Opinion: Earnings comparisons are fair game

Stockholders got billions that should’ve been retained to cover ferries , schools and dividends.

  • Thursday, July 2, 2020 12:09pm
  • Opinion

In a My Turn published June 8 in the Juneau Empire, I was accused by Roger Marks of misleading Alaskans in my My Turn comparing BP’s contracts with other oil-owning countries where BP produces their oil for cost plus $2 per barrel profit, while our Legislature lets Alaska’s Big Three producers take a $26 per barrel profit after deducting all their costs.

In an earlier My Turn, Marks accused me of misleading Alaskans, by comparing ConocoPhillips’ highest net profit per barrel outside of Alaska of $11 per barrel to the $26 net profit they made in Alaska last year.

It seems Marks wants to deny Alaskans’ any kind of a reference point to determine how profits from oil are normally divided between those who produce it and those who own it.

But on examination, neither of your arguments meet the smell test.

Marks argues that our producers took big risks in Alaska and deserve to be rewarded for the risks they took in Alaska, and claims they took no risks in Iraq. You argue that all BP did was sign a risk-free “Technical Services Contract” agreeing to take over an operating field, when in fact, the opposite is true.

BP sprouted its wings in 1908 in Iraq, working with Iraqi companies and risking the kinds of failures that often come with exploration. BP’s risks led to the discovery of three giant Prudhoe-sized oilfields in Iraq.

BP graduated from a fledgling exploration company to become an integrated wellhead to gas pump company marketing Iraq’s oil.

In 1974, fed-up with BP taking the lion’s share of the wealth generated from Iraq’s oil, Iraq confiscated everything BP had built and gave them the boot.

Thirty-five years later, BP got back into two of the three Iraqi fields they discovered and developed them by offering to resume production services at the market rate of cost plus $2 per barrel.

Nothing unique about $2 contracts; BP already had similar contracts in Iran, Abu Dhabi, and Kuwait, and so does Exxon, Shell, ENI, and several other companies Alaskans are familiar with.

BP bought into Prudhoe Bay in 1978 when the pipeline was finished, and all the risk was in the rearview mirror. BP bought 53% of Standard Oil of Ohio, Alaska’s largest producer, just after they had announced that their profits were up 149% from 1977 and they, SOHIO, were expecting profits to rise even higher in 1979.

BP bought into a no-risk cash flow that would choke a horse and spent the next 42 years sucking the easy oil out of Prudhoe Bay while doing little to no exploration to replace Prudhoe’s oil when Prudhoe runs dry. While high-grading Alaska’s biggest treasure for cash, BP went from the 13th largest oil company on the planet to third largest by buying up energy companies with obscenely excessive Alaskan profits that so many easily bought Alaskan legislators made possible.

Now, about the claim that it was unfair to compare ConocoPhillips’ $26 net profit per barrel made in Alaska in 2019 to their next highest net profit outside of Alaska in 2019. Conoco’s next highest production profit of $11 per barrel came from a fracking operation that produces a lot of gas with its oil, and because that $11 figure was derived from the combined sale of oil and gas which is measured in its BTU equivalent to oil, but sells for less than oil, I agree, it does bring down the average.

However, two things about the rationale don’t meet the smell test. One, they drilled wishing for pure oil and hit gas. Making the most of a less than desirable situation, they are marketing their oil and getting what they can for the gas. Not the kind of problem they are having in Alaska. Two, $11 is still their highest per barrel net outside of Alaska, — with or without gas, — and even you, “an Oil Economist,” can’t point to a single 2019 production operation outside of Alaska where ConocoPhillips or anyone else who produces crude oil, made half as much as the Big Three made on each barrel of Alaskan oil.

But, as any economist knows, the bottom line to all this minutia boils down to return on investment. How many dollars do you have to spend to get your dollars back plus a few more? Surely you can’t object to that comparison.

In an opinion piece written June 17, by Andrew Jensen, Managing editor of the Alaska Journal of Commerce, Jensen came to Conoco’s defense and said “Because ConocoPhillips is required by the Securities and Exchange Commission to break out its Alaska operations in its quarterly and annual tax filings, we know that in 2019 the company made profits of $1.5 billion in Alaska while spending $1.5 billion on capital investments on the North Slope.” —— I don’t think Jensen had his thinking cap on that day because If Conoco spent $1.5 billion and still had an additional $1.5 billion profit to take home, that calculates to a 100% return on investment.

In comparison, the highest worldwide quarterly earnings Exxon reported in the year of 2019 was their first quarter when they reported an 8.55% return on investment, according to macrotrends.net. For every one hundred dollars invested, Exxon got one hundred eight dollars and fifty-five cents back.

BP’s highest earnings from worldwide operations was also their first quarter. They got 6.21% or $106.21 back for every $100 invested.

ConocoPhillips’ highest 2019 quarterly earnings outside of Alaska was for their third quarter when they reported worldwide earnings of 17.31%. For every $100 they put in, they got $117.31 back.

Except for in Alaska, thanks to two very well paid State Senators who were simultaneously on ConocoPhillips payroll, for every $100 ConocoPhillips, BP, and Exxon invested in Alaska, every one of them got $200 back. Year after year, ConocoPhillips, Exxon, and BP stockholders got billions that should have been retained to cover today’s ferry system, schools, and dividends.

Ray Metcalfe rough-necked and drilled on the North Slope in the early 1970s. He was in the Legislature in the 1970s and 1980s. He chaired the House State Affairs Committee and co-authored the legislation establishing the investment strategy for Alaska’s Permanent Fund. Metcalfe has built several residential subdivisions in Anchorage and he has owned Metcalfe Commercial Real Estate, Inc. since 1976. Columns, My Turns and Letters to the Editor represent the view of the author, not the view of the Juneau Empire. Have something to say? Here’s how to submit a My Turn or letter.

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