This May 5, 2011 file photo shows gasoline prices of $5.09 USD displayed at an Exxon station in Washington, DC. ExxonMobil, the world’s largest energy company, on October 27, 2011 posted a 41 percent profit jump for the second consecutive quarter as sales soared. Net earnings rose to $10.33 billion, or $2.13 per share, in the July-September period, the company said. Sales increased 31.5 percent from a year ago to $125.33 billion, outstripping analyst forecasts of $113.56 billion. AFP PHOTO/Karen BLEIER (Photo credit should read KAREN BLEIER/AFP/Getty Images)
Associated Press | Oct 29, 2011
By CHRIS KAHN
Higher oil prices have masked a slowdown in production among the biggest oil companies.
Exxon Mobil, Royal Dutch Shell and BP reported a surge in quarterly profits this week even though they’re producing less oil from fields around the world, including a combined 7 percent decline in the third quarter that just ended. Each company has devoted billions of dollars to finding new petroleum deposits, but it could be years, even decades, before those investments translate to more oil and natural gas.
Experts say smaller companies will need to step up to satisfy growing world demand. China, India and other developing nations are expected to push the global appetite for oil to a record 90 million barrels per day next year, enough to outstrip supplies.
Three years ago, a severe drop in oil supplies helped push oil prices to above $147 per barrel, saddling airlines and shipping companies with high fuel costs. Gasoline prices soared above a national average $4 per gallon.
“We’re not at the point where oil prices are going to go bananas” and spike like they did in 2008, said Ken Medlock, an energy expert at Rice University. “But if we saw production declines like this for five or six years, then it’s time to worry.”
Big Oil’s third-quarter financial results highlight a growing problem within the industry. New petroleum sources are increasingly tough — and expensive — to find. The best new deposits are found more than a mile under the ocean, or in vast layers of sticky Canadian sand, or in the frigid Arctic.
Oil Industry Hums as Higher Prices Bolster Quarterly Profits at Exxon and Shell
Costs have increased dramatically as the industry digs deeper.
A decade ago, tapping a new well used to cost about $10 to $20 for every barrel of oil produced. Now it’s estimated at about $50 or $60 for wells in the Gulf of Mexico and $70 or $80 in the Canadian oil sands.
To boost production, oil companies not only must find new sources of oil, they need to make up for production losses at aging fields. Exxon’s fields, for example, are declining by 5 to 7 percent each year, Oppenheimer & Co. analyst Fadel Gheit said.
“They need to add 200,000 to 300,000 barrels a day of production just to break even,” Gheit said. “That’s huge.”
Overall, analysts think oil producers can still increase supplies in coming years, thanks to smaller companies and increased contributions from OPEC. But it may not be enough to keep up with demand.
Morgan Stanley analyst Hussein Allidina expects supplies to rise by about 1 percent to 2 percent every year until 2016. That assumes “flawless execution,” Allidina said in a research note. Even if that happens, demand will grow 1.5 percent every year over the same period.
It raises the possibility of price spikes. A surge in oil not only means higher fuel prices, it also poses problems for the industry. The record jump in oil prices in 2008 may have led to record profits for Exxon that year, but it weakened the economy so much that prices eventually plunged. That sapped profits in later quarters and forced the industry to table many projects.
Smaller companies are expected to ramp up in fields that are too tiny for Big Oil. For example, Occidental Petroleum said it has increased oil production about 4 percent so far this year. Saudi Arabia and a handful of other OPEC members have the ability to put more oil on the market, if needed. And Libya is expected to start exporting oil again later this year following an eight-month rebellion.
Exxon Mobil on Thursday said profits jumped 41 percent in the third quarter to $10.33 billion, or $2.13 per share, as higher oil and natural gas prices made up for lower production. Profits doubled for Shell and BP for the same reason. Chevron, the second-largest U.S. oil company, is expected to report its financial results on Friday.
Exxon sold oil in the U.S. for an average of $95.58 a barrel, up 35.2 percent from a year earlier. Internationally, it charged $107.32 a barrel, up 45.4 percent. It also charged more for natural gas.
The higher prices propped up earnings at Exxon’s exploration and production business, which finds and pumps oil and natural gas.
Exxon’s U.S. refineries also benefited. Their profits quadrupled as demand for gasoline and other fuels soared around the world, enabling them to charge more.
Exxon shares rose 81 cents, or 1 percent, to $81.88. BP shares climbed 78 cents to $45.43.
Oil prices also jumped 4 percent to end the day at $93.96 per barrel in New York.