No Gushing for these Gushers
It's the price of profit: Oil company chiefs trek to Congress for a tongue-lashing
The trouble with sitting on billions of dollars in cash--particularly if it has been earned in a way that annoys enough of the voting public--is that you might be hauled up to Capitol Hill to explain what you plan to do with it while also hearing a few choice ideas.
Chief executives of five top oil companies took pains to detail how they are planning to invest their record profits--Exxon Mobil alone earned nearly $10 billion in the third quarter--in a command performance last week before the Senate, but they still faced questions on whether they are doing enough to increase fuel supplies and ease painful prices for consumers. No one expects the GOP-controlled Congress to slap a windfall profits tax on the industry, despite much talk of reviving the 1970s idea. But continued political scrutiny, and perhaps other unfavorable legislation, remain a risk for the energy industry as heating bills soar this winter.
Big spender. "We keep investing in the future when earnings are high as well as when they are low," said Lee Raymond, Exxon's CEO. He pointed out that his company tallied $15 billion in capital spending last year, when oil prices averaged about $40 a barrel, the same figure it spent in 1998, when oil prices fell as low as $10. Although many criticize the oil industry for not having built a new refinery in the United States since the 1970s, Raymond pointed out that Exxon Mobil has spent $3.3 billion in the past five years expanding and improving its existing U.S. refineries, adding the equivalent capacity of three new facilities. He said payoff on investments takes years; production just began at the company's mammoth Sakhalin Islands project in Russia, where work began 10 years ago. Chevron CEO David O'Reilly said his company will increase capital spending 20 percent this year to $10 billion, including on a new deep-water oil drilling project. Chevron believes its Blind Faith field in the Gulf of Mexico may hold 100 million barrels of oil.
Although the planned investments would be staggering in any other industry, some energy analysts note that those figures increasingly represent spending on expensive production from known reserves rather than exploration for new ones. They question whether the industry is spending enough relative to its current large profits, especially considering the projected increase in global demand. Exxon Mobil's cash reserves, which have soared nearly 60 percent since last year to $29.2 billion, dwarf its typical annual capital spending. Also, some of Big Oil's plans will do more to please shareholders than to increase worldwide fuel supplies; the six largest companies are on track to buy back $40 billion in shares this year and pay out $31 billion--or 34 percent of their cash flow--to shareholders as dividends.
Those numbers may haunt the industry as Republicans show signs they are feeling heat over their perceived alliance with Big Oil. Some GOP lawmakers have urged the corporations to help finance the woefully underfunded government program to help low-income households pay winter heating bills. Some say industry should fund a public service campaign to encourage conservation. Democrats are pushing to repeal industry tax breaks, an idea that may gain currency as Congress grapples with its budget deficit. There were signs that the oil industry's once huge reservoir of goodwill in the House of Representatives was drying up. Speaker Dennis Hastert met in private with Raymond after the hearing. On the same day, the House abruptly dropped from its budget bill a measure until recently seen as the industry's best hope in nearly 25 years of opening the Arctic National Wildlife Refuge to drilling.
But amid the noise, the reality is that Congress will be loath to tamper significantly with an industry that contributed $25.5 million to federal candidates in the last election cycle, 80 percent of it to Republicans.
RAKING IT IN
Oil companies had a bountiful third quarter as crude oil topped $60 a barrel.
COMPANY 3Q EARNINGS INCREASE FROM 2004
Exxon Mobil $9.9 billion 75 pct.
Royal Dutch Shell $9.0 billion 68 pct.
BP $6.5 billion 34 pct.
ConocoPhillips $3.8 billion 89 pct.
Chevron $3.6 billion 12 pct.
Source: Company data
This story appears in the November 21, 2005 print edition of U.S. News & World Report.
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