[Congressional Record Volume 152, Number 88 (Monday, July 10, 2006)]
[Senate]
[Pages S7262-S7264]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
OIL COMPANY FINANCIAL DATA
Mr. WYDEN. Mr. President, I think we all know that during this part
of the session the Senate is going to spend considerable time focusing
on energy issues. That is certainly warranted because, if there is one
thing that can be agreed on, getting a fresh energy policy is just
about the most red, white, and blue step our country can take at this
critical time.
During the course of this debate, one issue that is sure to come up
is the issue of oil company profits. The oil companies have
consistently said that they need these very large profits in order to
have the funds to drill and explore for new energy sources. I certainly
feel strongly about developing new energy sources and increasing
production, but I have been concerned about the role of government. At
a time when the oil companies are making record profits and charging
record prices, Congress has still been making available record
subsidies. To get some clarity on this issue, I believed it was
important to get the Congressional Research Service, the independent
authority, to look at these issues, to analyze the question of exactly
where the oil companies are putting this gusher of revenue they have
accumulated recently. The findings in the new report the Congressional
Research Service has given to me are striking.
What the Congressional Research Service has found is that the return
on equity of the major oil companies has gone up in the last few years
six times; the amount of cash reserves of the major oil companies have
has gone up, over the same time, about six times; but the amount of
money the companies have devoted to exploration and capital investment
has only doubled. So what that means, the bottom line, is that the
major oil companies are only putting back in the ground a modest
fraction of what they have been siphoning away from consumers at the
pump across our country.
What I would like to do is break down this report and talk about
where I believe Congress ought to go on a bipartisan basis in the years
ahead.
[[Page S7263]]
On the issue of return on equity, I asked the Congressional Research
Service to examine the years of 1999 to present. They found that, with
respect to return on equity for the oil companies, it was about 4.5
percent in 1999 and it is nearly 30 percent as of last year. That is an
increase of more than six times over the last 6 years. The
Congressional Research Service also looked at the cash reserves of the
largest oil companies over the last 6 years. They have found that this,
as well, has gone up sixfold. So the companies are clearly sitting on
gushers of cash from higher oil prices and higher gas prices that
consumers are now paying across the country.
I believe it was then appropriate to have the Congressional Research
Service analyze what the oil companies are doing with all of this
money. Certainly the companies have made the argument that they are
investing these profits in exploring for oil and developing new energy
technology. That certainly is part of the story, but it is far from the
whole picture.
According to the Congressional Research Service, the major oil
companies have approximately doubled their exploration costs and their
overall capital investment over the past 6 years, but that rate of
increase is just a fraction of how much their cash reserves and their
return on equity have grown over that period. In addition,
Congressional Research Service experts indicate that much of the oil
companies' capital investment has been for operating expenses, not for
increasing production, and much of what they seem to have invested in
exploration has gone for overseas exploration.
Again, you come back to what I think is the clear conclusion of this
particular analysis: The American people are seeing the oil companies
put back in the ground just a modest part of what the consumer is
coughing up at gas pumps across the land.
One of the questions I hope we will ask over this next period of the
Senate being in session is, Why are the oil companies not putting some
of their burgeoning cash reserves into investment in other
technologies, particularly new renewable energy technologies which
could help the oil industry diversify and help reduce our Nation's
dependence on foreign energy? We ought to examine that issue, and
certainly what the Congressional Research Service has done for my
office makes a different contribution with respect to this debate and
one that I think warrants thorough examination.
The Congressional Research Service looked, for me, at the 10-K
reports the oil companies file with the Securities and Exchange
Commission. That is the information which Exxon and BP and Shell and
Chevron and ConocoPhillips, Valero and Sunoco and Total report to their
investors and to Wall Street. But what is in those 10-Ks that are given
over to the Securities and Exchange Commission is not the story the oil
companies seem to be telling the American people. The oil companies
have been running ads in newspapers, claiming that their profits are in
line with those of other industries. For example, the American
Petroleum Institute has been running a newspaper ad showing the oil and
natural gas industry's earnings of 5.9 cents on a dollar of sales,
which is just above the 5.6-percent average for all industries. But
suffice it to say, how many of the industries listed in these oil
company ads are getting the 30-percent rate of return on equity that
the Congressional Research Service has found in the report that I make
public today?
The oil industry wants the public to believe that the record profits
they are making are in line with other businesses, but it seems to me
the Congressional Research Service analysis of the oil companies' own
reports to the Government tells a very different story. This is
particularly important right now because I believe the American people
deserve a true accounting of what has been going on behind the numbers
at the gas pump and where their hard-earned money has been going for
the past several years. The report I release today on oil company
financial data shows the oil industry's profits are not only greater
than the profits of other businesses, but they also show how the oil
companies have not been straight with the American people.
I also think it is timely to have this information about oil company
profits because of the debate in both the Senate and in the other body
about oil royalty giveaways to the oil industry. At a time of record
prices, when oil companies are making record profits that are above
what other industries are earning, the question is, Should the oil
companies continue to get record subsidies from the taxpayers?
In May, the House of Representatives held a historic vote to put an
end to taxpayer-funded royalty giveaways to profitable oil companies.
The House of Representatives voted overwhelmingly on a bipartisan basis
to put a stop to this waste of taxpayer funds. Just a few weeks before
that House vote, I spent nearly 5 hours trying to get a vote here in
the Senate on exactly this issue. But despite that extended discussion,
I was unable to get an up-or-down vote on my proposal to stop ladling
out tens of billions of dollars of unnecessary subsidies to the oil
sector.
I believe the Senate ought to have an opportunity to debate and vote
on the oil royalty issue, and it seems especially timely after the new
report the Congressional Research Service has supplied to me. With the
Government Accountability Office estimating that tens of billions of
taxpayer dollars could be lost as a result of the oil royalty program,
this issue is too important to duck.
Over the next few weeks, as the Senate debates energy, I am hopeful
that the Senate will think carefully about the findings of the
independent Congressional Research Service. The Congressional Research
Service analysis indicates to me that the oil industry in their
advertisements and other promotions is not being straight with the
American people. The Congressional Research Service has given us a good
sense of where the oil sector is actually putting their money, and at a
time when their rate of return on equity--30 percent--is certainly very
strong and we look at where their cash reserves are--and they are
sitting on piles of money--we are not seeing those dollars put back
into exploration and development here in our country so we can have a
new red, white, and blue energy policy that makes us independent from
sources of foreign oil.
Let's work to have a debate in the Senate based on the facts. The
Congressional Research Service has now given us illuminating
information about what the facts are. Let's make better use of taxpayer
dollars than to give away tens of billions of dollars in royalties in a
program that began when oil was $19 a barrel and now frequently is well
over $70 a barrel. This is a time for the Senate to come together on a
bipartisan basis to look at these issues carefully. The Congressional
Research Service report provides an opportunity to get the facts out--
the real facts--about what is going on in this critical sector of our
economy.
I ask unanimous consent that the report of the Congressional Research
Service be printed in the Record.
There being no objection, the material was ordered to be printed in
the Record, as follows:
Congressional Research Service,
Washington, DC, July 5, 2006.
memorandum
To: Hon. Ron Wyden.
Subject: Oil Company Financial Data.
From: Robert Pirog, Specialist in Energy Economics and
Policy, Resources, Science, and Industry Division.
This memorandum is written in response to your request for
financial data for selected oil companies for the period 1999
to 2005. The companies for which you requested data are
ExxonMobil, BP, Shell, Valero, Chevron, ConocoPhillips,
Sunoco, and Total SA. The analysis is complicated by reason
of mergers and acquisitions among the selected firms,
differences in U.S. and international accounting standards,
currency exchange rates, differences in the size of the
selected companies, and differences in the extent to which
the selected companies participate in all aspects of the oil
business. The likely effects of these factors will be noted
in the appropriate sections of this memorandum.
Profit rates
Profit rates are usually expressed as net income as a
percentage of a relevant base; usually revenue, shareholder
equity, or assets. Each profit rate provides a different
measure of the success of the firm. Profit relative to
revenue shows how well the firm translates revenue into net
income. Profit relative to shareholder equity shows how
effective the firm is in utilizing the capital invested in
the firm by its owners, the shareholders. Profit relative to
assets shows how effective the firm is in utilizing its total
asset base to generate net income.
[[Page S7264]]
Table 1 shows the average return on revenue and the return
on equity for the eight selected oil companies. The averages
are simple averages; they do not assign weights to account
for the different sizes of the firms in the group.
ExxonMobil, the largest company in the group, has total
revenues over ten times as large as Sunoco, the smallest
company in the group. However, a weighted average would still
not account for the fact that the sample of eight companies
is only a fraction of the industry. For example, the Oil and
Gas Journal includes over 130 companies in its oil and gas
firms' earning report.
TABLE 1. RATES OF RETURN FOR SELECTED OIL COMPANIES
[Percentages]
------------------------------------------------------------------------
% Return % Return
Year on revenue on equity
------------------------------------------------------------------------
1999............................................ 2.88 4.64
2000............................................ 5.79 24.85
2001............................................ 5.36 16.67
2002............................................ 3.89 8.11
2003............................................ 5.23 18.47
2004............................................ 6.45 26.18
2005............................................ 7.10 29.38
------------------------------------------------------------------------
Source: Security and Exchange Commission Forms 10-K and 20-F, Company
Financial Reports.
Over the seven year period, the average return on revenue
was 5.24 percent, while the average return on equity was
18.32 percent. Both profit measures increased when the recent
increases in the price of oil began in 2003. Two of the
companies in the data set, Valero and Sunoco, are refiners
and marketers with no crude oil production. These two firms
were not, therefore, positioned to benefit directly from
increases in the price of crude oil.
Cash reserves
Companies might accumulate cash reserves in anticipation of
a major merger or acquisition, before a share re-purchase, or
before a capital investment expenditure. In the case of the
selected oil companies, these reasons might be augmented by
the rapid expansion of sales revenues associated with the
increases in the prices of crude oil and products from 2003
through 2005. Large investment projects take time to plan and
execute, and it may be that the rapidly increasing revenues
these firms realized could not be efficiently allocated in
the available time.
Both upstream (exploration and production) and downstream
(refining and marketing) investments in the oil industry tend
to cost billions of dollars and take years to plan, complete,
and realize returns from. Investment decisions are based on
company estimates of the long-term, expected, price of oil.
It may not be that the current market price of oil is
equivalent to the companies' long-term expected price of oil.
If the long-term planning price of oil is significantly lower
than the current market price, it might appear that the
companies have not increased investment in capacity to a
degree commensurate with increased market prices.
TABLE 2. CASH RESERVES OF SELECTED OIL COMPANIES
[In millions of dollars]
------------------------------------------------------------------------
Cash
Year reserves
------------------------------------------------------------------------
1999....................................................... 9,495
2000....................................................... 27,185
2001....................................................... 23,875
2002....................................................... 20,908
2003....................................................... 24,764
2004....................................................... 41,323
2005....................................................... 57,828
------------------------------------------------------------------------
Source: Security and Exchange Commission Forms 10-K and 20-F, Company
Financial Reports. Note: Shell, Valero, and ConocoPhillips data could
not be obtained for 1999. Shell data could not be obtained for 2000.
Table 2 shows that the cash reserves of the selected oil
companies have more than doubled from 2001 to 2005, the
period of complete data. In 2005, three companies,
ExxonMobil, Shell, and Chevron accounted for over 87 percent
of the total cash reserves.
Exploration and capital investment
Exploration expenses are undertaken to locate and develop
new commercially viable deposits of crude oil and natural
gas. Two of the eight companies in the data set, Valero and
Sunoco, have no exploration expenses since they operate only
in the downstream portion of the industry. Since oil fields
deplete over time and production tends to decline, oil
producers must carry out a successful exploration program to
keep their reserve and production positions constant.
However, it cannot be determined from financial data which
exploration expenses are ``net'' in the sense of increasing
production and reserves, and which are ``gross'', including
depletion replacement. As a result, increasing exploration
expenses are not necessarily tied to increased production
capability or reserves. Most of the firms also report dry
hole expenses in exploration. Dry holes do not add to either
production capacity or reserves.
Capital investment expenditures were drawn from the
companies cash flow statements. These values represent actual
outlays made during the year. As a result, the values for
capital investment reported in Table 3 represent gross
investment, rather than investment net of depreciation. In
the current economic environment, it is likely that all
investments, new, as, well as those that replace depreciated
assets, must pass a profitability test to be undertaken. As a
result, gross investment is likely to represent well the
companies investment decisions.
TABLE 3. EXPLORATION AND CAPITAL INVESTMENT EXPENDITURES OF SELECTED OIL
COMPANIES
[In millions of dollars]
------------------------------------------------------------------------
Exploration Capital
Year expense investment
------------------------------------------------------------------------
1999.......................................... 1,794 32,835
2000.......................................... 3,114 36,417
2001.......................................... 3,843 52,798
2002.......................................... 4,231 55,577
2003.......................................... 5,018 56,558
2004.......................................... 5,318 58,304
2005.......................................... 4,704 68,884
------------------------------------------------------------------------
Source: Security and Exchange Commission Forms IO-K and 20-F, Company
Financial Reports. Note: Shell and ConocoPhillips exploration data was
not available for 1999. ConocoPhillips capital investment data was not
available for 1999.
Conclusion
The oil industry operates in a volatile, short run market
in which many decisions have long term implications. The
upstream portion of the market is increasingly controlled by
national oil companies, not private firms. The market is also
affected by political forces.
The private oil companies have the responsibility of making
decisions in the best interests of their shareholders.
However, because their products are important to the
functioning of national economies, their decisions are also
of interest to the public. This dual responsibility must be
balanced by the companies.
Mr. WYDEN. I yield the floor and suggest the absence of a quorum.
The PRESIDING OFFICER (Mr. Burr). The clerk will call the roll.
The assistant legislative clerk proceeded to call the roll.
Mr. GREGG. I ask unanimous consent that the order for the quorum call
be rescinded.
The PRESIDING OFFICER. Without objection, it is so ordered.
____________________