High Prices Not as Profitable as Expected for Crude Oil Companies

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Researched by Industrial Info Resources (Sugar Land, Texas)--With oil prices hovering in the high nineties and gas prices similarly high around the world, many people are quick to believe that oil companies are raking in the profits. However, last quarter, one of the largest oil companies in the world, Royal Dutch Shell plc (NYSE:RDS.A) (The Hague, Netherlands), reported lower-than-expected earnings. Joining it were Total S.A. (NYSE:TOT) (Courbevoie, France) and Chevron Corporation (NYSE:CVX) (San Ramon, California), which have reported lower margins. One of the biggest reasons given for this trend is the higher price of crude oil extraction/production in unconventional plays, such as the Bakken Shale and the Alberta Oil Sands. Conversely, oil-field services companies are earning more.

The reports by these three companies alone mean that of the six super-major oil companies, or "Big Oil," half are performing at lower-than-expected levels. These thinner margins have led to major asset sales; most notably, Shell's sale of its 8% stake in Chevron's Wheatstone liquefied natural gas (LNG) for $1.1 billion to Kuwait's national oil company, Kuwait Petroleum Corporation (Kuwait City). While not much of a loss to Shell, which just launched its own Prelude LNG project, it is still a demonstration of the oil giant being more focused on where its money goes.

While the increased difficulty of reaching oil in unconventional plays has proved to be somewhat of a bane for the oil companies, it has provided a windfall for oil-field services companies. Companies such as Schlumberger NV (NYSE:SLB) (Houston, Texas) and Halliburton Company (NYSE:HAL) (Houston) have had greatly increased earnings since the shale boom began several years ago. With that in mind, Halliburton's stock price remained low this week, as it is still paying off lawsuits from the Deepwater Horizon oil spill in 2010.

With the added necessary manpower, technology and job complexity that are inherent in shale drilling, oil-field service companies have had to charge more per well than in previous plays, where oil was easier to reach. Similarly, to exploit the oil sands in Alberta, billion-dollar facilities to process the oil-sand mixture into a shippable liquid are necessary, drastically increasing the cost per barrel over conventional plays.

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, three offices in North America and nine international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.