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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