Royal Dutch Shell Plc  .com Rotating Header Image

Investor’s Business Daily: Energy Giants Love High Prices, But That Hurts Output, Reserves

EXTRACT: Russia, which earlier this year forced Royal Dutch Shell (RDSA) and BP to turn over large Siberian natural gas projects at fire sale prices, is now said to be eyeing Exxon’s massive Sakhalin-1 gas project.

THE ARTICLE

ALAN R. ELLIOTT
August 08, 2007

High energy prices are fueling record profits for Big Oil. But these giants face concerns about their long-term supplies due to aging production fields and energy nationalization in many parts of the world.

Exxon Mobil (XOM) and the world’s other big publicly traded oil producers enjoyed strong refining margins and asset sales in the second quarter. But those increases either barely managed or entirely failed to counteract the industry’s production-side declines.

Exxon said production fell 10% in the U.S., with smaller decreases in Africa and Europe. BP’s (BP) oil output fell 5% vs. a year earlier.

Oil production in the U.S. has decreased due to smaller reservoirs and maturing fields. Those declines led Exxon to cut exploration and production investment in the U.S. by 20% during the quarter, to $497 million.

Exxon’s U.S. E&P spending for the year is down 17%. Outside the U.S., the world’s largest oil producer boosted E&P spending 2% for the quarter, to $3.37 billion.

New Fields, Tough Terms

Exxon, Chevron (CVX) and others increasingly depend on new fields in the Mideast, Asia and Latin America. Companies in many cases find as much oil – or more – than they produce.

Even as energy supplies continue to rise, strong global demand is pushing oil prices higher.

But non-Western countries demand a large – and growing – share of what the oil majors find and pump out of the ground. The oil majors only count as output what they get to keep.

High oil prices actually exacerbate the problem.

“Prices have accelerated the cost recovery on some of these big projects,” said Nicole Decker at Bear Stearns. “Once you recover your costs according to these production-sharing agreements, the regimen changes, and your take (of production) is lower.”

That take, also called an entitlement, divides barrels produced between an oil producer and the host country. In the early going, producers take a larger share of production until they earn back their initial investment. After that, host countries receive an increasing share. Higher prices produce a quicker payback, more rapidly paring down the producer’s share.

Higher prices boost refining margins, which so far have offset production declines. Exxon earned more than $10 billion in the second quarter on $98 billion in revenue.

Pricing Out Reserves

A similar scenario affects oil companies’ reserves.

An Exxon field might have 20 million barrels in reserves, but in many countries Exxon only gets to count a fraction of that as its own. As prices rise, its share goes down.

Many current deals were negotiated a decade ago or more, when forecasts for $35 oil were considered extravagant, noted Oppenheimer analyst Fadel Gheit.

Meanwhile, countries like Russia and Venezuela, taking advantage of the power that high energy prices bring, are altering or trashing existing contracts.

ConocoPhillips’ (COP) forced exit from its Orinoco project in Venezuela led to a $4.5 billion charge in the second quarter, slashing profit by 94%.

Russia, which earlier this year forced Royal Dutch Shell (RDSA) and BP to turn over large Siberian natural gas projects at fire sale prices, is now said to be eyeing Exxon’s massive Sakhalin-1 gas project.

Exxon hasn’t broken out precise reserve figures for the project. But if it can’t dodge the takeover effort, it stands to take a sizable hit.

“It’s likely to be rather substantial,” Decker said. “It is a huge project.”

The Securities and Exchange Commission requires oil companies to only count proven reserves, even when they have good reason to think fields will yield far more.

Letting firms book proven and probable energy reserves would provide a more accurate picture, many analysts say.

“The investment community would be better served by the reporting of companies’ expected future production, cost and net revenue forecasts,” said Jim Ross, of Ross Petroleum, a Wales-based consultant.

A broader standard would boost energy firms’ official reserves. Proponents say it would provide a more accurate gauge of the actual in-the-ground resources those companies own.

Copyright © 2007 Investor’s Business Daily, All Rights Reserved.

http://www.topix.net/content/ibd/2007/08/energy-giants-love-high-prices-but-that-hurts-output-reserves

royaldutchshellplc.com and its sister websites royaldutchshellgroup.com, shellenergy.website, shellnazihistory.com, royaldutchshell.website, johndonovan.website, shellnews.net and shell2004.com are all owned by John Donovan. There is also a Wikipedia article.

0 Comments on “Investor’s Business Daily: Energy Giants Love High Prices, But That Hurts Output, Reserves”

Leave a Comment

%d bloggers like this: