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16 February 2023

Energy company profits show where the real money is being made

Energy companies have announced bumper profits for 2022 – but the businesses are proving to be both a gold mine and a money pit.

By Emma Haslett

Editor’s note: This article was originally published on 2 February. It is being repromoted today following British Gas owner Centrica posting huge profits. The energy company’s profits hit £3.3bn for 2022, more than triple the £948m it made in 2021.

One month after Wael Sawan became chief executive of Shell, he has announced record-breaking profits for the oil and gas giant this morning (2 February): adjusted profits for 2022 rose to $39.9bn – more than double the $19.3bn the company made in the 2021 financial year.

These profits were driven by the Ukraine invasion’s inflation of gas prices, and the subsequent ban on imports of Russian gas by Europe and the US. But despite the enormous geopolitical windfall the company has enjoyed, Shell also announced last week that Shell Energy, the energy supply subsidiary from which it sells gas, electricity and broadband to 1.4 million British consumers, is so unprofitable that it is reviewing whether to sell the company, which employs around 2,000 people.

How can the energy business be both a gold mine and a money pit? The answer is that there are two very different businesses involved. As consumers we deal with energy suppliers, and while we are quick to criticise them, they have a number of responsibilities towards us as consumers. The cost of these responsibilities can rise in times of crisis – as demonstrated by results posted by the supplier Octopus yesterday, which showed a £161m loss in 2022, despite its revenues more than doubling.

As consumers, we seek out deals from suppliers in a regulated energy market in which, if prices become excessively high, the government will step in to subsidise our energy use. But suppliers have to negotiate with “upstream” generators, who are more exposed to wholesale prices. It is in the “upstream” part of the market – in which oil and gas is extracted from the ground and sold on – that the big money is made. This week, ExxonMobil announced fourth-quarter earnings had risen 43 per cent on the year before, to $56bn for the year; next week BP is expected to post fourth-quarter underlying profits of $5bn. Shell’s profits are almost entirely comprised of the money from its “integrated gas” and “upstream” businesses, which are those parts that respond most directly to higher gas prices.

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Domestic suppliers, meanwhile, are at the other end of the supply chain. Not only are these companies faced with making money for shareholders, but they also have a duty of care towards their customers. In December Raman Bhatia, the chief executive of Ovo, described to me how his company has sent out hundreds of electric blankets to customers struggling to heat their homes, while its customer service workers are receiving training from debt advice charities.

Dozens of suppliers went bust last year when the wholesale price of oil and gas climbed. As one senior insider at an energy supplier put it, on the retail side of the energy business “you get all the opprobrium for high prices, while running extremely risky, loss-making businesses”.

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Of course, this doesn’t mean suppliers are justified in taking some of the measures that have been revealed recently, such as the forced installation of pre-payment meters by British Gas. Last month, Citizens Advice warned that energy suppliers had switched 600,000 people, many who are vulnerable, to these more expensive, less secure meters last year, up from 380,000 the year before.

It may be morally unjustifiable, but it is possible to see why a company such as Shell would prefer to reap the enormous profits of the energy crisis without getting involved in the messy business of dealing with the people who actually use that energy. Since Shell entered the supplier market back in 2017 (with the $200m purchase of First Utility), its domestic energy arm has reportedly made pre-tax losses totalling at least £300m. Last year, Shell spent £1.2bn in the form of cash and loans to help its retail arm meet its liabilities.

“Shell’s retail business is too big to be irrelevant but too small to invest in making it good,” pointed out the energy insider. Why bother with all of that when it’s making record profits from its upstream arm?

That said, a company such as Shell might have persuaded customers and the government of its value to society had it trodden more carefully. Instead, the company chose to focus on its value to shareholders: its dividend was raised by 15 per cent in this morning’s results, and its mammoth share-buyback scheme will cost it $18.5bn this year.

This may be a long-term risk because, as Mathew Lawrence, director of the Common Wealth think tank, pointed out to me, “There’s a much bigger PR problem for Shell, which is that its investment decisions are warming the planet to an unstable degree.” Compared with rivals such as BP, the company has been reluctant to embrace the green agenda – and this week it was accused by the activist group Global Witness of overstating the small amount it does claim to spend on renewables. According to the group, just 1.5 per cent of its capital expenditure goes towards renewables, rather than the 12 per cent it has stated.

This should prompt further conversations about windfall taxes. Last month, Shell said it expects to take a $2bn hit from EU and UK windfall taxes – a small fraction of the actual windfall that is evident in its accounts. In his new role, Sawan has the opportunity to reconsider the company’s external reputation. If he dithers, that choice may be taken away from him: energy analysts do not expect a quick resolution to the energy crisis, and the patience of voters and governments is running out.

[See also: Nuclear power is just a slow and expensive distraction]

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