoncture/qu-est-ce-que-le-rachat-d-actions-cette-pratique-des-grandes-entreprises-que-le-gouvernement-pourrait-taxer-20240930
[11] https://www.lesechos.fr/finance-marches/marches-financiers/totalenergies-confirme-son-inedit-projet-de-double-cotation-de-totalenergies-2122900
[12] https://www.investopedia.com/terms/a/adr.asp
[13] https://home.treasury.gov/news/press-releases/jy1830#:~:text=The%20Inflation%20Reduction%20Act%20modifies,proportion%20of%20qualified%20apprentices%20from
[14] https://www.lazard.com/media/xemfey0k/lazards-lcoeplus-june-2024-_vf.pdf Please see pages 9 & 10.
[15] https://e2.org/wp-content/uploads/2024/08/E2-Clean-Economy-Works-IRA-Two-Year-Review_August-2024.pdf
[16] Financial Times, “Delays hit 40% of Biden’s major IRA manufacturing projects” August 17, 2024
[17] https://www.eia.gov/todayinenergy/detail.php?id=61545
[18] https://www.bloomberg.com/news/articles/2024-09-26/schneider-overtakes-totalenergies-as-the-world-goes-electric?sref=XVZ2svL2
[19] https://www.lemonde.fr/economie/article/2024/10/04/l-europe-confirme-la-surtaxe-des-voitures-electriques-chinoises_6343829_3234.html
[20] https://www.nytimes.com/2024/05/14/us/politics/biden-china-tariffs.html
[21] “This major export system includes 1,443 km (296 km in Uganda and 1147km in Tanzania) of insulated and buried 24” inch electrically heated pipeline, six pumping stations, two pressure reduction stations and a marine export terminal in Tanzania.” From: https://www.eacop.com/faqs/#:~:text=This%20major%20export%20system%20includes,marine%20export%20terminal%20in%20Tanzania.
[22] https://www.ft.com/content/2e4b2015-27e6-4b26-a02f-0040a71c6852
[23] https://thebarentsobserver.com/en/climate-crisis/2024/03/oilmen-step-arctic-drilling-south-ice-edge