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The Calgary Herald: Big Oil struggles to maintain production

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Countries like Venezuela, which transports some of its crude on ships such as the Inka, have demanded more cash and control from companies working their oilfields, posing hurdles for energy majors trying to maintain production.
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Higher capital spending fails to boost output

Reuters: Published: Wednesday, February 20, 2008

The world’s three largest fully publicly traded oil firms are investing billions of dollars more, but there is little sign yet the extra spending is leading to higher production.

ExxonMobil Corp., Royal Dutch Shell PLC and BP PLC posted falling 2007 output, even though they upped capital spending to over $60 billion and some expect a further rise this year.

The drop reflects the way higher oil prices reduce the amount of oil companies get under production-sharing agreements with governments, and declining supply from aging fields in some regions like the North Sea.

“Production growth is still a real problem for the U.K. majors,” said Ivor Pether, who manages the equivalent of $1.4 billion at Royal London Asset Management, including BP and Shell shares.

Violence in Nigeria, and moves by countries like Venezuela to get more cash and control from firms that work their oil and gas fields, have also cut supply for some companies.

Oil firms are lifting spending after years of under-investment and rising demand helped send prices skyrocketing. Shell and BP plan increases of up to 14 per cent and 16 per cent respectively in 2008.

But much of the boost is being soaked up by rising costs, as well as the drop in the U.S. dollar. Also, it takes years to bring new fields into production, meaning the impact of higher spending on supply is some way off.

“The lead time between exploration and production is about seven to eight years,” said analyst Jason Kenney of ING.

“So new investment today is not going to come through until 2015 in terms of production, cash flow and earnings.”

Shell posted a 4.5 per cent drop in oil and gas output to 3.315 million barrels of oil equivalent per day (boepd) in 2007, the largest drop among the top three oil companies, and said supply may fall further this year.

Production was hit by the reduction of Shell’s stake in the Sakhalin gas project in Russia following government pressure and snags at Shell’s oilsands-heavy unit in Canada.

Shell backtracked from previous targets for production. Chief financial officer Peter Voser declined to restate a plan for one per cent to two per cent growth to 2010 and said output was likely to fall “slightly” in 2008.

BP’s output fell 2.8 per cent in 2007 to 3.818 million boepd. But chief executive Tony Hayward also reaffirmed BP’s production growth plans to 2012 and said he expected higher supply in 2008.

Exxon posted the smallest drop in supply among the top three oil companies. Output fell one per cent in 2007, partly because of lost oil from assets that were taken over by Venezuela.

Big Oil’s lower output comes alongside a broader failure for supply to meet expectations in recent years, particularly outside the Organization of Petroleum Exporting Countries.

Part of the reason for that, say analysts, is declining output at fields already in production, such as in the North Sea, which raises questions whether new supply will lead to an overall gain in output.

In a Feb. 4 report, Citigroup said there are over 175 large new oil projects due to start up by 2012 worldwide, although it remains to be seen whether they will be enough to counteract declines elsewhere.

“The fear remains that most of this supply will be offset by high levels of decline, pointing to genuine difficulties in building net production levels, particularly after 2012,” the bank said.

© The Calgary Herald 2008

http://www.canada.com/calgaryherald/news/calgarybusiness/story.html?id=2aefe9bd-d26e-49da-805a-9d6fe033b40a

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