Even before U.S. oil prices began their summer drop toward
$80 a barrel, the three biggest Western oil companies had lower profit margins
than a decade ago, when they sold oil and gas for half the price, according to
a Wall Street Journal analysis.
Despite collectively earning $18.9 billion in the third
quarter, the three companies—Exxon Mobil Corp., Royal Dutch
Shell PLC and Chevron Corp. —are now shelving expansion plans
and shedding operations with particularly tight profit margins. The reason for
the shift lies in the rising cost of extracting oil and gas. Combined, the four
companies averaged a 26% profit margin on their oil and gas sales in the past
12 months, compared with 35% a decade ago, according to the analysis.
Shell last week reported that its oil-and-gas
production was lower than it was a decade ago and warned it is likely to keep
falling for the next two years. Exxon’s output sank to a five-year
low after the company disposed of less-profitable barrels in the Middle East. U.S.-based
Chevron, for which production has been flat for the past year, is delaying
major investments because of cost concerns.
It isn’t only major oil companies that are pulling back. Oil
companies world-wide have canceled or delayed more than $200 billion in
projects since the start of last year, according to an estimate by research
firm Sanford C. Bernstein.
In the past, the priority for big oil companies was to find
and develop new oil and gas fields as fast as possible, partly to replace
exhausted reserves and partly to show investors that the companies still could
grow. But the companies’ sheer size has meant that only huge, complex—and
expensive—projects are big enough to make a difference to the companies’
reserves and revenues.
As a result, Exxon, Shell and Chevron have chased large
energy deposits from the oil sands of Western Canada to the frigid Central
Asian steppes. They also are drilling to greater depths in the Gulf of Mexico
and building plants to liquefy natural gas on a remote Australian island. The
three companies shelled out a combined $500 billion between 2009 and last year.
They also spend three times more per barrel than smaller rivals that focus on
U.S. shale, which is easier to extract.
The production from some of the largest endeavors has yet to
materialize. While investment on projects to tap oil and gas rose by 80% from
2007 to 2013 for the six biggest oil companies, according to JBC Energy
Markets, their collective oil and gas output fell 6.5%.
Several major ventures are scheduled to begin operations
within a year, however, which some analysts have said could improve cash flow
Chevron said it planned to increase output by 2017, has
lowered its projections. The company has postponed plans to develop a large gas
field in the U.K. to help bring down costs. The company also recently delayed
an offshore drilling project in Indonesia. The re-evaluation has also come
because the companies have been spending more than the cash they bring in.
Though refining operations have cushioned the blow of
lower oil prices, the companies indicated that they might take on more debt if
crude gets even cheaper. U.S. crude closed Friday at $80.54 a barrel.
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