Baker Institute study shows 'Big Five' oil companies limit exploration

November 12, 2007

A study released today by Rice University's Baker Institute for Public Policy finds that the "Big Five" international oil companies (IOCs) are spending less money on oil exploration in real terms despite a four-fold increase in operating cash flow since the early 1990s. On the flip side, the study, "The International Oil Companies," 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.

The analysis is based on Baker Institute research on investment expenditures by the IOCs, the next 20 largest U.S.-based oil firms and national oil companies (NOCs). Data were culled from U.S. Securities and Exchange Commission filings going back to 1995 and, in the case of NOCs, to news reports and other public data.

The study found that the Big Five (ExxonMobil, Royal Dutch Shell, BP, Chevron and ConocoPhillips), 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 Amy Myers Jaffe, co-author of the report and the Wallace S. Wilson fellow for Energy Studies at the Baker Institute. "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."

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 IOCs still rank among the largest oil and gas producers worldwide, and these Western majors have also achieved a dramatically higher return on capital than national oil companies of similar size.

"The Five Big IOCs are still an important force in the market. Their production represents over 20 percent of non-OPEC production," notes Jaffe. "But, investors are placing a higher premium for the stock shares of emerging national oil companies, despite the measurable edge the majors have in terms of operational efficiency. Clearly, they are betting on who will own the oil in the future. Last week's announcement that Brazil's state oil company had an 8-billion-barrel discovery is a case in point."

Study findings summary:
-end-
The study's authors are Amy Myers Jaffe, Wallace S. Wilson Fellow in Energy Studies, at Rice University's Baker Institute, and Ronald Soligo, professor of economics; Baker Institute Rice Scholar.

To view the complete study, visit: http://www.rice.edu/energy/publications/docs/NOCs/Papers/IOCs_Jaffe-Soligo.pdf.

To set up an interview with Amy Jaffe or Ronald Soligo, contact David Ruth at 713-348-6327 or druth@rice.edu.

Rice University

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