Record oil price to boost oil majors' profits

By Tom Bergin

LONDON (Reuters) - Exxon Mobil (XOM.N), Royal Dutch Shell (RDSa.L) (RDSa.L) and BP (BP.L) are expected to report bumper first-quarter profits next week, thanks to record crude prices, but $110 per barrel oil will also squeeze refining profits and delay a return to oil production growth.

Brent and benchmark U.S. crude prices rose around 70 percent in the first quarter compared with the same period last year, to average almost $97/bbl and $98/bbl, respectively, while gas prices also rose.

Earnings growth, though generally strong, is lagging behind.

"The profitability of the industry is clearly not as robust as the headline oil price might at first imply," Lucas Herrmann, analyst at said Deutsche Bank said.

London-based BP, which is undergoing a restructuring under Chief Executive Tony Hayward who took over a year ago, is expected to be the strongest gainer in the industry's top tier.

Nine analysts polled by Reuters said, on average, they expect BP to report a 31 percent rise in net replacement cost profit, which is comparable to U.S. net income, to $5.3 billion, excluding one-off items.

The world's largest non-government-controlled oil company by market value, Exxon, is expected to see net income rise around 22 percent to over $11 billion in the first quarter.

Industry number 2, Shell, is expected to report only a 4 percent rise to $6.8 billion in current cost of supply net profit, its measure, which is also comparable to U.S. net income as it strips out gains in the value of inventories, excluding one-offs.

One reason that profit growth lags oil price rises is taxes, and higher prices have encouraged governments from Russia to Venezuela to hike these.

PRODUCTION SLUGGISH

Another reason for the relatively muted profit growth is the increasing use of production sharing contracts (PSCs) with host governments, under which companies receive a return based on the value of their investment, and so have limited exposure to oil prices.

Under traditional royalty schemes, which still dominate in OECD countries, companies own the oil or gas field and reap the gains when prices rise.

Under PSCs, companies are paid in crude, but they receive less oil if prices rise. Hence, the big jump in crude prices in the first quarter also means investors will have to wait for the sector to deliver a long-awaited return to output growth.

Analysts predict Shell's oil and gas production will have fallen over 3 percent to 3.2 million barrels of oil equivalent per day (boepd), compared with the same period in 2007.

Analysts said Exxon's first-quarter output may also fall from last year, when it was 4.12 million boepd, while BP's is forecast to be flat at 3.9 million boepd.