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Financial Times: Oil spike gives BP room to return up to $65bn

By Carola Hoyos in London
Published: February 8 2006 02:00
BP yesterday revealed it planned to return up to $65bn (£37bn)to shareholders during the next three years in what promisesto become an industry-wide bonanza.
Depending on oil price movements, shareholders of the world's five biggest listed energy groups could receive as much as $250bn through share buybacks and dividends in the next three years, according to data provided by UBS, the investment bank, based on guidance to investors.
The exact amount will vary depending on the oil price but it is based on UBS's assumption of $56 a barrel – at the higher end of expectations, but still below the $60 a barrel mark underpinning BP's $65bn figure. Brent crude closed yesterday at $62.16 a barrel. If oil prices were to fall to $41 a barrel, the average for the years 2003-05, BP said investors could still expect around $50bn.
In 2005, ExxonMobil and Chevron, the two biggest US energy groups, and BP, Royal Dutch Shell and Total, their European peers, returned an estimated $76bn to their shareholders while they spent a little more than $50bn looking for and producing oil and natural gas.
“The size of the buybacks and the relatively low percentage that is being reinvested in the industry would tend to indicate that oil companies don't have enough new upstream opportunities and projects to spend their money on,” said Neil McMahon, analyst at Sanford Bernstein.
He added: “The years 2005-2006 could well prove to be the peak of the industry in terms of profitability because they are having to spend their money on shareholders instead of reinvesting in oil projects that will yield production and revenue in the future.”
In 1980-82, the last time oil prices spiked, the industry spent more than 80 per cent of its free cash flow, after dividends, on finding and producing new oil. Today that share has shrunk to 40 per cent.
“It is not that they are holding back in investment, there is just not enough good stuff to invest in until foreign investment is allowed in areas of the Middle East currently closed and the business climate in Russia improves,” Mr McMahon said.
Thierry Desmarest, chairman and chief executive officer of Total, has warned that the production capacity crunch could not be overcome if countries in the Middle East did not allow foreign companies to help develop their oil fields.
“Perhaps the only place left to discover the type of giant fields the world has relied on in the past 30 years is in Russia and the Arctic,” said David Bamford, head of BP's global exploration programme from 1999-2003.

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