BP

Sorry about the mess CRONTAB, i'm more concerned about making a good return on my investments. A few charts which just focus on the BP price in isolation will never give you the whole story.

Apologies to anyone who hasn't yet got broadband and a 19" plus monitor. I appreciate that this thread will be a pain in the ass to them.

if you want to look at something pretty, there's always the BABE thread :)

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Exxon, BP Rebuff Pleas to Boost Exploration as Oil Demand Soars

Dec. 22 (Bloomberg)

Exxon Corp. dispatched technical manager Scott Nauman to Siberia in 1995 to help develop oil fields buried under the ice-choked Sea of Okhotsk. The $12.8 billion project had been stymied since 1979 because tests showed that shifting ice blocks would destroy a floating drilling rig, Nauman says.

To tap the Chayvo oil deposit, Exxon had to build on land a 22-story drill, the most powerful of its kind in the world, to burrow a mile into the ground and then six miles horizontally beneath the seafloor. In October 2005, Chayvo produced its first barrel, 26 years after its discovery.

``We didn't think it could be done,'' says Nauman, 48, who now oversees economics and forecasting at Irving, Texas-based Exxon Mobil Corp., the world's biggest publicly traded oil company. ``No one had ever been able to drill horizontally that far.''

Oil industry executives point to Chayvo as an example of how aggressively they're working to increase crude supplies to catch up with soaring demand for fuel to run cars, trains, trucks and power plants. They're losing the race. Global demand has grown faster than supply for the past five years, boosting average U.S. regular gasoline prices to a record $3.069 a gallon in 2005 and provoking lawmakers to accuse Big Oil of gouging the public.

From 1985 to 2004, companies slashed spending on the search for new oil supplies, and current funding falls short of what's needed to prevent shortages over the next 25 years, according to figures from the International Energy Agency in Paris.

Record Profits

``What we're seeing today, both in terms of sky-high prices and record profits, is the result of two decades of underinvestment,'' says James Thorne, a senior portfolio manager at Baltimore-based MTB Investment Advisors. Thorne's funds hold 52,800 Exxon Mobil shares among MTB's $11.5 billion in assets.

Profits in 2005 for the five biggest publicly traded oil companies -- Exxon Mobil, BP Plc, Royal Dutch Shell Plc, Chevron Corp. and Total SA -- probably soared to $108 billion, according to estimates by analysts Mark Flannery and Edward Westlake at New York-based Credit Suisse First Boston. That matches the gross domestic product of oil-rich Venezuela.

During the first three quarters alone, the Big Five raked in $83.1 billion, surpassing their total profit in 2004. The companies had cash reserves of $80 billion as of Sept. 30, a 54 percent increase from a year earlier. Yet no company has built a U.S. refinery since 1976.

Surging Stocks

Energy stocks in 2005 outgunned all other industries, including health care and finance, by a factor of almost two as of Dec. 21. The Morgan Stanley Capital International World Energy Index climbed 29 percent. Shares of Paris-based Total led the Big Five, posting a gain of 34 percent, followed by Shell, which jumped 23 percent.

At a joint hearing of the U.S. Senate energy and commerce committees on Nov. 9, lawmakers lambasted top executives from London-based BP, Chevron, Conoco-Phillips, Exxon Mobil and The Hague-based Shell. They said executives were taking excess profits while Americans faced a 50 percent jump in heating bills from a year ago.

``It's become perfectly clear that the big oil companies are cashing in while average American families are being bled dry,'' Senator Charles Schumer, a New York Democrat, says. ``Big oil behemoths are making out like bandits.''

Exxon Mobil Chief Executive Officer Lee Raymond, who is scheduled to retire on Dec. 31, told senators that profits were in line with other industries and a proposed windfall profits tax would discourage investments.

Windfall Tax

As the 67-year-old CEO testified, the U.S. economy was in its 17th consecutive quarter of expansion, making it unlikely that lawmakers would impose a windfall tax, says Paul Kuklinski, a Boston Energy Research LLC analyst who follows oil politics.

Higher oil prices have only tempered economic growth during the past three years, says Gary Becker, a University of Chicago economist. ``Oil prices haven't had the catastrophic effect some people predicted,'' says Becker, who won the Nobel Memorial Prize in Economic Sciences in 1992. Becker says growth in corporate profits and individual wealth has enabled the economy to absorb the record energy costs.

The four oil-induced recessions of the past half century, in 1973, 1980, 1981 and 1990, came after Middle Eastern producers cut off supplies. ``Unlike the previous oil shocks, which were supply shocks, this time supply has continued to rise but has lagged growth in demand,'' Becker says.

From the third quarter of 2000 through 2005, demand jumped 13 percent to 85 million barrels a day, outpacing a 9 percent rise in supply, according to an estimate from the IEA, an adviser to 26 oil-importing nations.

Saudi Arabia

The shortfall in supply stems from actions taken from 1981 to 1985, when Saudi Arabia flooded global markets with crude oil to recapture market share lost to North Sea competitors.

The glut of crude cut global oil prices in half during 1986, hurting industry profits and spurring a long-term reduction in investments. From 1985 to 1994, income dropped 39 percent and spending plummeted 74 percent to $32.9 billion, near a 20-year low, according to the U.S. Energy Department.

These cutbacks went against the trend in other industries, such as pharmaceuticals, in which investment has risen at times of shrinking profits. U.S. drugmakers boosted capital spending by 10 percent from 1994 to 1997 amid a 27 percent decline in profitability, according to data compiled by Bloomberg.

Even when oil prices and profits began to rebound after 1998, the biggest companies kept the lid on spending for exploration.

Swallowing One Another

Concerned that Middle Eastern producers might flood the market again, the oil companies sought to boost market share and profits by swallowing one another rather than the riskier approach of drilling for new reserves in unfamiliar terrain, says Brian Bethune, director of financial economics at Global Insight Inc., a Waltham, Massachusetts-based research and forecasting firm whose clients include energy companies.

BP and San Ramon, California-based Chevron were among companies that spent a combined $273.4 billion from late 1998 to 2002 purchasing rivals. That's about equal to the amount spent during those years on exploration by the entire U.S.-based oil industry. The biggest deal was Exxon's $85.2 billion acquisition of Mobil Corp. in 1999. Three years later, Phillips Petroleum Co. purchased Conoco Inc.

``They took their cash flow and plowed it into mergers instead of upgrading their exploration efforts or refinery technology,'' Bethune says. ``The investments that should have been made just weren't there.''

Soaring Demand

After starving their exploration divisions, oil companies were incapable of quickly increasing supplies when demand unexpectedly started to soar in 2000, says Ken Chew, who analyzes data at IHS Energy, an industry consulting firm in Englewood, Colorado. The boom in emerging-market economies has spurred the increased consumption of gasoline and diesel and jet fuels.

In 2005, the Middle East accounted for almost a quarter of this worldwide gain. China, whose industrializing economy expanded 9.4 percent in the third quarter, was the second- largest source of demand growth, followed by the U.S., which burns one-fourth of the world's crude oil.

The combination of surging demand and anemic supplies has pushed oil prices up about 20 percent a year since 2000. Prices touched a record $70.85 a barrel in August 2005 following Hurricane Katrina's U.S. landfall, more than triple the average of $19.69 in the 1990s.

Spending Falls Short

Oil companies didn't begin to boost investments until 2004. They probably spent $192 billion in 2005 to find and develop new wells, a 13 percent increase from a year earlier, according to a June forecast by James Crandell, a Lehman Brothers Inc. analyst who tracks industry spending.

The increase falls short of the $250 billion in investments that are needed annually over the next quarter century to prevent shortages of oil or natural gas, according to the IEA.

ConocoPhillips CEO James Mulva says his company is spending as much as it can on searching for oil and developing new wells. Mulva, 58, says investment is being constrained after 147 years of exploration as companies struggle to find deposits large enough to produce sufficient profits. In the past four years, the average discovery outside of North America was the equivalent of 38.6 million barrels. That's less than half the amount of oil burned every day around the world and the lowest average for a four-year period since 1901, Chew says.

``We're finding less and less,'' he says. ``The resource is still huge; it's just that much of that is either in the Arctic or places like Iraq.''

The Arctic

The Big Five are focusing investments on the world's biggest untapped oil fields to try to contain production costs, says Rick Roberge, Houston-based leader of the U.S. energy consulting practice at PricewaterhouseCoopers LLP. Conoco- Phillips's Mulva says he's aiming for deposits big enough to require at least a $1 billion investment and to meet his profit goals of at least $100 million in annual net income, or a 10 percent return.

The biggest deposits are in remote locations or buried very deep in the ground, driving up costs to record levels. ``New developments are occurring but in challenging and capital- intensive locations, such as the deep water, the Arctic and oil sands in Canada,'' Chevron CEO David O'Reilly, 59, told the Senate panel, made up of the Energy and Natural Resources and Commerce, Science and Transportation committees.

Venezuela, Russia

Total is drilling a well in Argentina to a depth of 11 kilometers (6.8 miles), one of the deepest the company has ever attempted. At that depth, where temperatures approach 200 degrees Celsius (392 degrees Fahrenheit), pipes and valves must be made of stronger, costlier materials to prevent collapse, according to the Society of Petroleum Engineers.

A Shell-led group built the Molikpaq platform off the coast of Russia's Far East to exploit reserves beneath the sea floor. The platform, which began operating in 1999, can pump oil only during the warmest months of the year because large blocks of ice make the sea impassable for tanker ships for half of the year. The cost of finding and pumping a barrel of oil reached an all-time high of $17.12 in 2004, up 43 percent from a year earlier, according to Bloomberg data.

``Costs are climbing at a speed you can't even imagine,'' says Christophe de Margerie, Total's head of exploration and production.

Too Cautious

The oil giants have become too cautious about where and how they spend their billions in cash, says Donald Coxe, who helps manage $21 billion, including shares of ConocoPhillips and Exxon Mobil, at Chicago-based Harris Investment Management Inc. He cites Canada, the biggest foreign source of crude for the U.S. market, as one place where the Big Five should pour more money into exploration.

They're competing with China, whose largest producer, China National Petroleum Corp., in August agreed to buy Calgary-based PetroKazakhstan Inc. for $4.18 billion. ``They better get moving on it, or pretty soon, the Chinese will have beat them to it,'' Coxe says.

Oil companies are taking fewer risks with exploration, Energy Department data suggest. The number of dry holes, or exploratory wells that failed to produce commercial quantities of oil or natural gas, fell 18 percent in the decade leading up to 2004. During the same period, success rates for U.S. drilling projects rose to 88 percent from 75 percent.

Companies aren't taking any chances with new refineries either. Oil executives say costs partly explain why they haven't built a refinery in the U.S., the world's biggest gasoline market, since Marathon Oil Corp.'s Garyville, Louisiana, plant went up in 1976.

Refineries

A 200,000-barrel-a-day refinery would cost more than $2.5 billion and would require margins of about $9 a barrel for 20 years to provide an 8 percent to 10 percent return, says Joel Maness, 55, senior vice president of refining and supply at Sunoco Inc., the biggest refiner in the U.S. Northeast. U.S. refining margins have never averaged more than $9 a barrel for more than eight consecutive months.

``It would appear there's a purposeful effort to keep refining capacity tight because it increases profits,'' Senator Dianne Feinstein, a Democrat from California, told executives at the November hearing.

Mulva, whose ConocoPhillips controls 3 percent of global refining capacity, disputed the senator's contention. ``Not only are we adding capacity but we're modernizing our refineries so we can make more gasoline, jet fuel and heating oil,'' Mulva told Feinstein during the hearing.

Asian Investments

The retrofitting of old units has increased production capacity by 12 percent in the past decade while demand for refined fuels has grown 15 percent, Energy Department figures show.

New refinery construction is focused on China, Singapore and other Asian markets. The Organization of Petroleum Exporting Countries, the source of 40 percent of the world's oil, is also courting the Chinese market to boost sales and grab market share from Russian crude producers. OPEC President Sheikh Ahmad Fahd al-Sabah was scheduled today to lead the cartel's first talks with China, where Saudi Arabia and Kuwait already have plans for $8 billion in refinery investments.

The refining shortfall in the U.S. helped raise fuel prices to painful levels for oil-dependent industries such as airlines. Shackled with overcapacity and weakened by competition from discount carriers such as Dallas-based Southwest Airlines Co., four airlines representing about 50 percent of U.S. passenger seats descended into bankruptcy in the past four years.

General Motors, Ford

In September, the Washington-based Air Transport Association of America, a trade group representing 19 carriers, unsuccessfully petitioned Congress for a $600 million exemption from fuel taxes to soften the blow of higher fuel prices.

The contagion has spread to U.S. auto companies as they take a beating from Asian rivals. Detroit-based General Motors Corp., the world's largest automaker, in November announced plans to shut 12 North American plants and cut 30,000 jobs after high gasoline prices contributed to a decline in sales of gas- guzzling sport utility vehicles.

Ford Motor Co. in Dearborn, Michigan, also curbed production of SUVs and said it would fire about 10 percent of its North American workforce after profits fell. The company is considering shutting as many as four plants, Buzz Hargrove, president of the Canadian Auto Workers union, says.

Other industries, such as railroads, trucking and shipping, have weathered rising fuel costs by passing them on to manufacturers, distributors and retailers, says Donald Seale, executive vice president of sales at Norfolk Southern Corp., the fourth-largest U.S. railroad operator.

Rising Costs

The Norfolk, Virginia-based company burns $4 million of diesel fuel a day, an expense that will increase during the next two years as the company expands its cohort of locomotives to serve rising demand for coal, Seale says.

Denney Transport Ltd., the largest U.S. shipper of organic meats, more than doubled the fuel surcharge added to freight bills in 2005 as the price of diesel fuel jumped, owner Michael Denney, 48, says. The price of fuel used to run his fleet of 70 refrigerated 18-wheelers rose 70 percent from the end of 2003 to Dec. 2.

``Without the surcharge, you don't survive,'' says Denney, who started the Commerce City, Colorado-based company in 1994 with a single rented truck.

Price increases like Denney's surcharge have spurred Federal Reserve policy makers to raise the benchmark U.S. interest rate 13 straight times. ``My concern about inflation is distinctly higher now,'' Federal Reserve Bank of Richmond President Jeffrey Lacker told reporters in October.

U.S. Growth

Still, in the third quarter, the U.S. economy was in its fourth-longest expansion since 1970, growing 4.3 percent, Commerce Department figures show. The rise in oil prices from 2003 to 2005 probably curbed economic growth by about 0.7 percentage point, Global Insight's Bethune says.

``Because we're so much wealthier than we were, these prices are taking a much smaller bite out of household income,'' says Jerry Taylor, a senior fellow and former director of natural resources at the Cato Institute in Washington. Annual disposable income in the U.S., adjusted for inflation, rose to $30,772 per capita in September, a 49 percent increase from September 1974, Bureau of Economic Analysis figures show.

Europeans, who pay twice as much as Americans for gasoline because of higher taxes, are also able to absorb higher fuel prices.

`Not So Painful'

When the Arab oil embargo of 1974-1975 sent fuel prices soaring, the average French worker could buy two liters of gasoline for an hour's wage, says Pierre Terzian, director of Paris-based Petrostrategies, an oil consulting firm. Today, that worker can buy six liters with an hour's labor.

``It's not so painful; otherwise, demand would drop,'' Terzian says.

The pain will likely get worse as demand increases faster than supply for at least the next decade, according to economists and analysts. A.G. Edwards & Sons Inc. analyst Bruce Lanni, former director of exploration and production at Atlantic Richfield Co., says oil prices will climb an average of 4.4 percent annually and average $62 a barrel by 2007.

As of Dec. 21, prices had dropped 17 percent from the August 30 record to $58.56. The decline followed bigger shipments of fuel to the U.S. from Europe and South America after Hurricane Katrina struck in August.

Boone Pickens, the Dallas hedge fund manager who in 2004 correctly predicted that oil would top $60 a barrel, says he expects the rally to regain momentum when imported stockpiles are burned through and demand once again bumps up against the limits of supply.

Pickens's Forecast

Pickens says the world's leading oil-producing countries, including Saudi Arabia, have grown accustomed to oil selling for more than $50 a barrel and would consider reducing production and exports if prices began to plunge. ``I don't think the Saudis will let it go below $50,'' says Pickens, whose views on oil helped turn a $37 million investment in 1997 into $2.4 billion today.

Exxon Mobil's Raymond and other chief executives told the Senate panel that prices have probably peaked. ``We are at the high point of a cycle,'' Raymond told the senators. ``We go through many cycles. I can recall with pain when oil was at $10 a barrel.''

Thus far, record oil prices haven't convinced the Republican-controlled U.S. Congress to heed calls from Democrats to resurrect the windfall profits tax.

One-Time Tax

In opposing the move, Republican senators such as New Mexico's Pete Domenici, chairman of the energy committee, cite a Congressional Research Service report about the 1980 windfall tax. The report said the tax, which was repealed in 1988, led producers to curb U.S. crude output by as much as 6 percent to skirt the levy, boosting oil imports as much as 16 percent.

The only proposal alive in Congress targeting the industry is a one-time, $4.3 billion tax. ``What we need to be doing as an industry is spending all of our money to add capacity,'' Conoco-Phillips's Mulva told senators in arguing against new taxes.

The biggest boost in industry spending in 2005 was for acquisitions, not exploration, continuing a pattern from the 1990s. Five weeks after Mulva's Senate testimony, he agreed to buy Houston-based oil and natural gas producer Burlington Resources Inc. for $35.6 billion in what would be the biggest oil merger since 2001.

`Reshuffling'

In 2005, energy companies announced $202.5 billion in deals as of Dec. 16, more than double the amount spent in 2004 and the highest annual total since 1998, according to Bloomberg data.

``There are two ways to get new reserves,'' says Robert Kaufmann, director of graduate studies at Boston University's Center for Energy and Environmental Studies. ``Go out and drill for them or buy someone else's. They are increasingly doing the latter, and the problem with that approach is it doesn't add any new barrels of oil. It's just a reshuffling of the cards in the deck.''

If the petroleum industry continues to plow capital into acquisitions at the expense of exploration, the leaders of the Big Five may find themselves once again hauled before an irate Congress. The next time it may cost them substantially more than airfare to Washington and a limousine ride to the Capitol.



To contact the reporter on this story:
Joe Carroll in Chicago at jcarroll8@bloomberg.net