[NYTr] Oil chiefs told to focus on reinvestment

[All the News That Doesn't Fit]

sent by Riaz K Tayob - activ-l - Jan 4, 2008

Financial Times (UK) - Jan 2, 2008
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Oil chiefs told to focus on reinvestment

By Sheila McNulty

Oil's flirtation with the $100-a-barrel mark will heighten pressure on 
energy companies to reinvest profits rather than continuing to use them 
for share buybacks, energy experts said Wednesday.

This year, with $100 oil, is a great year for the chairmen of all the 
oil companies to think more creatively about how to spend their higher 
income flows on productive investments, said Amy Myers Jaffe, energy 
expert at the James A Baker III Institute for Public Policy. By 
productive investment, I mean investment on: how do I find more oil?
How do I access unconventional oil? And ways to make money in
alternative energy.

She noted that a recent study by the Baker Institute revealed the Big 
Five international oil companies have cut exploration spending in real 
terms between 1998 and 2006, in spite of the rise in oil prices. 
ExxonMobil, BP, Chevron, Royal Dutch Shell and ConocoPhillips used 56 
per cent of their increased operating cash flow on share buybacks and 
dividends instead of exploration.

To just say we are opportunity constrained and need to stick our money 
under the mattress is not an adequate response to higher revenue and 
$100 oil, Ms Jaffe said.

The international oil companies feel constrained by the reversal of 
ownership of global oil assets. In 1970, international oil companies 
controlled 85 per cent of the worlds oil reserves. Today, state-owned 
oil companies control 80 per cent of those reserves. Oil-rich
countries, such as Russia and Venezuela, reacted by raising taxes and
royalties, or even blocking access to reserves or taking ownership of
projects away from the international oil companies.

Nonetheless, Robin West, chairman of PFC Energy, the consultancy, said: 
The companies must reinvest and if they cant, they have a problem. He 
said some have hesitated, believing oil was bound to return to $50 or 
$60 a barrel. Some dont believe these prices will hold.

They also face challenges in the form of rising costs for personnel and 
parts across the industry. Some prices have gone up more than 100 per 
cent in recent years, even as government take has been rising in 
oil-rich countries that want an ever-growing piece of the pie. 
Nonetheless, Mr West said, international oil companies must focus on 
reinvestment.

The ability to reinvest is fundamental to the future of these 
companies, Mr West said. He singled out Chevron for being the boldest 
for its size. The USs second-largest oil company recently announced 
$22.9bn in capital spending in 2008, up 15 per cent from 2007.

That is more than ExxonMobil, the worlds biggest public oil company, 
allotted for this past year. Exxon has not announced its 2008 budget.

Copyright The Financial Times Limited 2008