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July 29, 2011

Big Oil reaps big profit in 2Q as fuel prices soar

July 28 — CHRIS KAHN,AP Energy Writer

NEW YORK (AP) — Big Oil continued to make big money in the second quarter.

Industry giants Exxon Mobil and Royal Dutch Shell on Thursday reported combined net income of more than $18 billion, because of higher prices for oil, gasoline and other fuels. Even BP, still paying for last year's Gulf oil spill, made more than $5 billion in the quarter.

To keep profits rolling in the long run, the industry must overcome some obstacles. High oil prices help profits, but they can also derail economic growth and energy demand by increasing prices for gasoline and other fuels. Oversized profits have led many, including President Barack Obama, to call for an end to government tax subsidies for the industry. And to meet world oil demand that's expected to rise to a record 89 million barrels per day this year, the industry needs to find new sources of oil.

The search is leading many in the industry back to the U.S.

Exxon, BP and Shell reported lower oil production from fields outside the U.S. in the second quarter. International production dropped in part because maintenance issues and entitlement programs in foreign countries forced them to take less oil as prices rose.

A wave of anti-government uprisings also swept through oil-producing regions in North Africa and the Middle East.

Production issues overseas will help keep the U.S. a premier destination for the oil industry, even if Congress heeds calls from Obama and others to do away with roughly $4 billion in industry subsidies. Not only is America the largest petroleum consumer in the world, it is home to the most extensive pipeline and transportation network. Technologies that have helped tap large reserves of natural gas are increasingly being used to find oil onshore in the U.S.

Even without subsidies, analysts said, the U.S. probably would still be a more profitable place for oil companies to work. In addition to entitlements, many foreign countries charge expensive royalties and other fees that can sweep a large portion of a company's oil revenue off the table. Oppenheimer & Co. analyst Fadel Gheit said the Algerian government takes about twice as much in taxes and royalties as the U.S. Libya pockets three times as much. "Outside the U.S., the government take is significant," Gheit said.

As they announced their quarterly profits, oil executives said they will devote billions of dollars more to finding new deposits that will eventually bring more supply to the market. The executives also said they want to get back to work in the Gulf of Mexico, where deepwater exploration was shut down last year following BP's massive oil spill.

Exxon, which announced a huge oil field discovery in the Gulf of Mexico in June, told investors Thursday that it would look to "safely and rapidly" develop the field located about 250 miles south of New Orleans. Shell said it's trying to ramp up production in the Gulf, where company wells are producing about 50,000 fewer barrels per day than before the spill. BP, the largest oil producer in the Gulf, said it planned to get back to drilling there very soon.

"We have lots of people gearing up, ready to go," BP CEO Bob Dudley said Tuesday.

Shell and others also will develop fields off the Alaska coast. And the industry has heavily invested in drilling for natural gas in underground shale deposits across the U.S.

Exxon Vice President David Rosenthal said the company nearly doubled the size of its assets in the Marcellus shale region of the U.S., which stretches through New York, Pennsylvania, Ohio, Virginia and West Virginia. Exxon's production has been dominated by natural gas wells since its acquisition of XTO Energy last year. But the company will try to tap oil-rich fields "anywhere we have an opportunity," he said. Oil prices soared in the second quarter, rising 31 percent to an average $102.34 per barrel. The price of gasoline, diesel, jet fuel and other petroleum products also jumped during the period, resulting in a strong quarter for the entire industry.

In the April-June period, Exxon's profits jumped 41 percent to $10.7 billion, the biggest since Exxon hit a corporate earnings record of $14.8 billion in the third quarter of 2008. Shell's net income nearly doubled to $8.7 billion and BP earned $5.6 billion compared with a loss of $17.2 billion last year.

Chevron Corp. is expected to enjoy a healthy profit bump as well — $7.19 billion, or $3.51 per share on revenue of $78.2 billion, according to FactSet. Chevron reports on Friday.

The huge windfall drew jeers from environmental groups that oppose government tax subsidies for oil companies. The profits prove the industry doesn't government help, they say, especially at a time when lawmakers need to chop billions of dollars from the budget.

"Why should those who are posting record profits be exempt from sharing the sacrifices we all will be making?" said Jacqueline Savitz, senior campaign director for Oceana, an environmental advocacy group.

Industry officials have fought calls to do away with the subsidies. They say that governments should help them increase oil supplies — not find ways to make production more expensive.

"Taxes will immediately slow down investments" in oil projects, Shell CEO Peter Vosser said Thursday.

The industry's profits may rise even further this year if oil prices continue to grow as expected.

Argus Research analyst Phil Weiss noted that oil profits appear huge in comparison to almost any other industry, but they're relatively tame when considering how expensive it is to extract oil from the ground. Exxon, for example, earned $10.7 billion after taking in a whopping $125.5 billion from April to June. That's a profit margin of less than 10 percent, much lower than margins for pharmaceutical, technology or service companies, Weiss said.

"Those businesses have much richer bottom lines," he said.

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