Investors get much of Big Oil's cash windfall

By Alex Lawler - Analysis

LONDON (Reuters) - The five largest fully publicly traded oil firms are spending more on finding and producing oil, but the industry is still handing back much of its windfall from record oil prices to investors.

Exxon Mobil Corp. (XOM.N), Royal Dutch Shell Plc (RDSa.L), BP Plc (BP.L) and two smaller rivals upped capital spending to $29 billion in the first quarter -- and spent $20.7 billion on dividends and stock buybacks.

Oil companies are handing cash to investors because they plan their businesses at lower prices than today's. Even though the industry is investing more, some say spending on new supplies remains too low.

"The money that is put in is not enough," said Fatih Birol, chief economist at the International Energy Agency, an adviser to 27 industrialized countries, referring to investment by international and national oil firms.

"We can either do two things -- either step up the investment or slow down the demand growth."

Record earnings have brought the oil industry under the scrutiny of politicians and consumer groups, who are upset about skyrocketing fuel prices at the pump.

Oil firms are lifting spending after years of underinvestment and rising demand helped propel crude oil's rally from below $20 a barrel at the start of 2002 to a record $123.93 on Wednesday.

Executives such as Shell Chief Executive Jeroen van der Veer say their companies are doing their bit. Shell invested $7.6 billion in the first quarter, more than larger rival Exxon.

"Shell has the largest capital spending program in our industry today to grow the company and play our part in ensuring that energy markets remain well supplied," he said on April 29.

RISING COSTS

While spending is rising, analysts say that much of the boost is being soaked up by higher costs, as well as the drop in the U.S. dollar.

According to the International Monetary Fund, rising costs for rigs and shortages of skilled engineers have largely cancelled out the increase in industry spending.

An IMF study of 53 national and international oil companies found they invested more than $240 billion in nominal terms in 2006, although the real level of investment was less than half that.

"Some of the capital spending is going into higher costs and not actually adding new supply," said Jason Kenney, oil analyst at ING in Edinburgh.

Of the world's five largest fully publicly traded oil firms by market value -- Exxon, Shell, BP, Total SA (TOTF.PA) and Chevron Corp. (CVX.N> -- only Shell reported a rise in first-quarter production.