Investing legend Warren Buffet supposedly once said that the only consistently profitable extractive industry is dentistry. That's a good proxy for summing up the skeptical attitudes of many investors these days. And yet, oil companies and experienced investors know that it is still worth searching for oil and gas reserves, consistent profits and the occasional "big hit." But now, too many people question the integrity of the financial and accounting system, and by inference, energy companies. The storehouse needs to be replenished, several speakers said at the annual conference of Cambridge Energy Research Associates in Houston last month. "The most important commodity is credibility, but we only realize its value when it is gone," said CERA chairman Daniel Yergin. Clarity and honesty of financial reporting is key. There is too much pressure on companies to dance around to deliver exacting short-term results rather than building for the longer term. One of the most significant remarks at CERA came from Stephen G. Butler, KPMG chairman and chief executive. "This focus on making quarterly earnings per share has gotten out of hand," he said. "It causes managements to stretch through creative accounting to make their numbers. When they don't, their stock is punished. Who is to say that 22 cents is right and 21 cents or 23 cents is wrong? No one can run a company with that precision." Not surprisingly, he called for accounting and financial disclosure reforms. He said cooperative solutions must come from every sector-companies, accountants, regulators and investment bankers. He insisted that not enough has been heard from the investment-banking community. "And, investors must be heard," he said. Analysts are now poring over year-end 2001 financial results and what they have found is disturbing. Despite decade-high gas-drilling levels last year, aggregate gas production from the top 30 or so companies was down as much as 3% compared with the prior year. The numbers vary depending on the number of companies surveyed, but the trend is clear. Lehman Brothers forecasts a further 1.5% to 2.5% production decline this year. This situation is setting us up for higher gas prices, possibly as early as this coming winter. What about crude oil? It is estimated that OPEC has cut less than half what it pledged in January. And Russia has not fulfilled its pledge to cut 150,000 barrels per day either. In fact, Russian oil exports will pick up this spring, just when global product demand is weak between the heating and driving seasons, according to Energy Security Analysis Inc. ESAI predicted Russian adherence to cuts would not last through this first quarter, and "may not be extended through the second." This is one more sign that Russia's oil industry is back from a long sleep. Simmons & Co. International noted that Russia among all non-OPEC producers posted the highest production growth during the past two years, increasing output by about 500,000 barrels per day. This came from diligent drilling, workovers and repaired infrastructure. "Our research indicates Russia has about another two years of low-hanging fruit remaining," Simmons says. Russia intends to keep growing its output, keynote speaker Andrei Illarionov, economic advisor to Russian president Vladimir Putin, told CERA attendees. "In the mid-1980s, Russia had 11% of the world oil market. Today its market share is about 5% or 6%, so we have lost half our market share, and yet we do not complain," Illarionov said. "But we will do what is necessary to recoup our market share, and what is necessary for our people, to become an efficient, reliable, predictable partner in the world economy." The Russian stock market outperformed most other stock exchanges last year as the country's gross domestic product grew. "But the main factor that produced our good economic performance in the last three years was not high oil prices, it was economic-policy reform," Illarionov said. If Russia is open for business again and playing a bigger role in the world oil economy besides, we better pay attention. And indeed, global trends such as this will affect every U.S. producer to some degree. "We are more aware of global issues now. We have to think the unthinkable, but in the end, we still have to decide every Monday morning what we are going to do," Shell managing director Philip Watts told CERA attendees. One thing Shell has written in black and white, he said, is a new commitment to reduce CO2 emissions and other pollutants. This represents a big shift in mindset for the major, he admitted, although changes will be made gradually. Watts keeps his hand on the pulse of this topic as chairman of the World Business Committee on Sustainable Development. Large companies like Conoco and Suncor now report annually on their commitments and progress in sustainability and the environment. It's all part of a growing global move to foster cooperation, socioeconomic progress and credibility.

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