Wednesday, April 23, 2008

Incentives Count-For Oil Companies Too!

"ExxonMobil Corp. doesn't make many mistakes. In the often-chaotic petroleum business, its careful budgeting and efficient operations are widely admired. But Exxon's stingy approach to capital spending--amid skyrocketing oil prices--could be a target of second-guessing for years to come. ... Consider these numbers. In 2007, Exxon spent 5.3% of revenues on exploration and capital outlays, down from 6.5% in 2003. The actual dollar amounts did increase, to $20.9 billion from $15.3 billion. But they didn't keep pace with Exxon's overall revenue growth, let alone soaring oil prices. ... 'Exxon has consistently been the most cost-disciplined of the big oil companies,' says Morgan Stanley analyst Doug Terreson. 'They most likely believe that the historic rise in oil prices isn't sustainable. Otherwise they would be spending a lot more than they have.' ... What's more, countries such as Venezeula and Russia have become more assertive about the terms on which foreign oil companies can operate within their boundaries", George Anders at the WSJ, 16 April 2008.

"Russian oil production declined in the first quarter of 2008. ... But since 2003, the most efficient Russian oil company, Yukos, has been dismembered, contracts with efficient foreign operators such as Royal Dutch Shell have been forcibly renegotiated, and Russia has imposed an 80% tax on revenue after the first $27-a-barrel price. ... Venezuela recently seized majority control of foreign oil concessions, so even with the world's largest oil reserves, its production has declined since 2006. Nigeria taxes foreign oil companies at 98%; its production has declined 10%", WSJ, 16 April 2008.

I think Terreson is all wet. I suspect Exxon's management believes current oil prices will be maintained, but Exxon will be unable to profit from them as a result of tax changes and contract renegotiations.

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