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Big oil boosts buy-backs in absence of new investments

Financial Times: Big oil boosts buy-backs in absence of new investments

By Sheila McNulty in Houston
Published: April 25 2008 03:00 | Last updated: April 25 2008 03:00

Rising nationalism, insufficient talent and scarce supplies are limiting investment opportunities for the world’s major oil companies, leading them to increase share buybacks, said Jim Mulva, chief executive of ConocoPhillips.

Conoco, the US’s third largest oil company, budgets $15bn a year on capital spending. “We, technically, could be spending more,” Mr Mulva said in an interview. “But we have a number of issues or concerns.”

Among them are “availability of opportunity”, given heightened nationalism in oil-rich countries, such as Venezuela, and the US’s refusal to permit development of environmentally sensitive areas.

In addition, he said, “there is a real issue of human resource talent”. The industry projects the retirement of 50 per cent or more of its staff over the next 10 years, and prices for already scarce talent are skyrocketing.

Against this backdrop, a study by the James A Baker III Institute for Public Policy notes the Big Five international oil companies have cut exploration spending in real terms between 1998 and 2006, despite rising prices and profits.

ExxonMobil, BP, Chevron, Royal Dutch Shell and Conoco used 56 per cent of their increased operating cash flow on share buy-backs and dividends instead of exploration, the study said
. They continue to commit billions to share buybacks, with Exxon, the world’s biggest private oil company, spending $35.6bn for share buy-backs and dividends in 2007, up $3bn from 2006. Yesterday, Conoco, the first major to report first-quarter earnings, registered $4.1bn in net income, up from $3.6bn in the yearearlier quarter, on high oil prices. It spent a hefty $2.5bn repurchasing stock, amid plans to spend $10bn on share buy-backs this year.

“One could argue that companies spending this amount of money buying back stocks are slowly liquidating themselves,” said Robin West, chairman of PFC Energy, the consultancy.

The majors have been reducing exploration dollars since 1988-1989, said Priscilla McLeroy, a director at Arthur D Little, the consultancy. She attributes it to them being so big that not even “elephant-sized” fields are worth investing in; rather they need “mammoth-sized” fields to get sufficient returns.

Amid today’s nationalism, such fields are increasingly difficult to find. While Mr Mulva was the only executive linking limited investment challenges with share buy-backs, other chief executives told the Financial Times of difficulties making energy investments. Jeroen van der Veer, Royal Dutch Shell’s chief executive, said: “There is not enough access to easy oil and easy gas.”

Rex Tillerson, Exxon’s chief executive, said: “The risks associated with major energy projects are considerable.”

In 2007, Venezuela expropriated Exxon’s assets in nationalising the energy sector. Exxon has filed for arbitration following Venezuela’s failure to pay the compensation mandated in the project agreements.

“A shared commitment to open markets, international trade and contract sanctity is essential to meeting the energy supply challenge for our generation and those that follow,” Mr Tillerson said. Without that commitment, it is the majors who lose, as they cannot be confident in doing business with the national oil companies that control more than 80 per cent of the world’s reserves. Mr Tillerson also noted: “We are not immune to the recent overheated cost pressure in the industry.”

Copyright The Financial Times Limited 2008

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