Robert J. Beck
Economics Editor
Joan Biggs
OGJ Energy Database
The Oil & Gas Journal group of 22 large U.S. oil and gas companies produced more gas, less oil and natural gas liquids, and drilled 22.7% fewer net wells in 1989 than in 1988, analysis of their annual reports shows.
The group's world gas reserves were slightly higher at yearend 1989 and world liquids reserves slightly lower than at the end of 1988.
The group's crude runs to stills were up a combined 0.9% from the 1988 figure, and refined product sales were 1.6% higher.
Higher crude oil prices boosted the group's upstream earnings in 1989, but this was offset by lower downstream earnings as margins were compressed.
Writedowns associated with a variety of environmental issues were a major contributor to a sharp decline in 1989 group profits (OGJ, Apr. 16, p. 19).
The group's net profits fell 12.2% in 1989 to $18.8 billion. Earnings fell for 10 of the companies, including the 4 largest, while the other 12 posted improvements. None posted a loss for 1989.
The drop in group earnings lowered other measures of financial performance for 1989. Return on assets fell to 4.4% from 5.7% in 1988. Return on stockholders' equity fell to 11.8% from 14.8%. And net profits as a percent of revenues fell to 4.1% in 1989 from 5.4% in 1988.
Group revenues climbed in 1989 even though profits fell, increasing 7.4% to $418.2 billion.
Higher crude oil, natural gas, and petroleum product prices led to the improvement in revenues.
UPSTREAM OPERATIONS
Exploration and production operations were affected by offsetting factors in 1989.
A substantial increase in prices for crude oil and a small increase in U.S. gas prices provided a boost that was partly offset by a drop in crude oil production, particularly in the U.S.
The average price of crude at the wellhead in the U.S.
rose 26% in 1989 to $15.85/bbl.
The average wellhead price for natural gas increased 1.2% to $1.71/Mcf. Worldwide the average price of export crude moved up 20.7% to $16.65/bbl.
The higher prices provided greater revenues for investment but were partly offset by declining crude production. U.S. crude oil production fell 6.3% in 1989 to 7.631 million b/d. Including NGL, liquids production was down 6.1% at 9.233 million b/d.
World non-Communist production outside the Organization of Petroleum Exporting Countries was down 1.9% at 22.318 million b/d.
Gas consumption was up in 1989, and U.S. marketed production of natural gas rose 0.9% to 17.965 tcf in 1989.
Similar movements showed up in the OGJ group results for 1989. Net worldwide liquids production fell 5.6% to 8.988 million b/d, down 528,800 b/d. Net natural gas production increased 4.6% in 1990 to 30.98 bcfd.
One of the more disturbing results was a 22.7% drop in net wells drilled by the group to 5,999.
The additional funds from higher prices were not all going back into exploration and production activities in 1989.
Energy Information Administration (EIA) figures show total U.S. well completions fell 8.7% in 1989 to an estimated 28,530. Oil well completions dropped 17.9% to 10,770, and gas well completions rose 13.5% to 9,310.
The group's liquids reserves were down 1.3% in 1989 to 32.8 billion bbl. Natural gas reserves inched up 0.3% to 129.2 tcf.
The group's reserves:production ratio for liquids climbed to 10.01 years in 1989 from 9.58 years in 1988. The rate of decline for production was greater than the rate for liquids reserves.
The ratio for natural gas fell to 11.43 years from 11.92 years the year before. The rate of increase in gas production was greater than the rate of increase in reserves.
DOWNSTREAM OPERATIONS
Smaller margins hurt U.S. downstream operations in 1989.
Demand increased worldwide but fell in the U.S., and x therefore the group's results were greatly affected.
The latest International Energy Agency estimate showed an increase in world-wide non-Communist demand of 1.1 million b/d in 1989. However, EIA said U.S. demand for petroleum products fell 39,000 b/d in 1989 to 17.244 million b/d.
Crude runs to stills for the OGJ group inched up 0.9% to 15.2 million b/d for 1989. Refined product sales rose 1.6% to 20.2 million b/d.
EIA said the average retail price of all types of motor gasoline in the U.S. moved up 10.1% in 1989 to $1.06/gal. The average retail price of No. 2 distillate for home heating increased 10.7% to 90/gal.
In contrast the average U.S. refiner acquisition cost of crude oil increased 22.5% to $17.97/bbl. The total increase in crude oil feedstock costs was not passed through to the consumer, depressing refining margins and profits.
ENVIRONMENTAL CHARGES
Three of the companies in the group posted substantial extraordinary charges in 1989 related to environmental issues.
The charges posted by Phillips, Chevron, and Exxon totaled $3.17 billion. This amount is greater than the combined decline in earnings for the entire OGJ group.
Exxon Corp. earnings were reduced $1.68 billion due to a provision for costs associated with the Exxon Valdez oil spill.
Chevron Corp. earnings were reduced $1.21 billion due to special charges. The largest charge was a $598 million writedown of investment in certain oil properties. This included a $445 million charge for Point Arguello field off southern California, Also included was $356 million for future environmental cleanup costs at certain U.S. refining, marketing, and chemical facilities.
Phillips posted a charge of $280 billion also for the writedown of its interest in Point Arguello field.
1989 PROFIT PATTERN
The year started off well with posted first quarter OGJ group profits of $7.095 billion, well above the same period of 1988.
Chemicals and exploration and production earnings were up early in the year, but weakness was developing in the refining and marketing sectors as margins were being trimmed by higher crude costs.
Second quarter earnings for the group fell to $4.758 billion, and third quarter earnings came in at $4.855 billion. Margins were lower for the chemical and refining sectors due to the higher feedstock costs,
Fourth quarter profits for the group fell to $2.02 billion, down 54% from fourth quarter 1988, Many of the large extraordinary charges were posted in the fourth quarter, when rising crude prices also squeezed margins.
Strong world products demand put upward pressure on prices in 1989. EIA said world non-Communist consumption of petroleum products climbed 2.1%, 1.1 million b/d in 1989.
As a result the average world export crude price jumped 20.7% to $16.65/bbl from $13.79/bbl the year before.
Prices in the fourth quarter averaged $17.42/bbl and were above $19/bbl at yearend.
HISTORIC PROFIT PATTERN
The OGJ group's lower 1989 profits were still well above the lows of $11.135 billion in 1986 and $11.027 billion in 1987.
Group profits fell steadily from the peak of $30.2 billion in 1980 to the low in 1987, declining 63%.
Profits jumped up in 1988 on the strength of more efficient operations generally and profitable downstream operations specifically. Excluding the large environmental writedowns, the rebound in operating profits continued in 1989.
The other financial performance indicators for the group went through a similar cycle. Return on assets fell from 9.3% in 1980 to 2.4% in 1987, and then rebounded to 5.7% in 1988 and 4.4% last year.
Return on equity fell from 21% in 1980 to 5.6% in 1987 and then bounced back to 14.8% in 1988 and 11.8% in 1989. Profits as a percentage of total revenues peaked in 1979 at 6.1% and fell to 2.4% in 1987 before jumping to 5.4% in 1988 and 4.1% in 1989.
The companies appear optimistic that this was only a small adjustment in 1989 and that the upward trend in profits will continue.
SPENDING PLANS
The outlook for rising profits is reflected somewhat in capital and exploration spending.
Outlays for the group were up a combined 4.6% in 1989 even though profits were down. Spending totaled $41.9 billion, up from $40 billion in 1988. However the total was greatly influenced by a 57% increase in Exxon's capital and exploration spending.
Excluding Exxon, group spending was down 7.4% in 1989. This is still less than the drop in profits.
Ten of the companies increased outlays in 1989 while 12 reduced their spending.
Indications are that spending will increase this year (OGJ, Feb. 19, p. 21).
OGJ's annual capital expenditure survey showed that U.S. companies plan to increase their U.S. spending 13.1% in 1990, and 28 companies surveyed indicated plans to boost their international spending 13.5%.
Group capital and exploration outlays were at a peak in 1981 at $66.4 billion. Spending fell to $30.8 billion in 1987.
OGJ group capital and exploration spending as a percentage of profits vaulted to 222% in 1989 from 186% the year before. In 1981, the year of peak group spending, this ratio was 237%.
OUTLOOK
It appears that 1990 will be a year of relative stability for the industry.
Prices have slipped during the first 4 months of 1990, but the decline has not been as severe as in 1986 and 1988.
The average price of world export crudes slipped from $19.27/bbl in January to $14.95/bbl in April this year. That is a drop of 22.4% during the 4 months.
However, the average price for the first 4 months of this year, $17.41/bbl, is 6.6% above the average for the same period a year ago.
It appears that U.S. products demand may slip in 1990.
The EIA estimates U.S. demand through the first 123 days of the year has averaged 16.907 million b/d, down 2.5% from a year ago. The slump has been attributed to warm weather during the first part of the year and a slowing in economic activity.
Demand is not expected to be down that sharply for the year. A recent forecast by the supply and demand committee of the Independent Petroleum Association of America calls for demand for the year to average 17.207 million b/d, down 0.2% from last year.
EIA's most recent short term energy outlook projects 1990 demand at 17.15 million b/d, down 0.5%.
EIA projects that non-Communist demand will be up 1 million b/d in 1990 at 53.3 million b/d. Last year demand increased 1.1 million b/d.
What is critical to the price level is that it appears demand for OPEC oil will increase this year.
Supply from non-OPEC sources is expected to increase only 100,000 b/d. That means the remaining supply will have to come from OPEC or inventories.
Assuming no net change in inventories for the year would mean demand for OPEC crude oil will climb to 22.6 million b/d average for the year. This would be up 900,000 b/d from 1989.
Increased demand for OPEC oil is a positive sign for oil prices for 1990. There will be seasonal swings in demand and therefore some price volatility, but on average increased demand should help hold prices close to year ago levels.
EIA forecasts that the average imported crude oil price for U.S. refiners will rise 6.2% in 1990 to $19.20/bbl. EIA expects product prices to rise along with crude oil prices and projects the average pump price of all grades of motor gasoline to be up 6.6% in 1990 to $1.13/gal.
It projects the average retail price for residential fuel oil at 97/gal, up 7.8%.
These price increases should help companies in the OGJ group to retain their profit margins this year.
Copyright 1990 Oil & Gas Journal. All Rights Reserved.