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.
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