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Financial Times: Cash handouts hit investment

By Carola Hoyos,Chief Energy Correspondent
Published: February 22 2007 02:00 | Last updated: February 22 2007 02:00

Oil and gas companies have faced similar questions to miners about whether they are returning too much cash to shareholders instead of investing it in new production.

Royal Dutch Shell and BP, the UK’s largest energy groups, have returned a total of $120bn (£61.32bn) in cash to shareholders in the past three years, raising fears that their largesse reflects an inability to grow their business by finding and producing more oil and natural gas.

Profits have hit records at both companies in the past three years, thanks to the tripling in oil prices, but growth has been troubled. BP has had setbacks at important projects that were supposed to account for much of its growth in the past year, including its giant Thunder Horse platform in the Gulf of Mexico. The company this month cut its growth targets for the next three years by up to 18 per cent.

Yet, energy companies are investing historically relatively little in exploration and production because they are discovering few big oil fields. Some executives – including Lee Raymond, until recently chief executive of ExxonMobil, the world’s largest listed international energy group – have suggested that there are none left to be found.

Companies such as BP and Shell are being squeezed out of oil-rich countries including Russia, where both have major stakes – Shell’s Sakhalin II liquefied natural gas project and BP’s TNK-BP joint venture.

Jon Rigby, analyst at UBS, the investment bank, said: “Over time, free cash flow doesn’t rise to the degree that the oil price increase would suggest.”

He said cost pressures – including higher taxes and rig fees and renewed nationalism among oil-rich countries – had hurt.

BG, Shell and BP’s substantially smaller competitor, has been less generous in terms of returning cash but has also presented a far better growth story. Its total shareholder return has grown more than 170 per cent since 2003 compared to about 40 per cent for both BP and Shell.

Copyright The Financial Times Limited 2007

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