Exxon Mobil Corp. led an investor-friendly but politically charged oil industry earnings parade Thursday with its quarterly profit of $10.7-billion (U.S.). But the booming profits mask a serious challenge for the super-majors: declining oil production.
As well, the industry's ballooning earnings present a juicy target for debt-burdened governments that are eager to raise taxes on oil companies and score points with consumers burdened by soaring gasoline prices.
Fuelled by a spike in crude prices, virtually all the major oil companies are reporting sharply higher profits in the first quarter, compared with the same period in 2010. They are boosting their earnings even as they produce less crude, relying on higher oil prices and increased natural gas production to drive revenues.
But the companies know their profits will be tempting sources of tax revenue for politicians fighting budget-deficit battles. One Exxon executive described the $11-billion quarterly profit as a "simple fact of economics" that should be expected when commodity prices rise.
"We understand that it is simply too irresistible for many politicians in times of high oil prices and high earnings - they feel they have to demonize our industry," the company's vice-president of public affairs, Ken Cohen, wrote in a blog posting on Thursday.
The United Kingdom has already raised taxes on North Sea oil, and U.S. President Barack Obama has been attacking the industry's profits as he seeks to eliminate some $4-billion (U.S.) a year in tax incentives. This week's lofty earnings reports will likely strengthen Mr. Obama's political hand.
In Canada, both the New Democrats and the Liberals have attacked Stephen Harper's Conservatives over their planned reduction in corporate income tax rates, saying it amounts to a give-away to oil companies.
As it so often does, Exxon led the pace on profits with its earnings report Thursday that beat even the optimistic estimates of Wall Street analysts with a 69-per-cent increase in its quarterly profit.
Royal Dutch Shell PLC reported Thursday that its first-quarter profit rose 22 per cent to $6.9-billion (U.S.). On Wednesday, Houston-based ConocoPhillips Co. said its net income was 43 per cent higher than the corresponding period of 2010, at $3-billion (U.S.).
While Exxon increased its total production of oil and gas by 10 per cent, all of that increase came from natural gas, primarily from its $31-billion (U.S.) acquisition of XTO Energy Inc., which was a major U.S. shale gas producer.
Liquids production was down slightly in the quarter, but that suggests more significant declines in crude oil output because Exxon increased its production of natural gas liquids (NGLs), which contain propane and butane but are not used to make gasoline or diesel. The company does not provide a breakdown between crude production and NGLs.
Shell said its production of oil and gas declined by three per cent in the first quarter compared to the first three months of 2010, primarily due to the sale of assets. The Anglo-Dutch company has seen its oil production - including natural gas liquids - slump to 1.69-million barrels per day in the first quarter from an average of two million barrels per day in 2006. Growing gas production has offset those declines, but it has been a far less profitable business, particularly in North America.
On Wednesday, ConocoPhillips said its oil-and-gas output had declined 7.4 per cent in the first quarter compared to the first quarter of 2010.
The current run-up in crude prices has resulted in lower production volume claimed by the majors in many of the countries where they operate. That's because they produce much of their oil under production-sharing agreements with countries such as Russia, Kazakhstan and Nigeria.
"As the price goes up, the contract terms generally stipulate that the host government gets an increasing share of the actual production," said David Kirsch, an analyst with PFC Energy in Washington. "So although revenues should continue to go up for the companies, a lot of time what they see is their actual production go down. The volumes from the fields where they're operating stay the same but their entitlements go down."
As a result, the major oil companies are finding it difficult - if not impossible - to increase their crude oil production or offset natural decline in existing fields, as they are shut out of many producing countries such as Saudi Arabia and Iran and face restrictive contracts in others.
And so they're forced to target more expensive prospects, such as ultra-deep water in the Gulf of Mexico and the Atlantic Ocean off West Africa or Canada's oil sands.
"There is more focus on North America than before, precisely because North America doesn't have the same types of political hurdles or risk that investing in Russia or West Africa does," said Pavel Molchanov, Houston-based analyst with Raymond James Financial Inc.