As House votes on energy plan, oil booms

While Congress begins voting on President Bush's supply-boosting energy plan, the world's oil companies are already spending at a record pace to explore and drill from the flatlands of Brazos County, Texas, to the polluted waters of the Caspian Sea.

In fact, the oil companies are now awash with so much money, they don't have enough places to spend it. They are practically accumulating cash faster than the US Treasury. With such fat pocketbooks, the industry may now be in a position to smooth out the boom-and-bust cycles that have dogged its past. That, in turn, could mean less volatility for consumers at the gas pump. More broadly, it's a reminder that the free market, not Washington, will ultimately decide what happens to the nation's energy supplies.

This is not to say the legislation is not important to the energy industry. Twenty years ago, some 75 percent of the country was open for drilling. Today, that figure is more like 17 percent and shrinking, says Amy Jaffe, senior energy analyst at the Baker Institute at Rice University in Houston.

"There's no question that when the oil companies have good cash flow, they will reinvest it in drilling. But that doesn't change the fact that they have to have a physical place to drill," Ms. Jaffe says.

That's where one of the most heated arguments of the Congress comes up: Should the ecologically sensitive Arctic National Wildlife Refuge (ANWR) be opened for drilling? This issue is an amendment to the energy act and could be voted on as early as today.

The bill, with over 130 amendments, includes changes in the standards that govern automobile fuel efficiency and has tax breaks for everyone from the nation's coal companies to the oil producers. It also provides additional funding for poor people's energy bills and requires the Environmental Protection Agency to reexamine laws pertaining to gasoline production and the environment.

Rep. Billy Tauzin (R) of Louisiana, the sponsor of the bill, says it will improve the nation's energy security, reliability, and affordability.

But "at the end of the day it will do nothing to help our energy dependency," claims energy analyst Pietro Nivola of the Brookings Institution in Washington. "The US currently imports about 50 percent of its oil and virtually all of its natural gas. In the case of oil, he says, "we are totally vulnerable to whatever happens in the world markets."

Regardless of what happens to the proposals in Congress, the oil industry is moving drilling rigs around the planet like chess pieces.

In the past year, capital expenditures doubled, and exploration and development activity in North America increased by 73 percent to $70 billion, according to the 2001 edition of Andersen's Global E&P Trends, released Tuesday. At the same time, spending in the rest of the world declined.

"The US is by far the largest market for petroleum products and is seen as a very attractive place for these companies to invest," says Victor Burk, managing director of energy industry services at Andersen.

Companies are drilling in many places where they have struck oil or gas in the past. This means roughnecks are working drill bits in the geologically challenging Overthrust Belt of Wyoming, the shallow waters off Louisiana, and the perimeters of old fields all over California and Texas. There are high hopes for big natural-gas deposits in Alaska. And, skyscraper-size drilling platforms are hunting for large gas deposits under the deep waters of the Gulf of Mexico.

"We're finding oil and gas in new depth ranges that we can now get to for almost the same cost as shallow drilling," says Jaffe of Rice University. "And with the improvements in technology, I can recover twice as much of my field."

Despite the technical advances, US oil reserves are probably declining over the longer term, says John Wood, director of the reserves and production department for the US Energy Information Agency.

"They aren't declining very fast, but they are declining," he says.

But Mr. Wood adds that reserve statistics are somewhat misleading, since new technologies and ways of extracting the hydrocarbons keep extending the life of oil and gas deposits. "Every large field ever found is still producing," he says.

The price of oil also makes a major difference.

In 1998, when oil prices fell below $10 a barrel, oil companies stopped exploring to conserve their cash.

US reserves that year fell by 6.7 percent, the largest drop ever. However, the following year, after the price rose again, reserves rebounded 3.5 percent.

Today, the price of oil is in the $23 to $26 per barrel range. At these prices, giant companies such as Exxon-Mobil are weighted down with cash.

Last year, for example, the giant company saw its net earnings increase 124 percent, rising to $17 billion. The Royal Dutch/Shell Group saw its earnings jump 48 percent, to $12 billion.

"This is one of the most profitable periods in the industry's history," says John Lichtblau of the Petroleum Industry Research Foundation in New York. "They are flush with cash and don't want it to just sit around."

Of course, there have been other periods when the industry has made a ton of money, only to be followed by lean years when oil rigs gathered rust in the bayous. But Burk thinks this time the business is in for a period of relative stability.

"We can see signs that companies are positioning themselves better to manage successfully and sustainably though the cycles," he says.

If that happens, he concludes, it may mean the consumer is assured an adequate supply of energy.