Major U.S. oil companies are set to spend more than ever next year, as they bolster funding for massive projects world-wide. But the outlays are raising concerns that the multibillion-dollar budgets are being driven by labor, materials and currency costs.
Major U.S. oil companies are set to spend more than ever next year, as
they bolster funding for massive projects world-wide. But the outlays are
raising concerns that the multibillion-dollar budgets are being driven by
labor, materials and currency costs.
For shareholders, the negative effects of inflation and currency fluctuations
in the short term could outweigh the benefits of investing in projects to
promote future growth.
Chevron Corp. (CVX) expects to spend a record $37.2 billion in capital projects
in 2012, 17% more than this year. ConocoPhillips (COP) has said its next-year
capital budget of $15.5 billion will be 15% higher than in 2011. ExxonMobil
Corp. (XOM) is expected to unveil in March a 5% increase over its current
budget of $35 billion, according to Barclays Capital.
The increases continue a trend that was interrupted by the 2008-09 financial
crisis. The oil companies' capital expenditures typically rose from year to
year, until oil prices collapsed in late 2008. Spending stagnated until this
year, when profits and budgets jumped following a recovery in oil prices.
In 2012, spending is poised to continue swelling as companies fund projects
that will drive their production growth and reserve replacement for decades. But
part of the boost comes from the higher costs of equipment, materials and
labor.
"We see strong cost pressure in
Australia
and
North
America
," says Robert Plummer, an analyst with energy consultancy Wood
Mackenzie. "There is a huge competition for workers and services in these
regions."
The energy industry is growing faster than labor in places such as
Australia
,
where a number of liquefied-natural-gas projects have boosted demand for
everything from front-line managers to drilling engineers to metallurgists. The
resumption of deep-water drilling in the U.S. Gulf of Mexico and the shale-gas
boom have also increased competition for skilled workers and equipment in the
U.S.
A shortage of deep-water rigs that meet heightened safety standards are
expected to result in a rise in rig leasing rates to more than $500,000 a day
by next year, according to Barclays. Rates have been around $400,000 a day
since the end of the nine-month drilling moratorium the federal government
imposed in May 2010 after the Deepwater Horizon oil spill.
On land, Morningstar analyst Mark Hanson estimates the price for drilling rigs
could rise as much as 15% next year in oil-rich regions such as the Eagle Ford
shale in
Texas
and
the Bakken Shale in
North Dakota
,
where companies are accelerating drilling in order to take advantage of high
oil prices.
Exxon, Chevron and Conoco declined to comment on whether rising costs were
driving their capital-expenditure increases, nor would they reveal how much of
their 2012 budgets represent inflation.
A large increase in capital expenditures is a controversial issue for investors
because spending more money doesn't necessarily mean generating higher returns
for shareholders, said Allan Good, an analyst with Morningstar Inc.
Oil companies invest billions in projects they think will be profitable in the
future, but a change in the marketplace could make the project obsolete, as it
happened with the LNG projects being built in the U.S. Companies spent billions
building LNG import terminals, but new shale-drilling techniques have sharply
increased domestic natural-gas supplies, eliminating the need for imports.
"Investors are leery of oil companies opening their purses for
unprofitable projects. But on the other hand investors want companies to
grow," said Fadel Gheit, an analyst at brokerage firm Oppenheimer &
Co. "One thing for sure is that investors don't want to know companies are
raising budgets to offset inflation."
Also beefing up budgets is a stronger Australian dollar. Conoco and its partner
Origin Energy Ltd. (ORG.AU) recently agreed to begin construction of their
US$20 billion gas-export project. To get the Australia Pacific LNG project off
the ground, Conoco will need to convert U.S. dollars to the local currency at a
time when the Australian dollar has gained nearly 70% from its 2008 lows.
Conoco Chief Financial Officer Jeff Sheets said in October that the capital
budget for next year will increase mainly due to foreign-exchange impacts in
Australia
.
Exxon also has had to spend 5% more than it planned for a joint-venture
gas-export project in
Papua New Guinea
because of the strong Australian dollar, the
U.S.
oil
giant's partner Oil Search Ltd. said early this month. Some of the contracts
for the project were signed with Australian companies, and the project has a
large office in
Australia
's
Queensland
state.
As costs have soared, companies have developed creative ways to ease the pain. Chevron
recently said that much of the work for its US$37 billion LNG Gorgon project in
Australia
was
being built in modules in Asian yards where labor is cheaper. The company has
said it may use the same system for its recently approved US$29 billion
Wheatstone project, Chevron's second major Australian LNG development. Chevron
maintains Gorgon and Wheatstone are on schedule to start production in 2014 and
2016, respectively, and that they will be within their budgets.
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