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Big Oil posts better profits on higher fuel prices

The major oil companies continue to climb back from the recession, with higher fuel prices driving up earnings.
/ Source: The Associated Press

The major oil companies continue to climb back from the recession, with higher fuel prices driving up earnings.

After setting record profits in 2008, the oil industry tanked last year as the global economic downturn induced a dramatic drop in oil and natural gas prices. On Thursday, Exxon Mobil Corp. said it earned $7.56 billion in the second quarter, its best result since the last three months of 2008. Royal Dutch Shell Group posted a 15 percent gain in net income. A day earlier, ConocoPhillips said net income nearly tripled in the April-June period.

Chevron Corp. reports its quarterly results on Friday.

The jump in profits comes as oil companies wait out a ban on deepwater drilling in the Gulf of Mexico that is scheduled to last until Nov. 30. Shell took a $56 million charge for idling its rigs while Exxon halted work on an appraisal well and suspended operations at one of its Gulf platforms.

But their operations are so vast that the impact is likely to be minimal. And both remain committed to drilling in deep water around the globe, including the Gulf. Exxon continues to explore the deep waters off countries like Indonesia and the Philippines.

"Slight delay in the Gulf, but we're proceeding full speed ahead in the rest of the world," Exxon Mobil Vice President David Rosenthal said in a conference call with investors.

Shell said it plans to wait out America's six-month ban on exploratory drilling.

"We are just trying to keep the rigs warm, ready to start up again," Shell Chief financial officer Simon Henry said.

For BP, of course, the Gulf is paramount at the moment. It will be paying for years for the oil spill set off in April when the Deepwater Horizon rig exploded and sank. The British oil company took a charge of $32.2 billion to cover the costs that it can reliably estimate at this time. On Tuesday, it reported a record quarterly loss of $17 billion.

BP, however, remains committed to deepwater projects. The company plans to begin drilling a deepwater well off the coast of Libya in coming weeks.

Argus Research analyst Phil Weiss said Exxon, BP and Shell have no choice but to keep exploring the deep sea. Most of the world's oil reserves are in the hands of state-owned companies, he said.

"Deepwater is one of the few places where they can grow."

For its second quarter, Exxon's net income nearly doubled as oil prices rose to an average of $78.16 from $59.80. Revenue increased 24 percent to $92.5 billion. The company boosted oil and natural gas production by 8 percent. Refining margins also improved as gasoline demand increased.

Per-share earnings rose to $1.60 from or 81 cents. Analysts had expected $1.46 per share on revenue of $98.5 billion. Shares fell 57 cents to $60.34.

In the year-ago quarter, Exxon's $3.95 billion profit set a six-year low. The drop came just three quarters after Exxon set the record profit for a U.S. company of $14.83 billion.

Natural gas prices rose 14 percent in the quarter to an average of $4.35 per 1,000 cubic feet. Exxon became the largest U.S. natural gas company when it bought XTO Energy on June 25. Shell has agreed to buy East Resources Inc., a major owner of shale gas holdings in the northeast U.S.

Natural gas, which pollutes less than other fossil fuels, has become increasingly important for Big Oil. For example, Exxon's natural gas operation in Qatar was primarily responsible for the uptick in second-quarter production, the company said.

Unlike BP and Shell, Exxon does a relatively small portion of its business in the Gulf of Mexico. The bulk of its income comes from exploration and production operations in foreign waters, particularly in Africa, Asia and the Middle East. Earnings from producing oil and natural gas outside the U.S. rose to $4.47 billion from $3 billion in the second quarter.

Despite its small footprint in the Gulf, Exxon is taking the lead in an industry effort to handle future oil spills and convince the government to lift the moratorium. Exxon, Shell, Conoco and Chevron plan to build a $1 billion network of emergency responders that can fix offshore oil spills in water as deep as 10,000 feet.

The industry is anticipating changes in how business is done in the Gulf. The moratorium and the chance that Congress may eliminate the current liability cap for oil spills could cause smaller companies to drill elsewhere. That would leave openings for the bigger players.

Conoco-Phillips CEO Jim Mulva told investors on Wednesday that he'd love to expand in the Gulf of Mexico, replacing smaller companies that might be scared away by tougher regulations.

"So if smaller companies don't want to continue to participate, and we see the risk-reward and the rules and regulations as OK, we would like to do more in the Gulf of Mexico," Mulva said.