|Oil Spending Drips Even as Profits Gush
Fear of a sudden, steep price drop has companies wary of committing cash
to exploration that could take several years to start paying off. Some of
the funds are going to investors.
By James F. Peltz
Los Angeles Times Staff Writer
November 28, 2004
The key numbers for Big Oil these days aren't $45 or $55. They're 1986 and
Although producers are reaping massive revenues because of soaring
prices - crude eclipsed $55 a barrel last month and gasoline is well above
$2 a gallon in California - the industry remains wary of spending on
exploration and production.
The worry is that oil prices will drop sharply and perhaps even collapse
as they did in 1986 and again in 1998. And no producer wants to be stuck
with a string of expensive new drilling sites that can't turn a profit.
"Companies are cautious," said Charles Williamson, chairman of El
Segundo-based Unocal Corp. "We're not investing based on $45 oil, because
our projects are in three-, five-, 10-year cycles - and we don't know what
the oil prices will be then."
Instead of betting all of their extra cash on drilling, oil companies are
using much of it to reward investors and bolster their balance sheets.
They are hiking dividends, buying back shares, paying down debt and
beefing up pension plans.
ChevronTexaco Corp., for example, raised its quarterly dividend 10% in the
third quarter and bought back $750 million of its stock. Those moves came
as profit that quarter jumped 62% from a year earlier at the San Ramon,
Calif.-based company. Irving, Texas-based Exxon Mobil Corp. raised its
quarterly share repurchase program to $2.5 billion from $1.5 billion.
Stephen Chazen, chief financial officer of Occidental Petroleum Corp.,
recently told analysts that the Los Angeles-based company hoped "over the
next year to find high-quality projects with good returns." But if it
doesn't, he said, "we will return the money to shareholders."
Investors are happy, but the industry's moves aren't making a big dent in
one of the key problems behind lofty oil prices: tight supplies. The
world's limited supply of oil is struggling to keep pace with rising
demand in the United States, Asia and other regions. And with spare
capacity so slim, fears of production snags because of terrorism,
political upheaval and bad weather have repeatedly pushed prices up. So
has heavy speculation by traders.
Yet even if companies immediately started spending more heavily on finding
and producing oil, it probably wouldn't have an effect in the short term.
That's because major new oil projects - many of them in difficult
terrain - don't produce their first barrel of oil for years, sometimes
"If we're developing a deep-water project, say, off the coast of West
Africa, it may have another four or five years before it's producing oil,"
said David Pursell, a principal at Pickering Energy Partners, an
investment bank in Houston.
The world's six largest oil companies this year are expected to reach a
record cash flow of $151 billion, a 40% jump from last year, according to
John S. Herold Inc., an industry consulting firm in Norwalk, Conn. But
their capital spending will rise only 19.6% to $75.4 billion, Herold
estimates. And much of that gain won't involve new exploration and
production; it will reflect higher operating costs for existing projects
and the companies' investments in foreign oil alliances.
ConocoPhillips of Houston, for instance, recently announced an investment
in Russian oil giant Lukoil valued at more than $2 billion. At Unocal, its
2005 capital budget "will look roughly like it does this year," about $2
billion, Williamson said. "Obviously, we've got to drill more wells; you
can't just stay still," he said. "But this industry is acutely aware of
having financial discipline."
It's an awareness born of disaster. As prices soared in the 1970s, oil
companies went on a spending binge. Exploration projects boomed, and the
companies diversified into such far-flung areas as retailing and beef
Then came the price collapse of the mid-1980s, with oil plunging as low as
$10 a barrel. Profits evaporated, exploration spending dried up, energy
stock prices tumbled, and several of the big oil companies merged to
The scenario repeated itself in the late 1990s, when oil climbed back
above $30 a barrel and then two years later plummeted to $10 a barrel.
Ever since, "capital discipline" has been the watchword for oil
"They have memories of being chastised by investors for destroying value,"
said Herold Chairman Arthur Smith.
Oil executives remain in a tough spot today even though oil prices have
climbed 52% this year. Crude for January delivery closed Wednesday at
$49.44 a barrel on the New York Mercantile Exchange; commodities markets
were closed Friday for the Thanksgiving weekend.
They have to find more oil because their existing sites are being
depleted. But prosperous new fields are getting hard to find, or are
off-limits because they are environmentally protected or run by national
oil companies. Meanwhile, there is pressure from investors for companies
to keep posting high earnings quarter after quarter - which requires a
close watch on spending - and to return a big chunk of their extra wealth
Paul Roberts, author of the book "The End of Oil," said he would prefer to
see oil companies boost spending on alternative fuels in the face of
dwindling supplies of conventional crude oil. Even so, Roberts said, he
understood the companies' dilemma.
"I would hate to be in their position, because they don't think there's
any clear picture of how to invest" their latest windfall, Roberts said.
"They've seen these cycles before."
Refiners, too, are spending cautiously on new equipment because they
expect prices to drop from current levels. Strict environmental laws have
curbed new construction - there hasn't been a new U.S. refinery built from
scratch in two decades - though several refiners are expanding or
modernizing current sites to produce more gasoline, heating oil and other
Exxon Mobil, for instance, is seeking approval to enlarge its giant
Baytown, Texas, refinery to increase output by 3% to 575,000 barrels a
day. ChevronTexaco this month said it was considering plans to increase
the capacity of its Pascagoula, Miss., refinery by 25% to about 79,000
barrels a day.
Total U.S. refining capacity "should rise annually only by 0.6% during the
2005-07 pe- riod, significantly less than the 0.9% yearly increase
witnessed in 1998-2004," analyst Jacques Rousseau of Friedman Billings
Ramsey & Co. said in a recent note to clients.
To be sure, the industry isn't running in place. It is spending more than
$60 billion a year scouring the world for more oil, and that's keeping
providers of drilling rigs and other oil field services busy.
"We forecast continued growth in the worldwide rig count to 2,595 rigs in
2005, up 8% from 2004," analyst Mark Urness of Merrill Lynch & Co. said in
a recent report.
Still, that's less than half the peak number of rigs operating in the
early 1980s, and spending for oil services also is expected to keep rising
only gradually despite the surge in crude prices.
"We have the same problems the operators have," said Dennis Smith,
director of corporate development at Nabors Industries Ltd., a leading oil
services concern. Oil exploration and production companies "are very
sensitive" to the past boom-and-bust cycles, "and they're being more
measured" about spending, he said.
The oil companies' search for petroleum spans the globe. Unocal is
operating in the Gulf of Mexico, Indonesia, Thailand and Bangladesh.
Occidental - whose oil spending is expected to rise 13% next year to about
$1.8 billion - has sites in Ecuador, Colombia, Qatar and Yemen.
ChevronTexaco this year has announced discoveries in the Gulf of Mexico,
Australia, Venezuela, Nigeria and the Atlantic Ocean off the coast of
Angola. The company also is boosting its total capital budget next year by
15% to about $8.5 billion. But that's still well below the $12-billion
level it reached in 2001.
Each year's spending is "guided by long-term corporate strategies and
business plans, and not by short-term market conditions" such as this
year's soaring oil prices, said ChevronTexaco spokesman Stan Luckoski.
Analysts said there were some potential oil sources that the major
companies would pursue regardless of their outlook for future market
prices, simply because those fields have such rich long-term prospects.
One is the Arctic National Wildlife Refuge, a 19-million-acre region in
northeast Alaska. The oil industry, environmentalists and politicians have
fought for years over whether drilling should be allowed there.
Now, with Republicans having added to their majority in Congress, the Bush
administration is expected to push again to open the refuge to drilling.
If it prevails, "the oil companies will be standing in line to get
leases," Smith of Herold said.
The government estimates that there are 6 billion to 16 billion barrels of
oil beneath the refuge's tundra, though opponents argue that only about
3.2 billion can be recovered economically.
Another potential source is Libya, which has about 36 billion barrels of
proved oil reserves, more than Mexico and Nigeria and about 3% of the
world's total, according to the U.S. Energy Department.
This year, President Bush eased sanctions that have kept U.S. oil
producers out of the North African country for 18 years. Occidental and
ChevronTexaco are among the companies exploring ways to resume operations
there, and another meeting of U.S. oil firms and Libyan officials is
scheduled in Tripoli in early December.
"Whether oil is $25 or $30 or $40, Libya is an extremely attractive spot,
so I think it's pretty independent of price," Occidental's Chazen said in
Overall, though, the oil companies will maintain their guarded stance
toward spending on new production unless they become convinced that
today's prices are here to stay, Pursell of Pickering Energy Partners
"They're making long-term bets here," he said. "But if we're having this
discussion next year, and oil is still $50 or $55 a barrel, you will see
them drill for more oil. You can buy back stock or raise the dividend only