Big Oil: 2nd Quarter In Brief

Two-thousand eight second quarter corporate results were released in the past two weeks. I reviewed the numbers for the oil supermajors (with market capitaliation above $100B US): Exxon Mobil, BP, Royal Dutch Shell, Chevron, Total S.A. and Conoco Phillips.

Average Second Quarter production Rates (mboe/d)*

Major	2008	2007	2006	2005
Exxon Mobil	2,393	2,668	2,701	2,468
Royal Dutch Shell	3,126	3,178	3,253	3,526
Chevron	2,540	2,630	2,669	2,421
Total S.A.	2,353	2,323	2,290	2,506
BP	3,830	3,804	4,018	4,112
ConocoPhillips	1,750	1,910	2,130	1,540
Totals	15,992	16,513	17,061	16,573
Year-over-year change	-3.16%	-3.21%	+2.94%

The highlights are as follows.

• Profits were robust (as expected) due to high oil prices.


• Production rates fell (not quite as expected) despite record capital expenditures.


• All but two saw production decreases from the same quarter last year despite the fact that oil prices doubled in the same period.


• The average year-over-year production drop was over 3% in each of the last two second quarters.

These are the unadulterated numbers. The production drops are under-reported because the companies only highlight production within their control and downplay production drops from the 'Chávez-factors'. For example, in Exxon Mobil's 2008 Q2 press release:

On an oil-equivalent basis, production decreased 7% from last year. Excluding impacts related to the Venezuela expropriation, the Nigeria labor strike and lower entitlement volumes, production was down 2%.

Also downplayed is the effect of asset sales; the reality is that most of such sales are mature fields that already in decline and are no longer material to the company. It seems that while global reserves have edged upwards, our ability to get them out of the ground under free-market conditions is quickly deteriorating, even with oil at record prices. Expropriation of reserves by state-governments is likely why oil prices have increased so rapidly: free-markets are losing control of production to countries like Venezuela, Russia and China. This is very bad for free-market pricing. So far at least, demand destruction has not appeared to offset the bullish market forces including resource nationalization, geopolitical instability and exponential production declines. The entire independent oil & gas industry tells the same story. I'm not predicting $300/bbl oil yet, but I wouldn't fault anyone for holding on to crude oil futures in light of this data.

There is one more recurring theme. Nearly all the refinery and gasoline distribution divisions were the least profitable and in some cases lost money. Exxon Mobil now plans to exit the gasoline distribution market citing very weakening margins. This is bad news for gas prices which have yet to increase by the same percentage as crude oil.

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*mboe/d = Thousand barrels of oil equivalent per day. Natural gas volumes are converted to an oil-equivalent basis at a ratio of about 6 mcf:1 boe.