For Big Oil, does the future look too much like the past?

From Times staff writer Edward Silver:

With Big Oil pumping out immense profits, you’d think cash would be available to fund renewable-energy programs. It is, and there's plenty of it, yet the majors' outsize earnings may be leading them back to the oil patch instead.

In February, BP said it would regard its impressive solar and wind operations strictly for their equity value and might spin them off. So much for Beyond Petroleum. More recently, Royal Dutch Shell withdrew from a landmark wind project in Britain and in 2006 sold the lion’s share of its solar interests to a German firm.

Exxon Mobil Corp., the giant among giants, remains outspoken in its belief in the enduring primacy of oil -- an issue that activist shareholders challenged at the company's annual meeting today in Dallas. Energy alternatives have gotten a bit more traction at Chevron Corp. and ConocoPhillips, but they still take a far back seat to other priorities at those premier fossil fuel marketers.

Big Oil commands the expertise, and certainly the resources, to play a transformative role in tackling the planet's energy dilemma. That, however, would entail a measure of self-transformation. At least in the short term, these profit machines have little incentive to bear the costs of a new mission or foster a culture of change.

Contrast their stance with that of U.S. carmakers. General Motors Corp., for one, is scrambling for survival by investing in hybrids, fuel cells and other technologies that limit oil use and carbon emissions. "The auto industry has been disciplined by the marketplace," said Deron Lovaas, a transportation expert with the Natural Resources Defense Council. "Their profit margins are gone. The marketplace is not providing the discipline for the oil companies to help get us where we, and they, need to go."

Instead, the majors are going to Canada’s Alberta province to squeeze oil out of tar sands. These lands contain potentially 175 billion recoverable barrels, but don't expect to see gushers. The oil is embedded in sand, clay and silt, and its extraction requires great flows of water and natural gas. In the process, a heavy load of CO2 is released, much more than in conventional oil operations. Costs are steep in the tar sands. The added overhead is justified only by the startling price the resource now fetches.

Why are the majors going to such trouble? As the cliché says, the low-hanging fruit already has been picked. Access to the world’s rich fields is dwindling for the Western oil powers. Stagnant global output is fanning supply fears –- is "peak oil" approaching? -– and state-controlled companies overseas have a lock on the majority of the remaining assets. Consider that in the most recent quarter, maturing wells and confiscation in Venezuela factored into a 10% decline in production at Exxon Mobil. For investors, that was an oil shock of a different kind.

"Many people in the industry I speak to off the record admit to being quite terrified about where future supply is coming from," said Andrew Logan, oil program director at CERES, which works with investors toward environmental goals. "They don’t know what to do, so they are investing in these secondary sources. They see where the future is going, but their business is so good currently that they fear the market response if they diversify."

Indeed, Big Oil is finely attuned to rewarding shareholders by throwing off cash. Stock buybacks outstrip spending to find oil and gas, to say nothing of the industry’s minuscule investment in clean and renewable fuels. Exxon, for example, racked up almost $405 billion in revenue last year, taking home $40.6 billion in profit. About $21 billion was channeled into capital costs, including exploration.

By contrast, the company laid out $31.8 billion to take its own shares out of circulation. And then there's the ever-rising dividend. Even after the buybacks, Exxon has $41.4 billion in cash sitting on its balance sheet.

Exxon's direction is under fire from some activist investors. At the annual meeting today ballots will be taken on a series of resolutions mandating sustainable-energy projects, along with a proposal to separate the roles of chief executive and chairman.

The California Public Employees' Retirement System, the biggest public pension pool in the U.S., is an avid backer of the campaign, which CERES helped organize. Large swaths of the Rockefeller clan –- descendants of Exxon's founder, John D. -- are keen to see the company's top jobs divided. A smaller but still sizable contingent favors the green intitiatives. (Post-meeting update: The ballot measures failed. Go here for the results.)

These investors say the firm's own sustainability is at risk, not just energy resources. To keep the rich returns coming, they argue, Exxon can't ignore the need to adapt to a low-carbon future, with momentum shifting to renewables. Better, why not lead the way?

It's a future that's still blurry, but it promises to change the equation for Big Oil. As the majors tear up the tar sands and delve into even more experimental sources like the shale along the Continental Divide, each unit of energy becomes more costly to extract.

Regulation is likely to pile on additional burdens. Lawmakers are expected to attach a price to carbon emissions in the coming years and potentially raise standards for clean-burning fuels. Investors aren't being warned because no one can put their finger on the charges. Analysts on Wall Street "don't know how to capture these potential costs yet," said Philip Weiss of Argus Research. If and when the numbers change, he said, oil company shareholders may be in for a rude surprise.

Weiss applauds the majors' dive into the tar sands but also believes they need to direct some of their vast resources into alternatives. He favors the venture capital model rather than in-house projects -- he’s not sure these old hands are built to go about the task effectively themselves.

"Oil is a depleting resource, and if I’m a shareholder, that's something I care about," Weiss said. "If the company does nothing to replace it, eventually that company is going to go away."

Photo: Lisa Poole/Associated Press

Comments

[diamondcutter]

it is really a shame that the only concern of big money is bigger money. what is even more remarkable is padding ones 401k for the sake of oil. those that will pay the price are those that can least afford to. when you drive big SUV's and could care less what you pay at the pump are those who would quote Marie Antoinette "Let them eat cake."...this was the beginning of the French Revolution.

[Clifford J. Wirth]

Peak Oil is now, according to the U.S. Army Corps of Engineers, the Association for the Study of Peak Oil, T. Boone Pickens, Matthew Simmons, and now even the voice for the oil industry -- Cambridge Energy Research Associates -- appears to admit that global oil production is outstripped by demand. Peak Oil is a catastrophe. Oil under girds the world economy, and there are no real alternatives, according the government and scientific studies, reviewed at this free report: http://www.peakoilassociates.com/POAnalysis.html

[Michael Snyder]

The last thing any oil producer wants to see are alternative sources of energy. Ethanol has been available since "before gasoline" (how's that for a hook) yet its' potential was never explored until Chevron and BP were "positioned" to take advantage of it. What's more those alternative energy divisions were funded with US taxpayer dollars so the profits from their sale should be returned to the investors. That would be us. We could also use a little love from the ridiculous run up in grain futures that is making it even more difficult to feed our own families. After all, food was affordable before this administration decided to burn it.
Under the present administration oil has been king. Anyone who still thinks the invasion of Iraq was anything but a bungled oil grab is lost in the desert looking for evidence of WMDs. Honda is producing a "closed loop" hydrogen vehicle; that means the hydrogen is generated by solar power, but do we hear about it in the US? What about using the corn stalk & saw grass instead of the grain itself? O' yea, that's right. The billions of dollars in "research grants" have not made it profitable enough for BP to refine ethanol from "waste products". So in our "wisdom" we create an international food crisis and if you follow the money who do you find? You got it, Chevron, BP, Shell...
Our country would be well served by regaining the respect it once had for small business.

[Michael Snyder]

I just logged onto www.bloomberg.com where Mark Shenk details another prime example of the herd mentality in the commodities markets in "Oil Rises After Morgan Stanley Says Brent Oil May Reach $150". The title pretty much says it all and once again I'll bet that market would cool off in a hurry if investors were required to put up a reasonable amount of hard currency; say what lenders require on a fixed rate mortgage on their investments/bets. If levels reach what these market manipulations are striving for supply will no longer be a problem as no one will be driving / flying anywhere.
I'm amazed daily by the inherent resilience of our economy, but I fear this long term addiction to no-load manipulation of markets has finally stretched it to a breaking point.

[puciret]

Would thoroughly enjoy someone coming in with an alternative to oil as the main fuel for automobiles and seeing the big monied investors having to eat " Sara Lee " like the rest of us peons.

[Dick Thicke]

Big Oil can go to HELL..........it is going to be so much fun to watch when this bubble finally bursts, and it WILL. What's more, I hope that the speculators also get what is coming to them soon as well.

[puciret]

Contrast their stance with that of U.S. carmakers. General Motors Corp., for one, is scrambling for survival by investing in hybrids, fuel cells and other technologies that limit oil use and carbon emissions. "The auto industry has been disciplined by the marketplace," said Deron Lovaas, a transportation expert with the Natural Resources Defense Council. "Their profit margins are gone. The marketplace is not providing the discipline for the oil companies to help get us where we, and they, need to go."
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What a crock of propaganda this is. GM claims to have been struggling for the last 30 years. If their profit margins are in crisis then their execs know nothing of it. The only people who have suffered are the Blue Collar and some of the lower echelon gophers. The upper execs suffering is analogous to Lucky Luciano's trip to prison...a tolerable existence at its extreme. A few less perks but most of the amenities remain intact. Their "desperate" struggle for survival has been put on the back burner in favor of huge profits at the Blue Collar and the consumers expense. Right now its more profitable to keep cranking out junk then to spend some of those " Lost Profits " on re-tooling and building a quality product. I , for one, have no sympathy for these greedy profiteers. You can blame it on the Unions or blame it on the bossa nova...but the truth is the captains and the admirals are responsible for the sinking ship and not a mutinous crew.

[Brian Osterhouse]

Sure the proftits are record and astonishing when stated in terms of dollars. When viewed as a percentage they are average at best compared to the overall volume of business. Blaming Big Oil is just using a scapegoat to avoid to avoid the collective personal responsibility of greedy consumbtion.
Defending Big Oil? http://www.sifallorsum.com/Oil.html