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Financial Times: Sharing that oil profit

Published: February 8 2006 02:00
The paradox of the oil industry is that it is investing record amounts in exploration and production but, because its overall profits have risen even faster, it is returning even larger amounts to its shareholders. BP yesterday promised to give its shareholders $50bn-$65bn in dividend payments and share buybacks in 2006-08 if the oil price were to stay at $40-$60 a barrel. By one estimate, total returns to shareholders of the five biggest companies could amount to $250bn over that period. With the world short of oil, such largesse to shareholders might look like a terrible waste that should be taxed if it cannot be put to better use. This would be a mistake. For much of the gains to the shareholders of big oil companies could well end up being reinvested in other energy companies or sectors.
To some extent, the oil majors are rewarding their shareholders for sticking with them during lean years, such as the 1998-99 oil price crash to $10 a barrel. But the subsequent surge in the oil price has also made investment opportunities harder to find in some ways. The oil service sector is working at full stretch, with equipment such as deep water drilling rigs now booked years in advance. The rise in the oil price has also worsened political constraints because it has made governments and state oil companies in the Middle East even less interested in opening to foreign investment. Elsewhere, countries ranging from Bolivia and Venezuela to Russia and Chad are now imposing tougher terms on foreign oil companies.
However, not all the majors are that pushed to increase output at the moment; BP is, for example, less desperate than Shell to increase production and reserves. Many companies are wary of repeating the mistakes of past cycles when they increased capital expenditure that failed to pay off when the oil price sank. True, we now seem to be living in a world of at least $40 rather than $20 oil. Yet most of the oil majors still pride themselves on maintaining “capital discipline” and preferring to return profits to shareholders rather than plunge into high-cost,marginal projects. The archetypaldisciplinarian of the industry is its leader, ExxonMobil, which last week reported a world record annual profit of $36bn and vaunted the fact that it had increased shareholders' returns by 56 per cent last year.
The worst way to recycle such profits would be through government taxation; twice in the past five years the UK government has raised oil taxes and thereby merely accelerated the decline in North Sea output. To avoid this threat, the oil majors could artificially boost their investment plans beyond what they would otherwise judge commercial. But the risk of this would be cost inflation and overruns on projects. It would be far better to let the capital markets do their job of capital allocation and find new opportunities for these oil profits.

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