Monday, Feb 14, 2005
Big oil's cash surplus 'problem'
Even as fears of shortages grow throughout the world and prices remain high, the cash-rich oil companies are not pouring a large portion of their money into their basic business: digging for oil.
BORN FROM the mega-mergers of the 1990s, the world's giant oil companies have delivered on their promise. They have cut costs, boosted returns and increased profits to new records. Now, flush with cash, they find themselves in a paradoxical position — they are making more money than they can comfortably spend.
Thanks to crude prices that averaged $41 a barrel in New York last year, the world's ten biggest oil companies have earned more than $100 billion in profit for 2004, a windfall greater than the economic output of Malaysia. Together, their sales are expected to exceed $1 trillion for 2004, which is more than Canada's gross domestic product.
Shareholders rewarded
But even as fears of shortages grow throughout the world and prices remain high, the cash-rich oil companies are not pouring a large portion of their money into their basic business: digging for oil. Indeed, oil executives, in their second straight year of rising profits, are finding that too much money is chasing too few oil fields. Instead, they are giving much of their cash back to shareholders.
For example, ExxonMobil, the world's largest publicly traded oil company, earned more than $25 billion last year and spent $9.95 billion to buy back its own stock; Royal Dutch/Shell Group, whose revisions to its oil reserves have left many investors wary, pledged to hand out at least $10 billion as dividends to shareholders this year.
And BP, which earned $16.2 billion in 2004, will return as much as $23 billion to its investors this year and next, mostly as dividends. At the same time, it is cutting capital expenditure for the first time in at least four years, to $14.1 billion in 2005 from $14.4 billion last year.
Other oil companies, such as the French firm, Total, plan to report results this week. Altogether, profits in 2004 for the top ten companies jumped by more than 30 per cent from the previous year, when they brought in $80 billion.
Still, oil executives bristle at the suggestion that they are not investing enough and point to new operations in places such as Angola or Kazakhstan. Exploration in those places underscores the trend of West Africa and the Caspian Sea taking over from North America and the North Sea as a main focus of exploration and growth for oil companies.
The executives also remember that only six years ago, crude-oil futures were trading below $15 a barrel — a third of today's levels. That is a lesson no one is ready to forget.
"We're a cyclical business, and at the high end of the cycle it makes sense to get the company in good shape and strengthen our balance sheet," David J. O'Reilly, chief executive of ChevronTexaco, the second-largest American oil company, said in a telephone interview.
Lord John Browne, BP's chief executive, said oil companies were doing their job. "Investment is going in, a lot of reserves are being developed," he said in an interview in London. "Looking at the percentage of oil profits reinvested, rather than the amount of cash invested, gives a skewed perspective. I think you have to think of the dollar value."
Falling ploughback
One reason exploration spending is declining is quite simple — there is less oil left to drill for in places that are open for exploration, such as North America or the North Sea, while the bulk of the world's known reserves, mainly in the Middle East, are mostly shut off to foreign investors.
"If they had attractive things to invest in, they'd be investing their little heads off," said Gerald Kepes, Managing Director at PFC Energy, a consultancy based in Washington. "Twenty-five years ago, if prices had risen to $45 a barrel, you would have seen everyone in the U.S. drop everything, jump in a pick-up truck and drill in their back yards. The fact that you don't see this today says a lot. These kinds of easy opportunities have largely dried up."
Last year, the larger integrated oil companies spent about 24 per cent of their cash on dividends, 12 per cent on share buybacks, and 12 per cent on paring debt, Mr. Kepes said. Less than half of their cash, or 46 per cent, went into capital expenditures. As a share of exploration and production expenses, spending on exploration has declined over the last decade, and now accounts for about 20 per cent of the total, compared with about 30 per cent in 1991, according to PFC.
High oil prices are not a guaranteed boon for oil companies. When oil prices are low, oil executives are courted by commodity-rich countries to develop national resources. But when prices rise, governments have a tendency to rethink their contracts and seek higher royalties.
That is happening in Venezuela, which is reviewing its operating agreements with foreign oil companies; it is also happening in Russia, where the government is assuming more control of the country's oil industry.
"The net effect of $50-a-barrel oil is to reduce opportunities," said Paul Sankey, an analyst with Deutsche Bank in New York. "Large profits make governments think that they're not taxing sufficiently enough."
For example, the Russian government collects most of the profits when oil prices rise above $25 a barrel. Some countries — including Kuwait, Angola and Iran — put limits on the gains foreign companies can make if prices rise above a certain level. With many production-sharing agreements, for example, oil companies agree to a revenue cap, so that when prices rise, producers must reduce their volumes.
"The industry would much rather have lower oil prices and more stability and a more sustainable environment," Mr. Sankey said. "Record prices mean record revenue, but also too much attention for an industry that basically likes to remain out of sight."
Jad Mouawad New York Times News Service
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