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Financial Times: Oil chiefs told to focus on productive reinvestment

By Sheila McNulty
Published: January 3 2008 02:00 | Last updated: January 3 2008 02:00

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 yesterday.

“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 world’s 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 can’t, they have a problem.” He said some have hesitated, believing oil was bound to return to $50 or $60 a barrel. “Some don’t 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 US’s 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 world’s biggest public oil company, allotted for this past year. Exxon has not announced its 2008 budget.

Copyright The Financial Times Limited 2008

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