HOUSTON (Dow Jones)--As major oil companies work to boost production in 2007, they're experiencing fresh angst from an old rival: OPEC.
Responding to stumbling oil prices and concerns about falling demand, the Organization of Petroleum Exporting Countries has returned to the fore-front as a driver of oil markets, rendering two production cuts since Nov. 1 that have been implemented with varying degrees of compliance by its members.
The revival has generated anxiety on Wall Street, where analysts fret that a more activist oil cartel will prevent Big Oil from meeting production goals. The topic was raised during the earnings conference calls for the three largest U.S. companies, Exxon Mobil Corp. (XOM), Chevron Corp. (CVX) and ConocoPhillips (COP).
The companies say the impact of recent cuts has been relatively small so far,but acknowledge that it could grow with additional moves by OPEC to pare production.
"This could impact us somewhat more over the next year, depending on what happens with total supply and demand," said Chevron Chief Executive David O'Reilly. Between 20% and 25% of the company's production comes from OPEC member countries, he said.
Many of OPEC's 12 members are notorious for not following the organization's mandates. Falling prices in early January reflecteddoubts that a 1.2 million barrels-a-day cut agreed in October had been properly enacted.The status is murky as far as the implementation of recent cuts by members and analysts say that only about 600,000 barrels have been cut. Occidental Petroleum Corp. (OXY), a major operator in Libya, said in January it had received no indications of "a negative impact" on its production there stemming from cuts.
An additional 500,000 barrels-a-day reduction was scheduled for Feb. 1 and officials in Saudi Arabia have said that the kingdom - the de facto leader of OPEC - is complying with the agreement. It's unclear whether other producers are, however.
Angola Joins OPEC Club
In 2006, ConocoPhillips expanded its crude oil and liquids production by 7.2% to 972,000 barrels a day, while Exxon pumped 6.26% more oil than the previous year - a total of 2.68 million barrels a day.
Still, Big Oil has struggled to boost production further in the face of hurricanes, declining fields and the increasing complexity of projects in deepwater or extra-heavy oil areas. Both Conoco and Exxon faced significant outages due to corrosion in the BP PLC (BP)-operated Prudhoe Bay, Alaska field. Chevron, which had significant production outages following the hurricanes, saw its 2006 output grow by 3.8% to 1.73 million barrels a day.
Many of the industry's multibillion-dollar projects are located in countries belonging to a reinvigorated OPEC - and production cutbacks could neutralize the companies' hopes for growth. Although the effect of OPEC cutbacks on U.S. oil companies' production has been small so far - 10,000 barrels a day in the case of Chevron - oil executives acknowledge some OPEC producers have taken action.
"We have received very firm direction on what the production numbers would be," said Jim Mulva, ConocoPhillips (COP) Chief Executive during an earnings conference call last week. Conoco has operations in Venezuela, Nigeria, Libya and Indonesia - all OPEC producers - and its production will decrease by 30,000 barrels a day over the first quarter of 2007 due to OPEC's currently mandated cuts, Mulva said.
For the major oil companies operating in Venezuela, the outlook is further complicated by the government's decision to have the four foreign-operated heavy oil projects of the Orinoco belt shoulder most of the cuts. The government is also endeavoring to take a majority interest in all the projects, a process it plans to complete by May 1. The move follows the nationalization of conventional oil projects, which took effect in the fourth quarter of 2006 and made Chevron cut its 2007 output forecast by 64,000 barrels a day.
For Exxon Mobil Corp. (XOM), the world's largest publicly-traded oil company, the effect of OPEC cutbacks in the fourth quarter was "very small," said Henry Hubble, Investor Relations Vice-President. "We'll see what the impact is on this quarter."
Angola's decision to join OPEC could also play a role in the expansion plans of the oil companies. The African nation, which became a member on Jan. 1, is set to increase its oil production by 600,000 barrels a day to 2 million barrels a day in 2008, helped by the massive projects of companies like Chevron and Exxon. OPEC cutbacks could slow that progress, analysts say.
Cuts Mean Higher Prices
But executives doubt that the near-term impact will be meaningful, as Angola will take slow steps in fully exerting its obligations as a member. "We're still very encouraged by Angola and don't really see this as a change from our perspective," said Hubble.
Of course, there's an upside to a more forceful OPEC presence: higher prices. Although the major oil companies remained highly profitable throughout 2006, the commodity price correction of the fourth quarter marked the first such decline in more than three years.
"The prices would be less inclined to decrease as rapidly," David Lundberg, a New York-based analyst with Standard and Poor's., said referring to OPEC cuts. "Some of the production cuts would be offset by prices."
Indeed, oil prices have surged in the past two weeks, clawing back from a slide at the beginning of the year, partly a result of the OPEC cuts. On Monday, the front-month crude contract on the New York Mercantile Exchange came within shouting distance of $60 a barrel to trade at $59.95, a big turnaround from $49.90 hit on Jan. 18.
In the long term, Big Oil will have to get used to an OPEC-dominated landscape and executives count on helping the cartel increase its production when the due moment arrives. Non-OPEC production is poised for a major expansion in 2007 and 2008 as massive deepwater projects come on line in the U.S. Gulf of Mexico and Brazil, but many experts predict that this will be the last major such increase. In the future, OPEC countries will drive output growth, because they have the most abundant reserves, they say.
"All of our projections suggest that within a few years, we will need more OPEC production, and it doesn't seem to me that this is something that we should be too concerned about," said Chevron's O'Reilly. "Our investments there are made in the very long term."