Near-record oil prices sustained the bottom line for most of the majors in 2Q2007, but the profits didn’t translate into gains on the production side, with none of the majors showing natural gas production gains in North America.

Energy analyst Paul Hichens said the majors are paying the price for efficiency and profits following a heady period of mergers that reduced the producer universe — and unwittingly challenged the smaller workforces.

“The drive for rationalization removed whole tiers of production expertise, and the oil companies did not really resume recruitment until around 2004,” Hichens said. “As a result, the average age of all oil service managers is now around 54…The shortage of expertise places a limit on just what can be done, and I fear that companies will have to run hard to stand still on the production front for some time to come.”

Analyst Jim Jubak said the majors “don’t have a good place to put those profits back to work. A big share of today’s oil exploration and development capital expenditures [is] unlikely to earn back a reasonable return on the money invested. The prices paid for today’s assets are too high, the costs of development are rising too fast and the risk that politics will prevent full production in the future is too great. That’s why you see companies across the industry buying back shares or increasing dividends and waiting — hoping, really — that the price of investing in future production growth will fall.”

Jubak said the more profitable a producer is, the bigger the problem. “If an oil company earning an 8% return on its capital can find a project that will pay back 10%, that’s a win. But if the oil company is earning 24% on its capital, as ExxonMobil is right now, a project with a 10% return is a complete nonstarter.”

“All the oil companies are struggling to grow production,” said Teather & Greenwood energy analyst Peter Hitchens. “It’s becoming more and more difficult to bring projects in on time and on budget.”

Considered the most capable oil patch operator, ExxonMobil Corp. delivered its fourth-largest earnings report in history on Thursday, with profit reaching $10.26 billion ($1.83/share), although it was 1% lower than a year ago when it earned $10.36 billion ($1.72/share). Investor Relations Vice President Henry Hubble, who presided over a conference call to discuss the earnings, said higher exploration expenses had contributed to Exxon’s lower earnings.

“A lot of it is timing of big wells and specific timing of whatever dry holes we have in the period,” Hubble said in response to a question on the high exploration costs. “We have a broad slate of activity going on around the globe, and there’s not a specific area that was a big chunk of that.” Included in Exxon’s North American portfolio of new exploration projects are the Beaufort Sea, the deepwater Gulf of Mexico’s Lower Tertiary region and the Piceance Basin. Hubble said those regions are all areas the company wants to pursue.

Exxon spent more on U.S. exploration in the quarter, but gas available for sale fell to 1.517 Bcf/d from 1.656 Bcf/d in 2Q2006; in Canada, gas sales fell to 794 MMcf/d from 841 MMcf/d.

Royal Dutch Shell plc, the world’s second largest oil company behind Exxon, reported an 18% surge in its quarterly profit to $8.67 billion ($1.38/share) from $7.32 billion ($1.13). Shell spent $916 million on U.S. exploration in 2Q2007, which was down from $985 million for the same period of 2006. Total crude oil production for Shell rose 1% worldwide. However, the London-based major was unable to deliver an increase in gas, with the gas available for sale falling 6% to 7.367 Bcf/d from 7.865 Bcf/d in 2Q2006. In the United States, Shell’s gas output fell to 1.09 Bcf/d from 1.175 Bcf/d.

CEO Jeroen van der Veer told analysts that Shell has begun “rejuvenating” its portfolio and plans to “sustain investments in new legacy assets as well as disposals, both upstream and downstream.” Most of its new investments are expected to be made outside of North America.

It was Chevron Corp.‘s turn on Friday. The second-largest U.S.-based oil company after Exxon delivered a 24% rise in quarterly profit to $5.38 billion ($2.52/share) from $4.35 billion ($1.97) in 2Q2006. However, the San Ramon, CA-based producer’s global oil and gas output dropped 1% to 2.63 million boe/d, partly the result of lower U.S. production, CEO Dave O’Reilly told energy analysts Friday.

U.S. upstream income jumped to $1.22 billion from $901 million, but Chevron’s domestic gas output fell 7% to 1.703 Bcf/d from 1.832 Bcf/d. O’Reilly said the company’s oil and gas production worldwide will most likely be flat through the rest of this year.

“In the second half of the year, there will be some declines here in the United States as the result of normal field declines, particularly in the Gulf of Mexico,” O’Reilly said on a conference call. Several deepwater projects are being assessed, but appraisal wells on the Jack and St. Malo discoveries in the Lower Tertiary won’t be completed before 2008, and any word on when those may progress is months down the line, O’Reilly said.

Chevron’s Henry Hub bidweek prices averaged $7.56/Mcf, up from $6.81, and at the California border, prices averaged $6.85, compared with $5.65 a year ago. In the Rocky Mountains, gas prices averaged $3.72/Mcf, well below the $5.26 that it captured in 2Q2006.

BP‘s profit, meanwhile, fell nearly 13% to $5.35 billion from $6.1 billion in 2Q2006, and in the United States, gas production dropped to 2.165 Bcf/d from 2.49 Bcf/d (see related story). Houston-based ConocoPhillips also reported a huge drop in earnings on an after-tax charge of $4.5 billion ($2.72/share) related to the pullback in Venezuela, which cut net income by 94% from a year earlier (see related story). Conoco’s U.S. gas production also was lower, falling to 2,319 MMcf/d from 2,428 MMcf/d in 2Q2006.

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