The world's biggest oil companies are failing to convert the highest Brent crude prices ever into record profits as production costs climb and US natural gas prices languish.
The London-traded benchmark for two-thirds of the world averaged $111.68 a barrel last year, up 0.7 per cent from a then-record in 2011 and more than double the price in 2006. At the same time, oil and gas producers have lagged behind other industries in stock markets as profit growth has failed to keep up. The MSCI World Oil & Gas Index lost 0.5 per cent last year, compared with the broader World Index that has risen 13 per cent.
"Even though Brent prices are up, so are the costs of producing that crude, and gas is a big drag," said Jason Gammel, an analyst at Macquarie Capital Europe in London. "That has negative effects on profitability."
Slipping output, a slump in USfuel prices and more production from high-cost frontier regions, such as ultra deepwater fields off Brazil, undercut returns. ExxonMobil, Chevron, Royal Dutch Shell and BP all will report earnings for last year that are lower than highs reached since 2007, according to analyst estimates compiled by Bloomberg.
Today, Shell will be the first to report. Adjusted annual profit will climb 6 per cent to US$26.2 billion (Dh96.25bn), helped by higher output from gas projects in Qatar, according to the mean of 25 analyst estimates. Exxon and Chevron report the following day, and BP publishes its earnings on Tuesday.
Exxon, the world's biggest company by market value, may say that adjusted annual earnings fell 10 per cent. BP's annual adjusted profit may have dropped 21 per cent to $17.2bn, a survey of 24 analyst estimates shows.
Exxon shares rose 2.1 per cent last year, followed by Chevron which gained 1.6 per cent. Shell retreated 11 per cent, while BP lost 7.8 per cent. Shell has recovered 9 per cent so far this year, and BP has advanced 12 per cent. Exxon and Chevron have also gained at least 5 per cent since January 1.
The cost of building and operating facilities to pump oil out of the ground rose to a record in the six months ending September 30, IHS reported last month. Deepwater drilling rigs are becoming more expensive with rising labour and fuel costs, said the consultant.
While Brent crude prices rose last year, the average cost of New York-traded West Texas Intermediate (WTI) retreated to $94.15 a barrel from $95.11. US natural gas prices declined to $2.83 per unit, the lowest since 1999.
The drop in gas prices comes as companies shift to produce more of it. Shell, the world's largest provider of liquefied natural gas, had higher gas output than oil for the first time last year.
"High prices are not everywhere," said Shell's chief executive Peter Voser. "We have got a mix of gas and oil."
"Henry Hub went the other way," he said, referring to the US benchmark price. "In America, you have the WTI effect and Canadian prices are very low and that has affected our profitability."
Brent crude was little changed yesterday at $133.97 a barrel. WTI rose 1 per cent to $97.40 in New York.
Shell and Chevron are the only top five oil companies that will not suffer production declines in the fourth quarter, according to the Banco Santander analyst Jason Kenney.
BP, Europe's second-biggest oil company, has pared back its global business as it sold assets after the 2010 Gulf of Mexico oil spill. The company is close to its $38bn target for disposals and faces a trial for civil penalties from the spill that is due to start on February 25 in New Orleans.
BP in October swapped its holding in the Russian venture TNK-BP, responsible for about a quarter of its output, for a 20 per cent stake in Rosneft in a deal that has yet to be completed. BP's shares remain about a third lower than before the Gulf spill three years ago.
At Exxon, the chief executive Rex Tillerson has stepped up acquisitions and capital spending to reverse the longest stretch of quarterly production slides in 13 years.
Analysts expect Exxon's profit last year to fall short of its best year in 2008, when Brent crude prices ranged from $36 to a record $147 and averaged $98.52 a barrel. Prices are holding up this year, averaging $111 this month.
"Oil prices have been much stronger than we might have thought so far this year," said Iain Armstrong, an analyst at Brewin Dolphin in London. "The important thing now is to get your operations on stream."
* Bloomberg News