Oil and Gas Plays

[lowman]

Money gushes in for U.S. oil companies...

Originally posted by DallasBoy50:

By Los Angeles Times

Even for Big Oil, the numbers have never been as big as this.

When major U.S. energy companies including Exxon Mobil Corp. and Chevron Corp. announce their third-quarter earnings in the next few days, the results are certain to be staggering.

Pumped up by soaring oil, natural gas and gasoline prices in August and September, Exxon Mobil alone is expected to report quarterly profit of about $8.7 billion. That would be more than such titans as Coca-Cola Co., Intel Corp. and Time Warner Inc. earn in an entire year.

For the energy companies, the record results amount to an embarrassment of riches -- an invitation for attack by foes and even some traditional allies.

"The question increasingly is going to be, what is the industry going to do with this money?" said Amy Jaffe, head of the James A. Baker Institute Energy Forum at Rice University in Houston.

On Tuesday, House Speaker J. Dennis Hastert, R-Ill., called on oil companies to spend more to build and expand refineries, to help "ease the pain" of high gasoline prices.

"It's time to invest some of those profits," Hastert said at a news conference in Washington.

Some Democrats in Congress, meanwhile, want a new windfall-profits tax like the one imposed in 1980. And with the price of oil holding above the $60-a-barrel mark, double the level of two years ago, consumer advocates accuse the industry of price-gouging and want a share of the earnings plowed into alternative-energy research.

One thing is certain -- oil companies are awash in money. Together, the 29 major oil and gas companies in the Standard & Poor's 500 stock index are expected to earn $96 billion this year, up from $68 billion last year and $43 billion in 2003.

Yet the industry disputes critics who say it is failing to invest in finding new sources of oil and natural gas.

Energy companies will spend an estimated $86 billion on capital expenditures in the United States alone this year, the American Petroleum Institute says, citing Oil & Gas Industry Journal data. That's up from $81 billion in 2004 and $76 billion in 2003.

Exxon Mobil said its total capital and exploration expenditures are projected to be about $17 billion this year, from $14 billion in 2004. The company expects to spend $17 billion to $18 billion a year from 2007 through 2010, said spokesman Robert Davis.

Chevron said it is involved in more than 20 exploration projects worldwide that will involve outlays of about $1 billion or more, compared to a handful of such projects a few years ago, a spokesman said. The company this month gave the go-ahead to a new deepwater oil drilling project in a Gulf of Mexico field known as Blind Faith, where Chevron believes more than 100 million barrels of oil may lie.

But as gasoline supplies have tightened this year and pump prices have topped $3 a gallon, much of the wrath of industry critics has been focused on the refining business. The last new U.S. refinery was completed in 1976.

Jamie Court, president of the Santa Monica, Calif.-based Foundation for Taxpayer and Consumer Rights, alleges that the industry has "intentionally reduced refining capacity to pump up profits to world record levels."

The industry, however, contends it has been hamstrung by environmental laws and other restrictions on refinery construction or expansion.

Nonetheless, existing U.S. refineries have been expanding their capacity by about 1 percent a year for the last decade, mainly by improving existing facilities, said Rayola Dougher, an economist at the American Petroleum Institute.

But some analysts question whether the industry can justify adding new refineries in the United States, given environmental restrictions and the risk that energy prices could come down sharply if supplies were to increase or demand were to fall, or both.

"Building a refinery is a 30-year commitment," said Nick Cacchione, an analyst at energy research firm John Herold & Co. in Norwalk, Conn.

Meanwhile, energy companies' owners -- their investors -- have their own idea of what to do with the avalanche of cash: They'd like much of it paid to them in the form of dividends and stock buybacks.

Many shareholders and industry executives have a far different perspective on current oil, natural gas and gasoline costs than do their consumers. They remember how the oil price surge of the late-1970s, amid turmoil in the Middle East, went bust in the early-1980s.

What followed were nearly 20 years of mostly depressed prices, which also depressed the industry's earnings and stock prices.

San Ramon, Calif.-based Chevron, for example, earned no more in 1998 than it had in 1985.

Coca-Cola, by contrast, earned nearly five times as much in 1998 as it had 13 years earlier.

What also went bust in the 1980s were many of the diversification moves the energy giants made with their then-record earnings of the 1970s. Mobil Oil, then an independent company, bought retailer Montgomery Ward in 1974, only to dump it 11 years later.

Exxon invested in an office-products business that marketed word processors and electronic typewriters.

Gulf Oil, since merged into Chevron, mulled buying the Ringling Bros.-Barnum & Bailey circus, although its board ultimately vetoed the idea.

The standard advice by academics to the oil companies in the 1970s was to diversify away from the energy business, because oil was running out, noted Michael Lynch, president of consulting firm Strategic Energy and Economic Research Inc.

"Not only did they do all these dumb things, but they did so on the advice of damn near everybody," Lynch said.

Even companies that eschewed venturing into non-energy businesses were slammed if they invested heavily in high-risk exploration and development projects in the '80s, only to find that tumbling oil prices made the investments uneconomical.

By the early 1990s, "It looked like money down a rat hole," said Severin Borenstein, director of the Energy Institute at the University of California, Berkeley. "I can certainly see why they'd be cautious now. Just because you're making an extra $35 a barrel doesn't mean you should be pouring that into exploration."

Today, any capital spending program by an energy company is likely to face much more severe review by its shareholders, given fears that the boom of the last few years could quickly give way to another bust.