* Oil groups produced much more than they found last year
* Oil and gas output fell in 2014, echoes trend over past
* Graphic on oil majors' output: link.reuters.com/huh93w
* Companies now making investment cuts to counter low oil
By Tom Bergin and Ron Bousso
LONDON, Feb 5 Big oil companies had a poor
record of finding and producing oil and gas last year, according
to figures out in the past week - and big cuts in spending in
response to falling crude prices could undermine their plans to
turn that around.
Four of the world's six biggest oil firms by market value -
Royal Dutch Shell, Chevron, BP and
ConocoPhillips - released provisional figures showing
together they replaced only two-thirds of the hydrocarbons they
extracted in 2014 with new reserves.
Combined, those four and industry leader Exxon Mobil
posted an average drop in oil and gas production of 3.25 percent
All predict their output will increase and new reserves will
be added in coming years. But the 2014 results echo longer-term
Over the past decade, the biggest Western oil companies have
seen reserves growth stall, production drop 15 percent and
profits fall by almost a fifth - even as oil prices almost
doubled, a Reuters analysis of corporate filings shows.
Analysts and industry executives have blamed the sector's
anaemic performance in that period, in part, on companies'
approach to spending on new fields and infrastructure, tending
to ramp it up when oil prices rise and cut when prices plummet,
such as in the late 1990s and after the 2008 financial crisis.
The latest collapse has seen prices halve since June. In
recent months, the biggest oil groups on both sides of the
Atlantic have announced sharp cuts in capital expenditure
(capex) out as far as 2017, as they seek to preserve cash to
Investors have largely welcomed the focus on dividends. But
some say the cuts could come back to bite the industry.
"Capex can't be cut forever. Cuts in capex are only storing
up problems for the sector down the road," said Will Riley, fund
manager with the Guinness Global Energy Fund, which holds shares
in many of the big U.S. and European oil firms.
The ability of oil companies to replace reserves has not
been as much of a concern for some executives and investors in
recent years due to the shale oil boom.
But the high cost of extracting shale oil makes doing so
profitably a challenge where prices are low - making traditional
and less expensive reserves more relevant in a downturn.
BP and Chevron have announced around 13 percent cuts in
capex for 2015, while ConocoPhillips last week upped its planned
reductions in spending for 2015 to 33 percent. Shell and Exxon
have not issued budget plans yet.
"We have to prioritise cash flow instead of growth for the
time being," Gerhard Roiss, chief executive of Vienna-based oil
producer OMV AG, said last week as he announced an
around 30 percent reduction in investment in new projects.
Oil executives play down worries about the sector's
fundamental health. They say lower production reflects an
increased focus on returns, rather than output for its own sake,
while falling reserves figures can be misleading.
"These (2014) reserve replacement numbers are a little lumpy
... I am not too alarmed about this year's down(turn)," BP boss
Bob Dudley told reporters this week.
However, even executives accept that excessive pruning of
investments can cost them barrels and profits in the long term.
"Many of the things that you may do out of excessive
prudence basically means that you lose them (the opportunities).
They won't come back anymore," Shell CEO Ben van Buerden told
investors last week.
Van Buerden said he would cut less than rivals to ensure he
did not crimp Shell's long-term prospects. Similarly, Exxon told
investors on Monday that while it would monitor spending
closely, it would not "forego any attractive opportunities".
Nonetheless, Shell has shelved projects and put off $15
billion of spending it might have committed to over the next
three years. Analysts at Jefferies predict Exxon will announce a
13 percent drop in capex when it presents its strategy plans in
Martijn Rats, head of oil companies research at Morgan
Stanley in London, said in a research note this week that overly
aggressive cuts could have long-term repercussions.
The expertise needed to develop new fields and
infrastructure takes long periods to build up, he said. Hence,
if companies lose this expertise, they may struggle to expand
their portfolios when oil prices recover.
Executives say the risk is not only that companies may lose
future growth opportunities but also that existing reserves may
not be fully exploited.
Production from oil fields falls over time, because
reservoir pressure drops as oil is extracted. Fields on average
experience natural depletion rates of around 15 percent per
year, industry executives say, but companies generally reduce
this to 3-5 percent by sinking additional wells, injecting gas
or by using other capital-intensive techniques.
Cutting capex will increase depletion rates, if past
experience is an indicator.
"That is a growing risk for the industry. If you go back to
the 2008 and 2009 period ... we saw an increase worldwide in
decline rates for all companies, basically for the entire
industry, increase by a percent or two. And that's very
significant," Chevron CEO John Watson told investors last week.
Using data going back to the oil drop in the mid 1980s,
analysts at Bernstein calculated the rise in depletion rates was
3 percentage points within two years after an oil price collapse
Across the industry, this could mean the loss of hundreds of
thousands of barrels of oil production each day.
Some investors and analysts say companies could yet use the
downturn to help build long-term reserves and production.
Paul Mumford, fund manager with Cavendish Asset Management,
said lower oil prices and a drop in drilling activity was
leading to downward pressure on the prices firms which sell
construction and drilling services to oil majors charge. This
could encourage some companies to drill and build more, he said.
And Charles Whall, fund manager with Investec, said stronger
companies should consider replacing reserves through
Morgan Stanley's Rats added: "Sometimes, the best projects
are done at the bottom of the cycle."
(Additional reporting by Dmitry Zhdannikov; Editing by Pravin