Big Oil: We told you so

With prices sharply lower from the summer's highs, Big Oil's decision to hold off on new production now seems rather wise.

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By Steve Hargreaves, staff writer

NEW YORK ( -- It would be tempting to say they told us so.

Back when oil prices were going nowhere but up, public officials, consumer rights groups and newspaper editorials chastised the major oil companies for not investing enough in new production. Big Oil, they argued, was simply lavishing shareholders with massive stock buybacks and dividends at the expense of the motoring public.

"The results illustrate an industry with plenty of resources to produce more oil in the U.S., but slow to spend the money to develop them," Judy Dugan, research director at Consumer Watchdog, wrote in a statement last August, just after Chevron posted a quarterly profit of $6 billion.

"In a normal market, with prices for a product rising like they have for oil, manufacturers in competitive markets would be spending like crazy to make more of it," Dugan continued. "Yet oil companies are able to sit back and make more money by selling less."

The oil companies, in turn, argued that commodity prices are cyclical and would fall soon enough. In addition to a lack of access to resources and skyrocketing production costs, the companies said planning projects that can take a decade to build and cost billions of dollars meant they needed to take a long-term view. In short, they just didn't believe the high prices were here to stay.

With oil prices now barely a third of that they were just 4 months ago, it seems they were right.

"They have been very good stewards of their investors' money," said Rayola Dougher, senior economic adviser for the American Petroleum Institute. "The majors are well positioned to move forward with investments over the next year."

Dougher was careful to stress it's the major oil companies that are in good shape.

Many of the independents embarked on aggressive exploration and production programs over the last few years, at a steep price. Rates to charter drill rigs have risen to more than $800,000 a day from as much as $400,000 a few years back. Leases that once went for $200 an acre have been known to fetch upwards of $20,000.

The market has punished these companies. Shares of Anadarko (APC, Fortune 500) are down over 30% over the last three months. Occidental (OXY, Fortune 500) is off 35% and Hess (HES, Fortune 500), a darling of 2007, has sunk 40%.

Other smaller oil producers are in even worse shape.

"Some of the smaller independents are having a hard time and are delaying or canceling projects" said Dougher.

The major oil companies were much more cautious during the price runup, and returned much more to their investors in the form of dividends and share buybacks.

For the five big international oil companies - ExxonMobil (XOM, Fortune 500), Royal Dutch Shell (RDSA) BP (BP), Chevron (CVX, Fortune 500), and ConocoPhillips (COP, Fortune 500) - spending on share buybacks increased sixfold, to nearly $60 billion a year in 2006 from under $10 billion a year in 2003, according to a study done this summer by Amy Myers Jaffe, a fellow in energy studies at the James A. Baker III Institute for Public Policy.

Spending on developing existing oil fields, however, rose at a less torrid pace - to $50 billion from about $35 billion, while spending on finding new oil fields increased to $10 billion from about $6 billion.

But lumping all the major oil companies isn't fair.

Paul Sanky, an oil company analyst at Deutsche Bank, said the major oil companies behaved very differently over the last few years.

He said ConocoPhillips and BP made several acquisitions at the height of the market. ExxonMobil, on the other hand, generally held back.

With prices now falling, Exxon now "looks like a hero on the way down," said Sankey.

Investors have taken note. BP shares are down 25% over the last three months, while ConocoPhillips is off 40%. Exxon, meanwhile, has lost just under 5%.

"Exxon got criticized for underinvesting over the last four years," said Fadel Gheit, a senior energy analyst at Oppenheimer. "It's not that they were stupid, it's just that they thought it was too expensive. Now Exxon is going to laugh all the way to the bank."

Gheit said oil companies made investment decisions with a target price in mind of about $30 a barrel back in 2005 or 2006.

Over that last year or so, he believes the target price has risen to about $40 or $45, although he still thinks Exxon has set the lowest number.

Exxon may laugh all the way to the bank during this downturn, but when the world pulls out of this economic slump, will the proper investments have been made to make sure prices don't run up like they did earlier this year?

Dugan, from Consumer Watchdog, doesn't think so.

"There's a sense that they think the prices are now too low to invest," she said "They are whipsawing it both ways." To top of page

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