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Oil is there, but that's not helping big firms

NEW YORK - New troves of oil have been found all over the globe, and oil companies are taking in about $100 for every barrel they produce.

Empty railroad tank cars snake their way into a storage yard in Newark, Delaware, July 28, 2013 The cars will return to North Dakota's Bakken region to be loaded with crude oil for another trip to the refinery at Delaware City, Delaware. With a shortage of new pipeline capacity, oil producers have been using rail as an alternative, and in some cases it's the preferred mode. (Curtis Tate/MCT)
Empty railroad tank cars snake their way into a storage yard in Newark, Delaware, July 28, 2013 The cars will return to North Dakota's Bakken region to be loaded with crude oil for another trip to the refinery at Delaware City, Delaware. With a shortage of new pipeline capacity, oil producers have been using rail as an alternative, and in some cases it's the preferred mode. (Curtis Tate/MCT)Read moreMCT
    by By Jonathan Fahey, Associated Press, Inquirer
    Published 

NEW YORK - New troves of oil have been found all over the globe, and oil companies are taking in about $100 for every barrel they produce.

But these seemingly prosperous conditions aren't doing much for Big Oil. Profit and production at the world's largest companies are slumping badly. Exxon Mobil, Shell and BP posted disappointing earnings this week. Chevron is expected to post a profit decline Friday.

All face the same problem. The cost to get newfound oil from remote locations and tightly packed rock is high and rising. And it takes years and billions of dollars to get big production projects up and running. Higher extraction costs could translate to higher oil and gasoline prices for consumers.

Strong production growth can offset higher operating costs, "but when production is flat or declining, it's a big hit," said Brian Youngberg, an analyst at Edward Jones. "Even though oil prices are $100 or higher, the returns on investment aren't what they used to be."

The new oil being produced is from ultra-deep ocean waters, from sands that must be heated to release hydrocarbons, or trapped in shale or other tight rock that requires constant drilling to keep production steady. That makes it far more expensive to get out of the ground than conventional oil - large pools in easy-to-drill locations. Those reserves were always hard to find, but now are all but gone outside the Middle East.

David Vaucher, who tracks oil-production operating costs at IHS CERA, said costs are at a record high: "The fields are more remote and the resource conditions are more extreme."

New projects in the United States and Canada, where production is growing faster than anywhere else in the world, require high oil prices to be profitable, he said.

To make an industry average return, a new production project in the Canadian oil sands requires a price of $81 per barrel. For an onshore U.S. field, it's $70 per barrel but ranges from $45 to $95 per barrel, depending on the rate of oil flow. In the Gulf of Mexico, it's $63; in the Middle East, just $23 per barrel.

Many oil analysts predict relatively weak growth in world demand, plus rising production, will mean flat or lower prices.

But if big oil companies can't earn strong profits at today's prices, it may mean prices will have to rise to convince them it's worth it to explore new fields. If they worry they can't make enough money, they'll cut back.