OIL INDUSTRY Cautious approach to drilling new wells

Oil companies pay down debt and give dividends instead of exploring.
WASHINGTON POST
WASHINGTON -- As oil prices have been hovering near record levels, oil company executives have been running their businesses as if prices will sink.
When the companies look around the world to determine where to spend money on new oil and natural gas projects, many are assuming prices for a barrel of oil will be in the low- to mid-$20s in future years, a far cry from the current $50 a barrel. They are plunking down cash conservatively, showing little interest in projects that would meet profit goals only when oil prices are high.
This behavior reflects an industry that has weathered a history of profitable booms and wrenching busts. The cautious approach to investing causes world energy officials to worry that exploration and development for oil and natural gas will not keep pace with demand.
The International Energy Agency, which represents 26 industrialized countries, thinks that international oil companies and countries' national oil companies need to invest about $200 billion a year to keep up with demand but are falling 15 percent to 17 percent short.
"There is not enough exploration worldwide," said Claude Mandil, head of the Paris-based energy agency. "There may be a problem in five years."
Slow spending
While capital spending on oil and gas is forecast to increase slightly in dollar value this year, it has not gone up in proportion to companies' increasing cash flow, according to the consulting firm John S. Herold Inc. of Norwalk, Conn.
"Cash is now pouring in, but so far reinvestment has not risen at nearly the pace witnessed in prior oil and gas bull markets," according to a recent Herold report. "Companies appear to be investing relatively cautiously and seeking to maintain capital discipline."
Herold estimates that the five largest oil companies -- BP PLC, Total SA, Chevron Texaco Corp., Exxon Mobil Corp. and Royal Dutch/Shell Group -- will spend nearly $65 billion on capital costs this year. That would be the lowest spending as a percentage of cash flow -- 54 percent -- in the past four years that Herold analyzed. Some of the increases in spending this year are a result of inflation, not more activity, analysts said.
As a result of limited investment, the world's ability to refine oil has not increased significantly in the past two decades, and there are far fewer rigs drilling for oil now compared with the early 1980s, when there was a flurry of activity, analysts said.
Where's the money going?
Many large oil companies are returning money earned from high oil prices to investors in dividend payments and are buying back stock. Some also are paying down debt. Wall Street has been rewarding the companies' behavior, and stock analysts have applauded the companies' approach.
Some analysts expect capital spending to increase slightly next year.
John Felmy, the chief economist for the American Petroleum Institute, a Washington trade association for the industry, said that companies are investing significantly in exploration and development. He said companies need to show restraint, however, given the cyclical nature of the oil business.
"Look back five years," Felmy said. "We had $11 oil. You have to be prudent with your investments."