Ron Abate

Does Big Oil's Apathy Justify Proposals to Tax Windfall Profits?

I think your comments are way off base and reveal a total lack of understanding of the oil business and business acumen in general. First, oil companies face huge risk, not the least of which is political risk, whenever it invests in oil and gas development.

Let's discuss economic risk. The cost of developing a major oil or gas field can run into the tens of billions, partly because most of the easy to get at oil has either been discovered or is under the control of foreign governments. This leaves projects that are so technologically challenging and expensive that the national oil company needs help. Those are the projects that the major multinationals are best suited for. There are all manner of risks -- political, price (projects started today may not come on stream for five to ten years -- what will the price of oil be in ten years?), cost (projects started just a few years ago are running well over budget because of oil industry inflation, as demand for everything from qualified people, to steel, energy and other materials have skyrocketed), geology, health and safety (working with a volatile product can easily cause harm to people, environmental (as much as you try shit happens when mother nature is involved and then you have all the public relations consequences) and political.

ExxonMobil developed one of the Sakklin Island fields in the Russian Far East because it had technology and the money. Projects like Sakklin payout over decades and there is no guarantee oil prices will remain high during the life of the project thereby earning a reasonable return. In addition to oil price risk (oil prices went from $35/bbl. in 1985 to $10/bbl in the late nineteen nineties), there is reservoir risk (the oil that you thought was going to be there is not there, or its there but very difficult to produce due to the geological formation). What you have no idea about is how technological difficult the oil business. I wish you could sit in on a meeting of geologists and reserve engineers and hear them discuss the technical and engineering difficulties developing any geologically complex. I have and its an eye opening experience.

You have no idea what goes into producing oil from thousands of feet below the sea floor in thousand of feet of water in the turbulent and frigid North Sea. It's a technological and engineering feat to behold. Your cluelessness palpable.

To equate the business of running a supermarket with the business of exploring for, finding and producing oil and natural gas reveal a total lack of any understanding of either business.

As a shareholder of XOM, I wish XOM would get out of the retail end of the business (which is not or only marginally profitable -- they have recently announced they are selling all their owned stations, but will still sell to their branded distributors) and only stick to refining (also not very profitable) and exploration and production (very high risk but very profitable).

Then there is political risk. Once you have sunk billions into a project in another country, what is to stop that country from taking over the project and kicking your ass out or changing the terms to make the project unattractive. This has happened throughout the history of the oil business and is happening again today -- Venezuela, Russia, maybe even in our own country, and many others. It took ExxonMobil seven years to negotiate a field development agreement with Indonesia for the Cebu field after it had invested maybe a $100 million buying the interest and doing development drilling.

By the late nineteen nineties, ExxonMobil had sunk over about ten years $250 million into exploring and mapping the Natuna gas field in the South China Sea near Indonesia. The natural gas has a lot of CO2 so it is difficult and expensive to process. ExxonMobil tried to get Japan, China, Korea, or Taiwan to buy the gas on a long term contract basis so financing for the field and its development could proceed. There were other fields also being explored (in Australia, Malaysia, Qatar) that had gas with less CO2 that could offer their gas at a lower price. (You have no idea what a complex technological undertaking it would have been to develop the Natuna field, including the construction of an island for the processing plant -- there is also a dispute as to whose gas it is since China claims most of the South China Sea -- more political risk.) The field has still not been developed and Indonesia, if it could technically, wants to take it away from ExxonMobil. A no risk business like running a supermarket? You got to be kidding. You have no idea.

As for share buybacks, your article missed one really important point when it comes to buybacks versus windfall profits taxes. First, ExxonMobil has no expertise in alternate energy. As a shareholder, I would prefer that they stick to what they know best, which is exploring for, finding and producing oil and natural gas. Share buybacks, if you thought about it beyond the typical knee jerk reaction, puts money back into the private investment system. Most of the buybacks are block trades in the hundreds of thousand to millions of shares. That means that the money is being paid to pension funds, mutual funds, endowment funds and other professional money managers whose expertise is to reinvest those funds in other industries and companies that have good prospects for high returns. No doubt some of that money flows to alternate energy -- so the buyback are funding alternate energy and doing it more efficiently that if ExxonMobil did it. That is what makes the capitalistic system so great at producing wealth. Now if you impose a windfall profits tax on oil companies, instead of the money going to professional money managers investing in the best of breed companies, including alternate energy companies, the money will flow instead into the government and will be used to buy votes, because that is what politicians are expert at. That will not help the country, will not produce alternate energy and subverts the capitalistic system. That is the argument you need to make against a windfall profits tax -- windfall tax money will flow to "alternate energy" companies that have good political connects but not good business prospects. Companies will sprout out of no-where bearing alternate energy names run by people who have good political connections and that is where the windfall profits tax money will flow. There will also be a lot of cons. I see iy happen here in Las Vegas.

There is plenty of venture capital money for alternate energy, and that money is not looking for political favors, it is looking for high investment returns. A politician or government bureaucrat couldn't give a fig about high returns.

I suggest before you write your next article about how easy it is for oil companies to make money and how riskless it is, you take a tour through an oil refinery, go out to a production platform in the North Sea, sit in on some technological discussion regarding the seismic findings for a new field, go to a research lab working on new drilling technology that allows horizontal drilling out seven miles and tens of thousands of feet below sea level. You need to go out to the Rockies to see how companies are using technology to extract natural gas from shale rock formations "tight gas". This technology did not exist a few years ago but is now being used by ExxonMobil and other to tap our natural gas resources in the West.

ExxonMobil and most of the major multinational are above all technology companies, every bit a technology company as Microsoft, Intel and Pfizer and operating in an industry with far greater risk. You just do not appreciate the science that goes into the business nor the risks.