Stuff.co.nz (New Zealand): Oil firms say powerless to cool soaring prices: A spokeswoman for Royal Dutch Shell said its failure to pass on the full brunt of record oil prices meant its UK retail operation was now losing money.": "Tuesday 13 September 2005

LONDON: Oil companies have deflected growing pressure from European ministers and fuel protesters, saying they are powerless to cool soaring fuel prices, despite reaping windfall profits as a result.

A weekend meeting of European finance ministers called on oil firms to invest more to boost drilling and refinery capacity, in order to bring down the record cost of oil.

However, the oil majors counter they are investing amply and raising production as rapidly as possible in an environment where good drilling opportunities are getting scarcer.

"We are developing everything we can, as quickly as we can," said a spokesman for France's Total, the world's fourth largest oil firm by market value.

The international oil companies (IOCs) argue that pump prices are determined by international oil markets, over which they have little control.

The IOCs say they have actually moderated retail price increases by absorbing some of the wholesale price rises.

A spokeswoman for Royal Dutch Shell said its failure to pass on the full brunt of record oil prices meant its UK retail operation was now losing money.

Privately, oil executives say the greatest area of flexibility in bringing down retail prices lies with European finance ministers themselves, who reap around 70 per cent of pump prices in taxes.

In the past few years, European fuel protesters have tended to agree, focussing most of their efforts on achieving tax cuts.

Farmers protested in Northern France on Monday against high fuel prices and more demonstrations are planned for later this week in the UK and France.

This time oil firms find themselves facing more criticism because of the record profits they are making.

While oil firms say they earn little from retailing fuel, soaring energy demand and a dearth of new refineries mean extracting crude from the ground and refining it has never been more profitable.

Oil firms are making money quicker than they can spend it on new opportunities and consequently they have boosted cash disbursements to shareholders, through share buybacks and dividends, by billions of dollars in the past year.

Governments would like to see more of that money spent on boosting crude production and refining capacity.

Companies say there are many constraints that stop them from raising investment sharply but that even if they did, the long lead time on projects means that it would be six or seven years before additional projects could impact oil markets.

One of the biggest problems oil firms face is simply finding large projects to invest in. Big finds are getting scarcer, industry players say, while the richest resources, in the Middle East, are closed to Western investment.

"The perception is that the industry is opportunity constrained... it is a tougher environment," said Jonathan Copus, oil analyst at Investec.

European Finance Ministers seemed to empathise with this challenge by also calling on oil producing countries to remove barriers to investment.

However, few in the oil business expect those countries which impose restrictions on investment, such as Saudi Arabia, to lift these in the near future because high prices remove their need for foreign investment.

The IOCs are also constrained by a shortage of qualified staff. The average age of the industry's geologists and project managers is rising as firms find it harder to attract new recruits.

Even if suitable projects can be found, the current high cost of making investments means the kind of large scale increase in investment espoused by politicians, could jeopardise the long term financial health of oil firms, analysts said.

Drilling costs have soared in the past year, as has the cost of buying oil and gas licences. Oilmen say that if crude prices fall sharply, many deals currently being agreed may turn into financial millstones.

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