By Alex Lawler - Analysis
LONDON (Reuters) - The world’s five largest fully publicly traded oil firms are planning to invest billions of dollars more this year but extra spending may not translate into higher production.
Exxon Mobil Corp. (XOM.N), Royal Dutch Shell Plc, BP Plc, Total SA (TOTF.PA) and Chevron Corp. plan up to a total of $97 billion in capital spending this year, up around 9 percent from 2006. BP (BP.L), Chevron (CVX.N) and Shell (RDSa.L) have also said output may fall in 2007.
“Most companies have dressed down their volume growth estimates,” said Jason Kenney, analyst at ING in Edinburgh, referring to the European oil sector. “Essentially, they are spending more and getting less.”
Violence in Nigeria has cut supply for companies such as Shell and Total. Higher costs for rigs, steel and wages are soaking up much of the spending boost, and some companies have said the costs surge might delay projects.
Exxon’s Chief Executive Rex Tillerson said at the company’s analysts meeting on March 7 that it had seen a 9 to 10 percent rise in drilling prices over the past year or so, although costs may have hit a plateau.
Kenney at ING estimates that average capital spending per barrel of oil equivalent of supply among the European oil firms he tracks has risen to $4.75 from $4.35 since December 2006.
Adding to the challenge of rising costs, countries such as Venezuela and Russia are grabbing more cash and control from companies that work their oil and gas fields, a trend dubbed resource nationalism by some analysts.
In addition, oil and gas resources are increasingly in places where production is technically more difficult, such as offshore the Gulf of Mexico. The oilfields of top reserves holder Saudi Arabia are off limits for foreign companies.
“The international oil companies are facing a tough challenge,” said Fatih Birol, chief economist at the International Energy Agency, adviser to industrialized countries.
“Their existing fields are declining and they do not have access to major oil reserves.”
Oil and gas output rose 4.2 percent at Exxon last year and by 6 percent at Chevron. BP’s output fell by 2.2 percent, Shell’s 1.3 percent and Total’s 5 percent.
The industry is also feeling the effects of the flip side of higher oil and gas prices, which have led to record or near-record profit.
Under production-sharing contracts with some governments, such as Nigeria and Angola, oil companies tend to be entitled to fewer barrels when prices rise.
“To some extent for the majors, what you are seeing in a high oil price environment is the effect of production-sharing contracts,” said Dirk Hoozemans, a fund manager at Robeco in Rotterdam.
Companies are lifting spending after years of under-investment and rising demand sent prices skyrocketing. Crude oil hit a record high of $78.40 last year and remains above $60, more than twice as high as five years ago.
“Historically, the industry has not been spending enough,” Hoozemans said. “Some of the companies have ramped up spending massively, others have been able to hold back.”
Exxon expects investment to remain little changed, up around 0.5 percent, in 2007 while Total and Chevron plan larger increases of 14 percent and 18 percent respectively.
While detailing plans to raise investment, BP has also trimmed production forecasts and said output may fall this year. Chevron expects 2007 supply to decline, mainly due to lost output in Venezuela.
Rising costs could prompt some ventures to be shelved. Earlier this month, Chevron said its developing projects could pump about 1.1 million barrels of oil equivalent per day by 2011, but surging costs may threaten some of them.
Of the companies expecting supply to expand this year, Total has the highest forecast of 6 percent. It also had the largest decline in 2006, reflecting in part the impact of higher prices and losses in Nigeria.
“Total is on the verge of a very strong period of growth,” ING’s Kenney said.
For a FACTBOX on oil companies’ capital spending and production plans, please click on <ID:nL30270535>