Tuesday, August 08, 2006

Investing in oil exploration

Oil companies are investing in exploration and new technologies for extracting oil. You didn't see this on the TV news. They are investing MORE than the amount of their record profits. The Washington Times reports.
Big Oil's record profits attract attention and outrage, but an independent study has found that oil companies do exactly what economic textbooks say they should do with all that money: They invest it in oil exploration and development efforts that eventually should relieve pressure on prices. The top 20 U.S. and Canadian oil companies actually invested 50 percent more than they earned in the past 10 years in efforts to produce more oil ...
Wouldn't you try to perpetuate the business you managed? But they are challenged because the cheap opportunities are gone, so the costs are much higher.

... but adverse geopolitical developments conspired to give them fewer opportunities to expand production while fading oil fields in the U.S. and elsewhere forced them to spend substantially more just to maintain current production, according to the study by the Ernst & Young accounting firm.

"Reinvestment is under way, and it's strong," said Charles Swanson, an energy analyst at the firm, but "average costs to find and develop oil and gas reserves have tripled since 1997, while total reserve-replacement costs have more than doubled."

They invested more than their profits? Yes. 50% more:
The study found that the top companies -- including Exxon Mobil, ConocoPhillips and Chevron, among others -- took in a mind-numbing $5 trillion in revenue from sales of oil and related products between 1995 and 2005. After subtracting the cost of equipment, leases, labor and other operating expenses, the companies posted whopping profits of $336 billion. Over the same time span, however, the companies spent even more than they earned -- $550 billion -- on oil exploration and development. Some of them went deeply into debt to finance new ventures, especially during times of lean profits. Despite the massive sums of money oil companies spent trying to find more oil for the world's fuel-thirsty consumers, returns on investment over the past 10 years declined sharply because most existing oil fields in the West are in decline and the most promising new discoveries are not available for development, Ernst & Young found.

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