Production fall another leak from Big Oil's drum

NEW YORK (Reuters) - Sagging crude output at the world’s top oil companies is the latest indicator that their profits may have peaked even as oil runs toward $100 a barrel.

Oil and gas production fell at all the largest publicly traded oil companies in the third quarter, as aging oil fields, production-sharing agreements and soaring costs and demand for drilling services took their toll on output.

Profits at oil majors such as Exxon Mobil Corp XOM.N and BP Plc BP.L have also flattened or dropped despite the record oil prices. And their lower output will only push up international prices further as demand from the U.S. and emerging economies outpaces new supply.

“A lot of majors for years have been focused on returns and not about putting rigs to work,” said Johnson Rice analyst Ken Carroll. “We’re seeing the results.”

The big integrated oil companies reported third-quarter earnings that largely fell short of year-earlier levels due to much lower profits from gasoline production.

Moreover, the companies’ exploration and production businesses were not able to pick up the slack in the quarter, even with oil averaging about $75 a barrel in the quarter.

Exxon, Royal Dutch Shell RDSa.L, BP, Chevron Corp CVX.N, ENI ENI.MI and ConocoPhillips COP.N posted third-quarter output drops of between 2 percent and 11 percent.

“You would think that if oil went to $110 a barrel that they would do incrementally better, but it’s not necessarily so,” Chris MacDonald of WHG Funds said of Exxon Mobil. “If they spend $20 billion a year on capex and their production goes down, it doesn’t say much for lesser companies.”


Oil majors have long complained that their access to oil projects around the world is shrinking, and higher crude prices have only exacerbated that trend.

Exxon, Chevron and ConocoPhillips all attributed parts of their production declines either to countries changing the terms of production agreements or to contracts that gave host countries a larger share of oil produced at the higher prices.

Venezuela, Nigeria and Canada have all made moves to harness a greater share of oil revenue.

“As the price goes up, more of the barrels go over to the other side of the ledger -- to the host countries,” said James Halloran, who helps invest about $35 billion at National City Private Client Group.

“There’s a trend here and it’s going to make it tougher on producers going forward to really benefit from the demand for oil the way they used to. Either they’ll be able to benefit from quantity or price, but not both,” he said, noting that the change should reduce some volatility in earnings.

Rising costs were also an issue. According to a Cambridge Energy Research Associates study released in May, oil and gas production costs were up nearly 80 percent since 2000 on high demand for steel, drilling rigs and other materials used in production.

BP Chief Financial Officer Byron Grote estimated that third-quarter costs were up 10 percent from the year-earlier quarter and the head of Chevron’s exploration and production operations acknowledged that the company had shelved some projects due to the higher costs.

The high demand for materials has also forced the delays of some projects, like Chevron’s Tahiti prospect in the deepwater Gulf of Mexico.

The companies also have to contend with the natural decline rates of oil projects. Shell attributed its 9 percent drop to field decline, a factor that BP also said hurt its output.

Johnson Rice’s Carroll said the sheer size of the companies alone makes offsetting the declines of aging oil fields tough.

“If you have a company producing 2.5 million barrels per day and they have a 15 percent decline, that’s almost 400,000 barrels a day they have to replace just to keep production flat. That’s a big project.”

But Barclays Capital analyst Paul Horsnell said the inability to keep up with natural decline might be exposing a larger underlying problem.

“After years of rising prices, the announcement by a major oil company that field decline rates were enough to counteract all of the accumulated supply response to higher prices and were at the heart of a large crude oil output reduction, might be seen as a further signal that prices have not yet been bid up enough,” Horsnell said.

Additional reporting by Tom Bergin in London