OPEC Cuts Biting Into Oil Cos' Output Growth Areas

LONDON (Dow Jones Newswires), Jan. 6, 2009

Oil majors that derive a large part of their income from production in member states of the Organization of the Petroleum Exporting Countries are finding the cartel's production cuts are hampering growth prospects in some of their most promising geographical areas.

As a result, both short- and long-term profit prospects will be hit, which could, in turn, hurt share prices.

So far, large oil companies have felt little pain from the global recession. But this may be about to change.

To support prices, OPEC members are enforcing a production quota system which, since September, has seen successive output cuts totaling 4.2 million barrels a day.

The OPEC cuts "have to be a concern for (international oil) companies going forward...They will hamper production growth" for them in member countries, said Julian Lee, a London-based oil supply analyst at Center for Global Energy Studies.

Implementation of a 1.7 million barrel-a-day cut in 2006 hurt oil majors' results in 2007, but the effect was largely offset by soaring oil prices.

The new reductions are much larger, have already been more stringently implemented, and are coming at a time of falling crude prices. 2008 was the first year since 2001 when prices finished the year lower than they started, despite a mid-year spike.

With the exception of the U.K.'s BP PLC (BP) and ConocoPhillips (COP) of the U.S., the world's largest non-state oil companies produced at least one quarter of their crude oil and other liquid hydrocarbons in OPEC countries in 2007, according to their annual reports.

Over 44% of liquids produced by France's Total SA (TOT) in 2007 came from OPEC states.

OPEC members control the majority of oil output in the Arabian Gulf, Africa and South America.

An OPEC reduction of 1.5 million barrels a day, decided in October, will be reflected in companies' income statements for the three months ended Dec. 31, which will be announced from Jan. 29.

But the worst may have yet to come, after OPEC started to implement a 2.2 million barrel-a-day reduction, its largest ever, on Jan. 1.

In early November, Anglo-Dutch Royal Dutch Shell PLC (RDSB.LN), the world's second largest oil company, was the first to disclose it was hurt by an OPEC cut, when it called force majeure on some of its Nigerian crude exports. Force majeure provides legal protection for the company if it realizes it won't be deliver all the cargoes it promised to its customers.

That same month, Jim Campbell, vice president in charge of project execution at BP's Angolan unit, said the Angolan government had asked the British company to cut 4,000 barrels out of its daily output to implement a 99,000 barrel-a-day OPEC cut. Other foreign operators had been asked to do the same, he said.

According to people familiar with the matter, Angola has requested a reduction in new tanker shipments from fields operated by Total, ExxonMobil Corp. (XOM) and Chevron Corp. (CVX) to implement its share of the latest cut.

And Ecuador, another OPEC member, has also said it would suspend all of Eni SpA's (E) 20,000 barrel-a-day local production to comply with the OPEC decision.

BP, Total, Shell, ExxonMobil, Chevron and Eni declined to provide more detailed comment on the impact of the OPEC cuts. A Total spokeswoman said "our production figures are depending on several factors, including OPEC quotas, but other factors also intervene."

OPEC's decision is particularly bad news for many companies as it curbs output in countries which they had earmarked as key to their output growth as production in other regions declines.

For example, BP's Plutonio field in Angola was one of three major fields the company was relying on increase its global production during the 2007-2009 period. But now, not only can it not boost production at the field, but has to operate at 40,000 barrels a day under capacity to comply with Angola's OPEC quota.

Production restrictions, if they persist, could also hamper bringing new fields on line. Eni, for example, has more than half its untapped proven reserves in North and West Africa - where the majority of production comes from OPEC countries.

Ironically, with the rising assertiveness of Russian and depleting reserves in Europe and U.S. onshore fields, some OPEC members had been seen as production safe havens.

But the impact of lower oil prices may also partly make up for some of the OPEC cuts. Production-sharing agreements, in force in several OPEC countries increase the share of production accorded the foreign operator when prices fall.  

Copyright (c) 2008 Dow Jones & Company, Inc.

Related Companies
 Company: BP plcmore info


 - Canada Rules Out Arctic Oil Drilling Extensions for ExxonMobil, BP (Jan 6)
 - Samsung Wins Mad Dog 2 Fabrication Contract (Jan 5)
 - Egypt Signs $220M Of Oil And Gas Deals (Dec 28)
 Company: Exxon Mobil Corporationmore info


 - Petrovietnam, Exxon Mobil Sign Deal On Gas Generation (Jan 13)
 - ExxonMobil Strikes More Oil Offshore Guyana (Jan 12)
 - Tillerson Tells Congress Neither He, Nor Exxon Lobbied Against Sanctions (Jan 11)
 Company: Shellmore info


 - Southern North Sea Special Interest Group Launched (Nov 21)
 - Report: Growing Confidence in North Sea Oil, Gas Industry (Nov 14)
 - Kazakhstan's Kashagan Produces 201,000 Tons Of Oil In October (Nov 14)
 Company: Total S.A.more info
 - Total's Uganda Expansion 'Significantly De-risks' Project Sanction (Jan 10)
 - Nigerian Oil Labour Union Suspends Strike At Total's Fuel Depots (Jan 6)
 - Total, Shell, Eni Eligible to Bid for New Iran Oil, Gas Projects (Jan 3)
 Company: ConocoPhillipsmore info


 - Startup Of Malikai Oil Field To Boost Malaysia's Kimanis Exports (Dec 13)
 - US Shale Firms Go Back To Work Buoyed By OPEC Deal, Trump Victory (Nov 14)
 - ConocoPhillips Aims To Sell Up To $8 Billion In Gas Assets (Nov 10)
 Company: Chevron Corporationmore info
 - Argentina Clinches Deal to Attract Investment in Vaca Muerta Shale (Jan 11)
 - Oil, Gas Conflicts throughout Africa in 2016 (Jan 4)
 - SOCAR, AIOC Agree to Develop ACG Field (Dec 23)
 Company: ENImore info


 - Oil, Gas Conflicts throughout Africa in 2016 (Jan 4)
 - Total, Shell, Eni Eligible to Bid for New Iran Oil, Gas Projects (Jan 3)
 - Egypt Signs $220M Of Oil And Gas Deals (Dec 28)
 Company: OPECmore info
 - BLOG: Should the US Cut Oil Production in Line With OPEC, NOPEC? (Jan 13)
 - Will OPEC Deliver Its Output Cut Deal? Here's How We'll Know (Jan 6)
 - Venezuela Says To Cut 95,000 Bpd Crude Output In OPEC Deal (Dec 27)
Events  SUBSCRIBE TO OUR NEWSLETTER

Our Privacy Pledge
SUBSCRIBE


Most Popular Articles


From the Career Center
Jobs that may interest you
Billing Manager
Expertise: Accounting
Location: Houston, TX
 
RtP Analyst / Buyer for Turnarounds
Expertise: Purchasing
Location: Deer Park, TX
 
Senior Buyer
Expertise: Purchasing
Location: Deer Park, TX
 
search for more jobs

Brent Crude Oil : $55.45/BBL 0.99%
Light Crude Oil : $52.37/BBL 1.20%
Natural Gas : $3.42/MMBtu 0.88%
Updated in last 24 hours