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ConocoPhillips CEO Defends Oil Company Profits

May 3, 2006 at 6:45 PM EDT
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JIM LEHRER: And now a conversation with the chairman and chief executive officer of ConocoPhillips, James Mulva.

ConocoPhillips is the nation’s third-largest oil company behind Exxon-Mobil and Chevron. Mr. Mulva has been CEO of the company since 2002 when Phillips Petroleum merged with Conoco. He’s been in the industry for more than 30 years. I spoke with him earlier this evening.

Mr. Mulva, welcome.

JAMES MULVA, CEO of ConocoPhillips: Thank you. Happy to be with you.

JIM LEHRER: Are the oil companies responsible for this rise in gasoline prices we’re seeing?

JAMES MULVA: Well, the rise in gasoline prices really comes from, really, three reasons. The first, over the last number of years, there’s been quite an increase in demand. It comes not only from North America and the United States, but we’ve seen a lot of increase in demand from Asia, particularly countries like China.

Second, we see — and the price of oil has gone up pretty dramatically. And there’s a political risk aspect to oil prices. There’s concern, perception, what have you, with respect to interruption of supply. And that could come from countries such as Iran, Iraq, Nigeria, Venezuela. And so some believe that part of the oil price, anywhere from $10 to $20 a barrel, is a political risk associated with some interruption of oil production.

And the third part is, we find that actually that we have a plentiful supply of oil, but we are finding that, in the United States and around the world, we fully are utilizing our refining capacity. And a result of that is we need more refining capacity, so as to take the oil, manufacture the gasoline and diesel that the consumers want.

Those really are the three reasons for the higher oil prices.

Higher gas prices = higher profits?

James Mulva
CEO, ConocoPhillips
Actually, our profit per dollar of revenue for our industry is somewhere in the neighborhood of six to seven, a little more than seven cents, a dollar, which is quite comparable with respect to other industries.

JIM LEHRER: So, the oil companies, your company and the other oil companies of the world, particularly of the United States, share no responsibility, there's nothing that you all are doing to jack the price up?

JAMES MULVA: No. All of the companies, our company, our industry, we are all in this energy situation together. And the result is, is that what we need to be doing is everything we can, investing our resources, so as to increase supply, meaning exploration and production, distill investment, so we can add supply around the world, and certainly in the United States.

JIM LEHRER: There's a poll -- CBS News had a poll that was out yesterday, and they had asked Americans whether or not they believe the oil companies were responsible for the rise in gasoline prices. And 64 percent said they bore a great deal of the responsibility.

And they tied it to, in the poll, to their belief that the oil companies are raising gasoline prices in order to increase profits. Why would they think that?

JAMES MULVA: Well, I certainly understand the concern. And it's very important for individuals like myself and our industry to meet with yourself and with the media, so as to better explain, certainly, the situation.

One of the things that I would like to point out is that, over a very long period of time, you can see that the price of gasoline moves almost nearly 90 percent with the movement in oil prices. And so, therefore, as we see oil prices go up and down, it certainly directly translates into the price of gasoline at the pump.

JIM LEHRER: So the crude oil price, when it goes up to, say, $75 a barrel or whatever it is, people should expect the price of gasoline to go up accordingly?

JAMES MULVA: Yes, that is true. And my earlier comment was that, if we look at $75 oil price, there's about $10 or $20 dollars in that oil price that's associated with -- you might call it political risk.

Now, if you look at gasoline prices at the pump -- let us say around $3 a gallon -- 60 percent of that $3 is tied to oil prices. So take $3 gasoline, the price at the pump, that is $1.80.

Then, on top of that $1.80, there's about 60 cents which is the cost of bringing the crude oil to the refineries, running the refineries, the pipelines, the transportation, and the marketing. On top of that, then there's 50 cents of taxes. So you add and you get to $2.90.

Our profit on a $3 gasoline price at the pump is about 10 cents a gallon, and that's in good times. In times when the price is lower or there's more supply, then the price is less than 10 cents -- profits less than 10 cents.

JIM LEHRER: Well, then why are your profits going up, in direct --almost in parallel -- with the rise in gasoline prices?

JAMES MULVA: Well, I would say our company operates in 45 different countries around the world. And about two-thirds of our business is tied to what we call exploration and production, and about a third of our business is in the refining and marketing side of the business.

The refining and marketing side of the business historically is a lower return. More of the profits are associated with the exploration and production of oil and gas.

We have a very large industry; it's very capital-intensive. In the case of the industry, if you look at the profits, yes, the absolute numbers are quite high. You look at the revenues, very high.

Actually, our profit per dollar of revenue for our industry is somewhere in the neighborhood of six to seven, a little more than seven cents, a dollar, which is quite comparable with respect to other industries. On the other hand, we recognize the concern of the consumer and the importance for ourselves and our industry to explain prices and the importance for us to make our investments.

ConocoPhillips profits

Jim Lehrer and James Mulva

JIM LEHRER: ConocoPhillips particularly, your profits went up 13 percent in this last quarter, the January-to-March quarter, and that was more than it's ever gone up in that quarter since 2002. And you're saying that has no connection to the increase in prices?

JAMES MULVA: Oh, no, I'm not saying that at all. Obviously, as I tried to say earlier, our profitability in our company, about two-thirds comes from the exploration and production side of the business, and about one-third from the refining and marketing side of the business.

JIM LEHRER: So that's where you're making your money, is in the refining part?

JAMES MULVA: No...

JIM LEHRER: No?

JAMES MULVA: ... mostly in the exploration and production, not in the refining and marketing side.

JIM LEHRER: All right.

JAMES MULVA: The other thing is, in the case of our company, in the first quarter, as you said, of 2006, our profits were $3.3 billion. The revenues were $50 billion. So you can see the return is six or seven -- less than seven cents per dollar of revenue.

On the other hand, profits were $3.3 billion. And in the first quarter of this year, our company invested $4.6 billion of investment to grow our exploration and production, and to invest, to expand our refining capability and capacity. In a case of our company, about half of our investment around the world is directed towards North America and, specifically, the 48 lower states.

JIM LEHRER: Bottom line, Mr. Mulva, is you have no sense of apology or anything about the level of profits that your company is making now?

JAMES MULVA: Well, with respect to our profits -- as I said earlier, $3.3 billion is a very large number.

On the other hand, what we are doing and have been doing for quite a number of years -- and we feel certainly our obligation as an energy company is to provide the energy at affordable, reasonable prices with certainty to our consumers. And we feel that we have done that, and it's our obligation to continue doing that in the future.

We are finding oil and gas, and developing it around the world, and making it available to all of our consumers and certainly into the United States requires substantial investment. And we do need the profits so as to redeploy those profits into making sure that we have the energy consumers need with certainly and at a reasonable and affordable price.

Oil executives' compensation

James Mulva
CEO, ConocoPhillips
So if the companies perform well, you would expect compensation will move accordingly. I also certainly recognize that executive compensation, not only in our company, our industry, but all industry, is a very sensitive subject.

JIM LEHRER: What do you think about the $400 million severance package paid to the former Exxon chief executive, Lee Raymond?

JAMES MULVA: Well, it's really not appropriate for myself to comment on executive compensation that may be made at one company or another. Certainly, in my own case, I'm very well-compensated.

I also would say that compensation in our industry, generally, is always tied to performance. So if the companies perform well, you would expect compensation will move accordingly.

I also certainly recognize that executive compensation, not only in our company, our industry, but all industry, is a very sensitive subject. We need to make sure -- and we fully support Securities and Exchange Commission -- that, with respect to CEO executive compensation, full transparency.

We recognize the boards of directors, the shareholders, and activist groups who have an interest in all of this to make sure that I think you will find over time that executive compensation -- changes will be made to make sure that it's done in an appropriate way and tied in line with performance of companies.

JIM LEHRER: The Republican speaker of the House, Dennis Hastert, said the Raymond thing was unconscionable, in his opinion; do you agree with that?

JAMES MULVA: Well, as I said earlier, it's difficult for me to comment with respect to other company's compensation.

As I said earlier, the most important aspect of it is to make sure that executive compensation is tied to performance, and I think companies do that. We also know that this is a very sensitive subject with a great deal of attention by consumers, politicians, and the public at large.

And I can assure you that boards of directors, shareholders, and everyone, will be certainly watching, working on this, and I think you will see changes as we go through time.

JIM LEHRER: Again, you're comfortable with your situation. I checked the thing. For 2005, you were paid $13 million. There also -- was it $190 million that are stock options that you can exercise, if and when you leave the company? Am I right about that?

JAMES MULVA: I believe that's correct, but that is really tied over time. And that's something that is really determined over time as a result of the performance of the company. That may or may not happen.

JIM LEHRER: Yes. But bottom line is, again, you're comfortable with this? This is not...

JAMES MULVA: Well, certainly, absolutely, without doubt. I'm certainly compensated very, very well; I recognize that.

But I also recognize the obligation that we have as individuals and as executives in the company that we have to make sure that compensation, completely transparent, that it's tied in line with the performance of the company, and that certainly the oversight and all of this is really handled by the board of directors and certainly shareholders, public at large, and activists will certainly weigh more and more on executive compensation.

I believe personally that you will see changes as we go through time.

Investing in enegry

JIM LEHRER: In time.

Congress, as you know, Mr. Mulva is desperately trying to find out, find something to do about rising gas prices. Do you have any suggestions for them?

JAMES MULVA: Well, first of all, things that could be done, with respect that have been done in the past, like putting a floor price on windfall profits tax, any kind of increased fiscal take, we've demonstrated in the past really doesn't work, because when you put those kind of measures in place, what happens is you lower the price; it increases demand; it increases our reliance on imports of energy; it increases demand; and it takes away from conservation.

As you increase the fiscal take on the company, there's less cash that's available that we can re-invest, so as to grow supply and increase capability and capacity in our refineries.

So when we look at what can government do? Certainly not those things, but things that the government can do is give us more access, access to lands so that we can explore and we can produce.

I think another thing that's very important is that we need to get away from boutique fuels. In the United States today, we have about 100 different types of fuels in different types of seasons of the year. We need standard...

JIM LEHRER: These are blends of gasoline, right?

JAMES MULVA: Yes. And what we need is to have standardization of fuels -- maybe five or six across the country -- that will lead to standardization, lower cost, more certainty of availability of product. And I believe it will have a modest impact, with respect to the price of gasoline.

I also think another thing that we need to do is we need to improve approval process, the approval process by which we make investment at pipelines, add capacity to our refineries, build new refineries. And we need to have an accelerated approval process so that we can import gas in the form of LNG to our country.

And the last thing that I think that we really need to do is conservation. Let me explain what I mean by conservation: It's a more efficient use of energy.

When I talk about more efficient use of energy, all of us are in this. It applies to companies like ourselves, manufacturers; it certainly applies to the transportation sector, as well as to the residential community.

On the transportation sector, we need to improve our efficiency and utilization of fuels. So one of the things that we can do to help, with respect to the price of gasoline or diesel -- the price of gasoline at the pump -- we need to certainly add supply by our investment, import gasoline. Our imports of gasoline from Europe are at a record level at this point in time.

But we also need to not only work on supply; we need to work very hard on reducing demand. And that means more efficient use of energy.

JIM LEHRER: And it means car mileage restrictions and that sort of thing? You support that?

JAMES MULVA: Absolutely. We need to have transportation, with respect to our automobiles, in a way that we are more efficiently utilizing every gallon of gasoline or every gallon of diesel. That means that mileage requirements -- we're going to have to be more efficient.

However that is done, I think competitively that's coming one way or another, in terms of the response by the automobile industry, to see to it that we have vehicles that are not only safe, environmentally friendly, but they have far better mileage.

As I said, we need to work on adding supply and we need to work on more efficient use of energy to constrain our increase in our growth and demand.

JIM LEHRER: All right. Mr. Mulva, thank you very much.

JAMES MULVA: Pleased to be with you.