Beneath ExxonMobil's $10.9 billion in profits—a first-quarter record for the company and the second-highest in the company's history—lies another number that should give pause to consumers and policymakers worldwide. The world's largest publicly owned oil company is producing a lot less oil.
Exxon's oil production was down 10 percent in the quarter, greatly accelerating a trend that has been evident for some time. Exxon saw a 2.4 percent decline in oil production between 2006 and 2007. Venezuela's grab of Exxon assets, the production limits set by OPEC countries where Exxon operates, and Exxon's own decisions to sell some of its fields all contributed to the decline, the company said in announcing its first-quarter figures today. But even excluding all of these factors, and counting natural gas production, which is increasing, the company's overall production slid 3 percent in the quarter.
Seen in the context of the production decline, Exxon's profits are even more staggering. The $10.9 billion the company netted in the first three months of the year was a 17 percent increase over last year and was surpassed only by the $11.7 billion profit Exxon reported in the fourth quarter of 2007. But on a per-barrel basis (counting both oil and natural gas), Exxon's profits in the first three months of this year leapt about 24 percent.
Speaking on the trend recently, before Exxon's latest numbers, Peter Hitchens, an oil analyst at Seymour Pierce in London, said that he had concerns about the future trends for all of the major integrated oil companies because of the struggle they are having growing their production. He noted that all of them have had to cut back their forecasts, and as recently as 2000, BP had been projecting 5 percent increases per year.
This week, BP reported first-quarter profit up 63 percent, to $7.62 billion, while Shell's net income was up 25 percent to $9.08 billion—but both saw production that was essentially flat.
"There are several problems for the companies," says Hitchens. "You've got nationalization, or I suppose, greed, coming through in the countries where they operate. When the oil price is low, the countries need the oil companies to fund development. But when the oil price is high, the countries don't actually need the majors because they can outsource all their needs to oil service companies." Not only Venezuela, but Russia and the Caspian countries have reduced the stake that outside oil companies have had in their national petroleum assets. The struggle over oil in Nigeria has been a constant headache for Shell. That's why Hitchens thinks the global market conditions are stronger for service companies like Halliburton and Schlumberger than for the giant oil companies like Exxon, Shell, and BP—despite the astonishing levels of profits they command on oil when it nears $120 per barrel.
"Profits are staying very, very high," Hitchens says. "But they're struggling to put those profits into growing the business."
It is clear, however, that the oil companies have one reliable place they can put their profits. Exxon accelerated its already aggressive share buy-back program, plowing $8 billion—or 73 percent of the quarter's profits—into the company's own stock. Exxon reduced shares outstanding by 1.8 percent and, including dividends, distributed $9.9 billion to shareholders in the first quarter, a 13 percent increase over last year.