The Sunday Telegraph: The great cash gusher: “Thanks to crude prices that have averaged more than $40 a barrel over the past 20 months and which last week broke through the $67 a barrel barrier in New York, the oil giants are drowning in cash.”: “BP, ExxonMobil and Royal Dutch Shell have given a new meaning to the concept of "record profits".: "The Treasury declined to rule out a windfall tax. "The Government is committed to the delivery of a tax regime for the North Sea which promises investment and takes a fair share of revenue derived from a national resource. All taxes are kept under review on a budget by budget basis," it said.": Sunday 14 August 2005
By Sylvia Pfeifer (Filed: 14/08/2005)
Lord Browne had just one word for it. "Staggering" was how the head of BP, the oil giant, described his company's performance earlier this year.
It is not often that chief executives, especially ones as heavyweight as Lord Browne, are quite so effusive about their company's performance - in this case, BP's generation of cash - but he was stating the obvious. Thanks to crude prices that have averaged more than $40 a barrel over the past 20 months and which last week broke through the $67 a barrel barrier in New York, the oil giants are drowning in cash.
BP, ExxonMobil and Royal Dutch Shell have given a new meaning to the concept of "record profits". Last year ExxonMobil, the world's largest oil company, generated more than $43bn (£24bn) of cashflow from operations and asset sales - mainly thanks to the benign operating environment.
BP and Shell have not been far behind. Last month BP established a new record for a UK company when it announced first-half profits of $10.4bn (£5.7bn) - equivalent to generating £33m a day, £1.4m an hour or £382 a second. Jeroen van der Veer, the Shell chief executive, was hard on BP's heels just a few days later, reporting profits for the first half of £5.6bn - £1.3m an hour. To put that into perspective, BP could buy 129,000 Rolls-Royce Phantom cars every single day.
And things can only get better - or so it seems. According to analysts at Goldman Sachs, the US investment bank, at $50 a barrel, BP and Shell combined will generate $70bn of cash in this financial year - a figure that is greater than the economic output of Qatar, Luxembourg and Lebanon combined, or 4 per cent of UK GDP.
Tight supplies, coupled with a lack of refining capacity in America, have been the main drivers behind the high prices. Last week the International Energy Agency urged the Organisation of Petroleum Exporting Countries (Opec) to pump more oil as supplies from outside the cartel are falling short of expectations.
Meanwhile, the burning question for the oil majors has been how to spend their windfalls. And while it may sound like an enviable problem, Browne and his counterparts are coming under pressure to do what chief executives with too much cash often do - splurge on a massive one-time dividend or embark on a huge acquisition.
So far, it seems that none of the oil giants are in favour of doing either. Lee Raymond, the widely respected chief executive of Exxon-Mobil who stands down at the end of this year, said as much when the subject was raised earlier this year.
"When inevitably you ask me how we manage our cash, I will remind you that we take a long-term perspective. First, we will not do anything stupid or silly," he barked. "Secondly, don't expect us to take mechanistic or knee-jerk reactions. We will continue to take a patient, disciplined approach to how we manage cash."
Of course, the corollary of all those riches for the oil companies is higher costs for businesses and consumers. Last week the cost of a litre of unleaded petrol rose above 90p for the first time. Household bills for gas and electricity are also on the rise.
Predictably, politicians are wondering whether there is a case for a windfall tax on oil companies. Earlier this year Martin O'Neill, the then chairman of the Commons Trade and Industry Select Committee, said a windfall tax on profits made in the UK should be considered.
And the sector's record earnings are coming under renewed scrutiny. "The fact that the oil companies' share prices have jumped so sharply at what is bad news for consumers must be a cause for concern," says Peter Luff, the Tory chairman of the select committee. "I am sure the committee will look at how the Government has responded to the increase in prices and we will want to make sure everything has been done to help British consumers."
Tony Woodley, the general secretary of the Transport and General Workers' Union, is more categorical. "Excessive profits made from rising oil prices shouldn't be allowed to fatten the wallets of directors and shareholders. The Government should announce a one-off windfall tax to fund proper compensation for workers who've lost their pension when their company went bust. "
The Treasury declined to rule out a windfall tax. "The Government is committed to the delivery of a tax regime for the North Sea which promises investment and takes a fair share of revenue derived from a national resource. All taxes are kept under review on a budget by budget basis," it said.
Supporters of the oil companies say calls for a windfall tax miss the point. Both BP and Shell have historically made around 10 per cent of their profits from their activities in the UK, which would make it difficult to impose a blanket tax.
That said, an increase in the petroleum revenue tax on oil flowing from the North Sea might be practicable. But it could lead to a reduction in investment in those British waters, which would not be a desirable outcome, especially on the back of earlier cuts.
"Any decision on tax is not ours to make but we have warned in the past that windfall taxes don't exactly inspire investors' confidence to go on spending the amount of money they are spending," says David Odling, the commercial manager of the UK Offshore Operators Association.
Companies are expected to spend more than £4bn of new investment on exploration and development in the North Sea this year. An additional £5bn has also been earmarked for ongoing operations.
Odling points out that Britain's economy is a substantial beneficiary of high oil prices. According to the offshore operators' association, Gordon Brown, the chancellor, will receive a £10bn tax windfall from the North Sea if prices remain higher $50 a barrel until the end of the year.
That's nearly twice the estimated £5.2bn the Treasury received last year - and is especially welcome in the light of a recent deterioration in the public finances. Brown also expects to receive at least £24.6bn in duties from petrol this year, excluding VAT. The duties account for 47.1p of the pump price of a litre of unleaded petrol.
The cash that isn't handed to the chancellor has tended to go to shareholders. Most of the oil majors have elected to spend the bulk of their cash on increased dividends and share buybacks. Browne has pledged to return all "excess" cash to shareholders as long as the oil price remains above $20 a barrel.
According to Goldman Sachs, BP will spend around $10bn this year on share buybacks, $7.5bn on dividends and $15bn on capital expenditure. The rest of the forecast $35bn of cashflow is expected to go towards paying down debt. Shell, which started its share buyback programme last week, is expected to spend between $3bn and $5bn on buybacks, $7.5bn on dividends and around $15.5bn on capital expenditure.
Not everyone believes that high crude prices are here to stay in the very long term. Last week industry veterans insisted that many executives still had to be convinced that the world has permanently changed.
"New projects have an economic lifecycle that is measured in decades and companies have to plan their investment over a very long period. Companies have to plan projects so that they earn a target rate of return even in a downward cycle," says one veteran. "The time of $10-a-barrel oil that we saw in 1998 is still fresh in people's memories."
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