Higher oil and gas prices fueled strong quarterly earnings reports last week, with the bulk of the major and top independent oil and gas companies, including BP plc, Exxon Mobil Corp., ChevronTexaco and ConocoPhillips reporting. Also reporting last week were some of the top North American independents, including EnCana, Talisman Energy Inc., Kerr-McGee Corp. and Pioneer Natural Resources.

BP plc‘s quarterly earnings jumped 42% compared with a year ago, as higher commodity prices and a strong liquefied natural gas (LNG) business lifted exploration and production income — despite a 5% overall decline in production. Higher prices helped to offset BP’s 5% year-over-year decline in hydrocarbon production — 2% adjusting for divestments — and 3% sequential decline, also attributed to asset sales. Production worldwide was 3.37 MMboe/d in the quarter. In the first six months of this year, BP’s production has fallen 1% overall, but it said that “declines in existing profit centers were as expected and more than offset by growth from new profit centers, particularly Trinidad and deepwater Gulf of Mexico.”

BP’s natural gas sales volumes grew 23% from a year ago, and equity LNG sales rose 58%. In the United States, gas volume sales were 10.4 Bcf/d in the quarter, compared with 8.5 Bcf/d a year ago. However, U.S. sales were down sequentially from the first quarter’s 11.7 Bcf/d.

“U.S. natural gas prices fell back in the second quarter but remained high, with the Henry Hub first of the month index averaging $5.40/MMBtu,” said Lord John Browne, the BP Group CEO. “Gas price differentials in the Rockies have narrowed significantly following the opening of the Kern River pipeline expansion.” Browne noted that high prices “have instigated a number of market reactions. These, together with mild weather, have led to a series of very high storage injections in recent weeks, despite falling domestic production. Prices look set to stay above residual fuel oil parity during the third quarter.”

Exxon Mobil’s plans to increase its exploration and production (E&P) capital spending 10% this year is part of an aggressive move to grow overseas oil and natural gas projects as its North American production dwindles. The major, which had a 58% increase in earnings compared with 2Q02, also plans to continue strengthening its liquefied natural gas (LNG) business to give it an edge in U.S., European and Asian markets.

Its new focus follows declines in U.S. production, especially its crude, which showed a sequential drop from the first to the second quarter by more than 100,000 bbl/d. Exxon’s boe production was flat, with higher European gas demand and contributions from new projects and work program offset by natural field declines and operational issues in the North Sea and West Africa. Second quarter natural gas production increased to 9,259 MMcf/d, slightly more than the 9,192 MMcf/d reported in 2Q02.

The company has confidence in the size and scale of Exxon’s LNG projects in Qatar, as well as its ability to use new technologies, which he said would allow the company to compete with other providers for a share of domestic and overseas markets. Discussions also are continuing on the siting of three potential LNG terminals in the United States. ChevronTexaco Corp.

Net natural gas production in the United States averaged 2.3 Bcf/d, down 8% from 2.5 Bcf/d for 2Q02. Worldwide, net natural gas production rose 8% to almost 2.1 Bcf/d, with the largest production increases in Australia, Kazakhstan and the Philippines. CVX also reported lower U.S. natural gas sales in the quarter, averaging 3.98 Bcf/d for the period, compared with 5.99 Bcf/d in 2Q02. For the first six months of this year, natural gas sales averaged 4 Bcf/d, down from 6.34 Bcf/d for the same period of 2002.

New York City-based Amerada Hess reported quarterly net income of $252 million, including gains on asset sales, compared with income of $149 million a year ago. On a boe basis, Hess’s quarterly production worldwide was 376 MMboe/d for the quarter, down from 469 MMboe/d a year ago. In the United States, Hess averaged 291 Mcf/d in the first half of the year, compared with 408 Mcf/d for the first six months of 2002. NGL sales in the United States averaged 10 bbl/d for the first six months, compared with 13 bbl/d in the first half of 2002.

ConocoPhillips, based in Houston, reported second quarter net income of $1.14 billion ($1.66 per share), compared with $351 million (91 cents) for the same period last year, which was prior to the merger of Conoco Inc. with Phillips Petroleum Co. Operationally, upstream production was 1.64 MMboe/d during the quarter, up slightly from the first quarter, including Canadian syncrude. Increased production in Venezuela was partially offset by seasonal declines in Alaska and the North Sea. U.S. Lower 48 gas prices averaged $5.10/Mcf in the second quarter, compared with $2.26 in 2Q02.

Dallas-based Pioneer Natural Resources Co. reported net income of $77.2 million (65 cents per share), compared with $11.1 million (10 cents) in 2Q02. Quarterly oil and gas sales increased 45% from a year ago, averaging 159,092 boe/d. Gas sales averaged 626 MMcf/d. So far this year, Pioneer has successfully drilled 155 wells in the United States, 23 wells in Canada and 35 wells in Argentina. Onshore in the United States, the company is running 13 rigs, including five in the West Panhandle gas field and six in the Permian Basin. Pioneer also is evaluating the commercial potential of its Jurassic discovery in the Northwest Kuparuk River area of Alaska. The evaluation effort is multifaceted, but Pioneer said it was encouraged with the early results of the work in progress. Pioneer expects third quarter production to average 150,000 to 165,000 boe/d.

Kerr-McGee Corp., based in Oklahoma City, swung to a profit in the quarter following last year’s net loss on charges. Second quarter income was $69.6 million (68 cents a share), compared to a net loss of $58 million (minus 58 cents) in 2Q02. Included in this quarter’s results were $24.6 million in charges for chemical plant shutdowns and other smaller items, but the company also warned that additional charges of $27 million could be incurred for exploration expenses in the quarter if some of its current drilling ventures prove unsuccessful.

Daily oil production averaged 154,800 b/d, down from 189,300 b/d a year earlier, mostly because of the sales of almost $1 billion of noncore producing properties. Natural gas sales also were lower because of asset sales, averaging 697 MMcf/d in the quarter, compared with 731 MMcf/d in 2Q02. The average gas sales price for the quarter, which included hedging, was $4.29/Mcf, 45% higher than a year ago.

Chesapeake Energy Corp. showed production gains for the eighth consecutive quarter, boosting its oil and gas 55% year-over-year and 19% more than the first quarter. In the last eight quarters, the Oklahoma City-based independent has seen its production grow 72%, averaging a sequential quarterly growth rate of 7%. Chesapeake produced 67.3 Bcfe in the second quarter, improving on an earlier forecast of 64-65 Bcfe. The quarterly production included 60.0 Bcf (89% on an Mcf equivalent basis) and 1.2 million bbl (11% on an Mcf equivalent basis). Of the 10.5 Bcfe in sequential production growth during the quarter, only 9.5% came from acquisitions closed during the period.

Reserves also grew in the quarter, as production of 67 Bcfe was replaced by 201 Bcfe of new proved reserves (a 300% reserve replacement rate). Chesapeake said the growth included 112 Bcfe from drilling and revisions and 96 Bcfe from acquisitions, partially offset by 7 Bcfe of divestitures that were sold for proceeds of $19 million. Internal estimated proved reserves now total approximately 2.95 Tcfe, Chesapeake said, of which 90% are natural gas and 74% are proved developed. The second quarter also was Chesapeake’s seventh consecutive quarter to grow its proved reserves.

Strong year-over-year production growth and robust commodity prices propelled EnCana Corp.’s second quarter earnings up 51%. The Canadian independent also reported a way to double its summer drilling program in the once untouchable northern climes, which lifted quarterly production in its northeast BC Greater Sierra play almost 25% from a year ago. The company remains on a 10% growth plan for the year, with the focus trained on the North American upstream.

Second quarter gas sales from EnCana’s U.S. operations were up 63%, averaging 698 MMcf/d, compared with 428 MMcf/d in 2Q02. Production growth came primarily from the Jonah field in Wyoming and the Mamm Creek field in Colorado. To mitigate pricing risk because of gas transmission constraints out of the U.S. Rockies, EnCana fixed the New York Mercantile Exchange price differential on 576 MMcf/d of forecast 2003 gas sales at an average basis of US$0.50/Mcf, and 392 MMcf/d of forecast gas sales for 2004 through 2007 at an average basis of US$0.44/Mcf.

EnCana also said it has pioneered a way to add value in this high growth region through the use of interlocking wooden mats, a simple technology that forms drilling islands in the soft Canadian muskeg. Traditionally, northern exploration and drilling have been restricted to winter only, which lasts about 100 days when the ground is frozen hard enough to permit the movement of large equipment. However, using more than 30,000 wooden mats, EnCana now has doubled its summer drilling plans from 35 to 70 wells, taking this year’s target for Greater Sierra to about 170 wells.

Canada’s Talisman reported record high cash flow and earnings for the first six months of the year, and while cash flow was down for the quarter, the company’s earnings were well above the numbers from last year. Cash flow during the second quarter was C$600 million (C$4.65 per share), compared with C$652 million (C$4.84) a year earlier. Quarterly earnings were C$201 million (C$1.52) versus C$90 million (C62 cents) in 2Q02.

In line with its guidance, production averaged 365,000 boe/d during the quarter. Unit operating costs averaged C$6.98/boe, down 3% from the first quarter. Talisman’s North American gas production is up 5% from a year earlier, averaging 865 MMcf/d. The increase has come from the addition of U.S. gas properties acquired late last year, which alone contributed 67 MMcf/d in the second quarter. In North America, Talisman participated in 108 wells (gross) in the quarter. A total of 43 gas and 56 oil wells were drilled, resulting in an average success rate of 92%.

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