March 4, 2021

Higher Prices Buoy Profits as Oil Companies Scramble for New Fields

HOUSTON — Exxon Mobil and Royal Dutch Shell reported large increases in second-quarter profits on Thursday, benefiting from oil and gasoline prices that have been propelled upward by political turbulence in the Middle East and North Africa.

It was the strongest quarter for Exxon since it set a corporate quarterly earnings record in 2008, when crude oil prices approached $150 a barrel before collapsing as the world economy slowed.

Exxon, the biggest American oil company, reported earnings of $10.7 billion for the quarter, up from $7.56 billion the year before, but a bit less than Wall Street had been expecting. Shell, the largest European oil company, posted profits of $8.7 billion, up from $4.4 billion a year ago.

The results of Exxon and Shell, as well as ConocoPhillips and BP earlier in the week, highlighted the oil majors’ dependence on high oil prices for profit growth at a time when they are straining to pick up new reserves to increase or even sustain future production.

Major oil companies are finding it difficult to acquire new reserves because countries rich in oil and gas have become increasingly grudging in their dealings with foreign companies, striking production-sharing agreements that offer them a smaller share of the profits. That is prompting oil companies to drill deeper below the ocean’s surface and explore in the Arctic for oil — expensive propositions that put pressure on profits — or drill for less profitable gas.

“We are going into a world where finding the oil and gas is going to be more complex,” Shell’s chief executive, Peter R. Voser, acknowledged as his company released its results. “It needs more money.”

Smaller oil and gas companies like EOG Resources and Cabot Oil and Gas have proved to be more nimble than the giants in recent years, moving into shale oil and gas fields in the United States and booking new reserves at a far faster rate. The major companies have tried to follow suit over the last two years, but a glut of natural gas from rising production has weakened the profitability of some fields.

Growth in oil company profits for the rest of the year is uncertain, given that oil and gas prices are strongly tied to the health of the global economy. Demand in the United States for diesel, gasoline and other petroleum products has eased in recent months after starting the year strongly, and the growth in Chinese oil demand has slowed somewhat.

“If the economy does not grow faster, earnings growth in the energy sector is obviously going to be limited,” said Fadel Gheit, a senior oil analyst at Oppenheimer Company. “You can’t grow energy demand in a flat economy.”

The Energy Department reported on Thursday that United States oil demand in May fell by nearly 2.5 percent from the same month the year before, representing a decline of 464,000 barrels a day. The department also reported that oil inventories last week were up by 2.3 million barrels from the week before, suggesting a less-than-robust summer driving season.

Oil prices have eased more than 10 percent since the spring, when crude prices peaked because of the loss of 1.3 million barrels of oil a day of production caused by the turmoil in Libya and fears that instability could spread to major producers like Saudi Arabia and Algeria. Since then, increased production in Saudi Arabia and the release of oil from strategic reserves in the United States and other industrialized countries have helped prevent shortages.

Even if oil demand and prices increase, large oil companies will strain to keep up production.

ConocoPhillips reported a 90,000-barrel-a-day decline in oil and gas production for the quarter on Wednesday, though earnings were higher anyway as a result of higher oil prices. Shell also reported a decline of 100,000 barrels of daily oil and gas production for the quarter, in part because of permitting delays in the Gulf of Mexico after the BP accident last year.

Exxon’s earnings were lower than analysts had expected despite strong revenue growth, reflecting a record $10.3 billion in capital and exploration expenditures in new oil and gas projects, up 58 percent from the second quarter of 2010.

Exxon’s purchase of XTO Energy last year to become the nation’s biggest natural gas producer has been questioned by some investors in light of low gas prices, but the acquisition helped Exxon’s oil and gas production to increase by 10 percent from a year ago.

Exxon is continuing to invest heavily in natural gas, purchasing 317,000 acres for $1.7 billion in Pennsylvania’s Marcellus shale field in June. It is also drilling deep in the Gulf of Mexico, and last month announced the discovery of a new deepwater field holding the equivalent of 700 million barrels of oil.

Edward Westlake, an analyst at Credit Suisse, said Exxon profits were hurt by the shutdown in production in several oil fields and refineries around the world for maintenance reasons. He said he was optimistic about the company’s prospects because of an increase of annual capital expenditures from $21 billion in 2007 to around $35 billion currently, along with its aggressive acquisition of oil and gas acreage.

“One day this will pay off,” Mr. Westlake added.

While Exxon has tried to buy reserves, Shell has invested heavily over the last decade in complex projects, particularly in the Persian Gulf state of Qatar. Its $20 billion Pearl project, which will produce liquid fuels out of natural gas on an enormous scale, has been going through final tests this year and should begin to produce profits in coming months.

For Shell, “earnings and cash flow should greatly improve over the next few years,” said Brian M. Youngberg, an oil analyst at Edward Jones.

Julie Werdigier contributed reporting from London.

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