Study: Oil majors put more cash into stock than exploration

Turns out the Big Five are betting more of their money on themselves than on new oil exploration, according to a study released by Rice University’s Baker Institute for Public Policy.

Where the Big Five are putting their cash. (from Rice report)

The “Big Five” (ExxonMobil, Royal Dutch Shell, BP, Chevron and ConocoPhillips) spend less money on oil exploration today despite a four-fold increase in operating cash flow since the early 1990s, according to the study co-authored by Amy Myers Jaffe, the Wallace S. Wilson fellow for Energy Studies at the Baker Institute.

The study found that the Big Five used 56 percent of their increasing cash flow on share repurchases and dividends, which were good for investors in the short term but put at risk the companies long-term oil reserves.
“The handwriting is on the wall. The oil majors are not replacing reserves,” said Jaffe. “It’s as if they are slowly liquidating their long-term asset base. They may see a declining rate of production over time and eventually that is bad news for both their shareholders and consumers.”

On the flip side, the study finds that second-tier oil companies are spending more in exploration, positioning themselves to be in better shape when it comes to future oil reserves.
State-owned monopolies, known as national oil companies (NOC), represent the top 10 oil reserve holders internationally. By comparison, ExxonMobil, BP, Chevron and Royal Dutch Shell are ranked 14th, 17th, 19th and 25th, respectively.
The five oil majors are still an important force in the market, Jaffe said, but their product is just 20 percent of non-OPEC production.
Other findings:
* Exploration spending by the big five has been flat or lower in the aftermath of OPEC’s reinvigorated effort to constrain market supply in 1998.
* This trend appears, however, to be easing, with exploration spending by the big five rising by 50 percent in 2006 over 2005.
* The next 20 largest U.S. oil firms have steadily increased exploration spending since 1998 and their spending now equals that of the big five.
* Oil production of the big five largest oil companies has declined from 10.25 million barrels a day (b/d) in 1996 to 9.45 million b/d in 2005, although there was a rebounding to 9.7 million d/b in 2006.
* The next 20 U.S. independent oil firms have seen their oil production rise since 1996, from 1.55 million b/d to about 2.13 million b/d in 2005 and 2006.