Oil. This year it has truly meant black gold for both producers and refiners of crude. With prices nearing $50 a barrel over the summer, the industry has reaped the benefits of record high profits — and taken lots of criticism for the same.
Los Angeles-based Occidental Petroleum Corp., which in 2003 produced the equivalent of 547,000 barrels a day, has been a top beneficiary. Its second-quarter earnings, announced in July, were up 55 percent over last year, to a record $581 million. Meanwhile, its stock price roared to a 52-week high of $53 in September.
But CFO Stephen Chazen knows how double-edged such success can be. Since energy prices are inextricably linked to economics, they have been blamed for all that is wrong in the economy. Companies, including Wal-Mart, have charged that overheated energy costs have caused weak sales. Economists warn that continued high prices could mean more inflation, fewer jobs, and instability in the stock market.
Although oil companies do not set the prices — national oil companies and the countries that run them do — the 58-year-old Chazen insists that the problem “will fix itself. If energy prices are too high, people won’t pay them, the marginal demand will decline, and the price will fall. If it is $45 or whatever, that is not a sustainable price. It will fall over time.” Still, he concedes, “the national oil companies have gotten used to the higher prices.”
What Chazen does control is how Occidental spends the windfall. Overseeing the “capital program is the most important job of financial management,” he maintains. And since all oil companies are racing to replenish an ever-diminishing supply, much of that spending must tap new reserves. To that end, Occidental may soon be the first oil company allowed back into Libya — where the company’s tycoon-founder, Armand Hammer, made the first of several discoveries in 1966 — now that relations with that former rogue nation have thawed. Thanks to the tight supply of oil in the United States, Occidental is also keen to expand its domestic focus — where it has concentrated for the past several years.
At the same time, Chazen and his oil-company counterparts are still reeling from the scandal involving overstated energy reserves at Royal Dutch/Shell Group. In July, Congress held hearings addressing how oil companies tally their energy holdings, and the Securities and Exchange Commission is seriously considering requiring independent auditors to review those reserves. To Chazen, the crux of the problem lay in the decentralized nature of Shell’s organization. And while he expects some added regulation, he is confident that Occidental’s procedures are above reproach. Still, he says, Shell “certainly has not done the industry any favors.”
Recently, Chazen — who is rumored to be a candidate to succeed CEO Ray R. Irani now that Occidental president Dale Laurance is retiring due to health issues — sat down with CFO deputy editor Lori Calabro to discuss the reserve controversy, his hopes for Libya, and why higher oil prices “will bring out more supply.”