Integrated Oils Struggle With Output Growth in Second Quarter

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After recording impressive output growth in the first quarter, the integrated oil sector took a step back in the second quarter, with most of the companies struggling to maintain that growth. The nine integrated oil companies tracked by International Oil Daily watched their oil output dip 2.4% in the second quarter versus a year earlier while gas production fell an even steeper 4.5%. A mix of factors, including weak European gas demand, North Sea maintenance work, mature and declining asset bases, and resource nationalism pushed upstream earnings and volumes lower. Softness in European natural gas demand, along with weak prices in the region, hurt the supermajors' gas output. Royal Dutch Shell took the biggest hit, with second-quarter European gas volumes down around 18% year-on-year, while Exxon Mobil and BP were affected to a lesser extent. Lower entitlement volumes from production sharing contracts and the continued shut-in of fields in Nigeria's western Niger Delta also weighed on Shell's quarterly oil volumes, which were down 2% year-on-year. Along with lower volumes, global oil prices dipped in the second quarter. US benchmark West Texas Intermediate (WTI) crude averaged $64.96 per barrel, down nearly $6/bbl year-on-year, while European marker Brent was down $1/bbl at $69.73/bbl. US Henry Hub natural gas prices averaged 75¢ higher than a year ago at $7.56 per million Btu. When comparing profits versus a year earlier, ConocoPhillips recorded the steepest drop in net income. The Houston-based major took a sizeable financial hit because it wrote down the value of its assets in Venezuela, following that country's decision to seize control of heavy oil assets. Conoco's net income fell 94% in the period due to the Venezuela charge. Excluding the impact of that one-time charge, however, Conoco's earnings were just 7.2% lower. The loss of volumes from Venezuela will compound the pressure on output for some companies in coming quarters. Decisions by Conoco and Exxon to leave the country's Orinoco River Basin will impact oil output, with Conoco taking the biggest hit of roughly 90,000 barrels per day in lost production. Conoco anticipates third-quarter output of 1.73 million barrels of oil equivalent per day, down 180,000 boe/d from the second quarter. Chevron agreed to new contract terms, but will see volumes fall once a restructured operating agreement is finalized. After having its share of operational woes over the past two years, BP appears poised for an improvement in the second half of 2007, thanks to the expected start-up of the Plutonio development offshore Angola and the Atlantis project in the US Gulf of Mexico. The integrated oils' weaker upstream performance was partially offset by the ongoing strength of refining margins, which produced another quarter of big downstream earnings. Downstream net income for the companies rose 40.2% year-over-year to an impressive $14.2 billion, but product sales were relatively flat in the period. Jeff Gosmano, Houston A full profit profile, including comprehensive details of US corporate earnings, is published as a special supplement in sister publication Oil Daily. For details, please e-mail

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