Financial Times: Back to basics: “Of course, Shell has particular problems of its own after the scandal over its inflated oil reserves and it is under heavy pressure to replenish and expand its proved reserves.”: Thursday 15 December 2005

By Paul Betts

Published: December 15 2005

Oil companies seem to be going back to basics. Since the rush to Kazakhstan in the early 1990s, low oil prices have encouraged the majors to cut back on exploration and build up reserves through acquisitions or maximising existing fields with new technology.

Nobody, not even the biggest companies, ever envisaged five years ago that prices would shoot up and remain at exuberant levels. Indeed, despite steadily rising consumption, the amount of oil revenues reinvested by the majors in exploration and production kept falling.

Instead, the majors preferred to indulge their shareholders by returning to them large dividends that often matched or even topped investment spending.

Judging from Shell's announcement this week that it is raising its annual spending targets by 27 per cent, the majors are having second thoughts.

Add to this the whopping sum ConocoPhillips is prepared to pay for Burlington Resources, and one can only conclude that buying reserves on Wall Street has become an increasingly rare and expensive alternative.

Of course, Shell has particular problems of its own after the scandal over its inflated oil reserves and it is under heavy pressure to replenish and expand its proved reserves. But Shell's move reflects a broader industry trend with oil companies ploughing a larger share of their record profits into finding and producing oil and gas in increasingly hostile environments.

This is probably the best way for a mature and concentrated industry to grow, even if it means a little less largesse for shareholders.

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