Oil Companies' Production Lags

The world's biggest oil companies, such as ExxonMobil (NYSE: XOM), Chevron (NYSE: CVX) and ConocoPhillips (NYSE: COP), are flush with cash.

So all looks well for the oil industry...but it is not.

If investors drill beneath the surface, they will see these companies are stagnating when it comes to their oil production. ExxonMobil, for example, reported that in the third quarter its oil production fell 4 percent to 4.282 billion barrels of oil per day.

This trend though is hardly new and points to a long-term challenge for the industry.

Paul Cheng, senior analyst in the US for BarCap, said “The supply outlook for global oil production for the next 12 months is challenging.” He expects “very slow growth, if any” from the major oil companies through 2012-2013 “at least”.

A study of oil production for the 2011 second quarter for 40 large oil companies in the OECD countries showed an average year-on-year drop in production of 8 percent. And this was despite the incentive of high oil prices – Brent crude oil averaged about $120 a barrel.

There are two macro trends which account for this poor performance from the oil companies.

The first is that a lot of the oil recently discovered has been in difficult and expensive to access areas...areas such as the deep water areas of the Gulf of Mexico and offshore western Africa.

Another issue is the lack of investment by the major oil firms. Companies like Exxon have been notorious for underestimating the price of oil. Their assumptions on the oil price have not been aggressive enough in order to justify their spending additional funds on exploration.

In the words of Mr. Cheng, “They [oil firms]did not plan for sustained $100 per barrel plus Brent [oil].”

This may all change, of course, if the industry proceeds full speed ahead over the next five years with development of shale oil in the United States.

But the environmentalists may have a lot to say about that.