Massive oil profits may not last

Weak production gains and an inability to refill reserves may put big oil in a pinch in coming years.

LONDON (FORTUNE) – Judging by the tens of billions (and yes that’s billions with a B) the big oil companies are reporting in earnings for 2005, you’d think this is as good as it gets for companies like Chevron, Exxon, Shell and BP. Their shares are up, they’ve got a friend in the White House (even if he has been daring to talk about alternative energy), and they literally have more cash then they know what to do with. Heck, when was the last time it was cooler to be a member of Houston’s Petroleum Club than be a tech type in Austin?

Look a few lines down from the blowout profits, though, and you’ll spot something that’s being quietly discussed in the boardroom but not maybe not at the Petroleum Club — weak production gains and a stunning inability to replace the reserves the giants are pumping right now.
Although industry leader Exxon has long shown extraordinary discipline in finding more oil year after year, rivals like Shell and Chevron are lagging badly. Despite earning $14 billion last year, most of Chevron’s production and reserve increases came from its acquisition of Unocal, not what oil insiders call ‘the drill bit.’ And while Royal Dutch Shell earned more than $25 billion, its daily production fell from 3.7 million barrels a day in 2004 to 3.5 million last year. Even worse, the Anglo-Dutch giant replaced only 70% to 80% of the oil it pumped out of the ground, despite spending billions on new projects.

“This is the big story for these companies,” says veteran industry consultant and occasional gadfly Matthew Simmons. “They’re so big, they’re having a very hard time growing. The only thing they really know how to do well is buy back stock.” Simmons, it should be noted, is convinced the world is entering a period of tight oil supplies that will drive prices much, much higher. That’s debatable — but he’s on to something here. Because if the oil giants can’t find new fields, going forward they’ll essentially be liquidating the source of future profits. Smaller, independent oil firms have had much more success in growing production, which leads Simmons to wonder if maybe the giants wouldn’t be better off splitting themselves up. “I think one of these days, one of the Big Oil companies is going to break itself up like AT&T and the Baby Bells.”

Fortune