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TheBusiness: BP leaves investors to spend $65bn surplus

By Richard Orange
12 February 2006
BP chief executive Lord Browne knows how to put a good shine on bad news. After its rivals Royal Dutch Shell and Exxon Mobil pulled in the biggest UK and US profits for any company ever, BP’s own undershot expectations.
The solution? Trump the competition with an even bigger number – in this case the staggering $65bn (£37bn, E54bn) BP announced it could return to shareholders over the next three years in share buybacks and dividends should the oil price stay at $60.
To BP’s investors, this is no change at all – it’s in line with the existing policy. But it did aggravate charges of profiteering and calls for a windfall tax.
It’s lucky then, that Browne is one of the most articulate defenders of shareholder capitalism around. The real question, he argued, is not whether the oil industry is profiteering, but where the profits go. One in every six dollars of profits generated by BP goes, he said, directly back to UK pension funds via dividends.
This year’s profits mark an industry high. Exxon Mobil made $36bn, Shell $23bn, BP $19.3bn. But they are investing less of their profits, proportionally, than ever before. In 1980-1982, the last time there was such a high oil price, the industry spent 80% of its free cash flow.
Now it is spending 40%. The rest goes to shareholders. Last year, the top five oil companies returned an estimated $76bn to their shareholders, while they invested about $50bn increasing their supplies of oil and gas. This year, they are expected to return some $57bn, according to UBS.
And the companies themselves are actually shrinking. This year, under US rules, Shell only brought enough new oil on to its books to replace 60%-70% of what it pumped out. BP managed 95%.
That the major oil companies pass money back to shareholders rather than invest it themselves when they are averaging 26% return on capital employed, and failing to replace their reserves, the argument goes, is evidence of market failure. Global business as a whole makes a 15% return.
But a recent study by Cambridge Energy Research Associates concluded that what was preventing the oil companies launching more projects was more a shortage of qualified staff than a shortage of invesment cash, as Browne reiterated last week. And if you are earning more cash than you can invest well, better to give the money to shareholders.
It may well go into oil, or alternative energy, or even a vaccine for avian flu. Rather than call on windfall taxes on oil companies to fund renewables, it is better to trust the market.

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