The Changing Role Of International Oil Companies And A Comparison Of Oil And Gas Profitability

Abstract

Abstract The changes in oil prices that nave occurred in recent years have been accompanied by development of new sources of oil and natural gas. This paper examines levels of net income in many of these areas and rates of profitability. The areas covered include the United States, Canada, North Sea, the Netherlands, Nigeria, Indonesia, and Australia. Returns in these areas are compared with results of synthetic fuels development. Introduction The role of international companies in the producing end of the oil business has changed producing end of the oil business has changed dramatically during the past ten years. Once the equity owners of a great share of the free world's oil reserves in the Middle East and other major foreign producing countries, the international oil companies producing countries, the international oil companies have all but lost their entire ownership in these reserves. Yet, the profits of several of these companies outside the United States have risen significantly in recent years. How have they managed to do this? The answer lies in the success encountered in discovering oil, and in some cases, gas, at remunerative prices elsewhere. While none of these areas is as important in terms of the volumes of oil produced as the countries where take-overs or partial nationalizations have occurred, there are an array of producing countries where unit profits are good and returns on investment are remunerative. Not only the international companies but other more domestically oriented companies have been attracted to these areas, too. The profit and investment data used in this paper are based on published reports, generally paper are based on published reports, generally annual reports to shareholders and reports to the Securities and Exchange Commission. For this reason, most of the data cover results and experience up through 1978. The increased prices that have occurred in world markets in 1979 have added to net income in several areas and, where possible, these developments are included in the discussion. NORTH AMERICA As a base for comparison of developments overseas, it is useful no start this discussion with a look at the United States and Canada. In Table 1, the net income and investment from exploration and production operations of five leading U.S. oil production operations of five leading U.S. oil companies and their affilitates in Canada is shown. Major company operations include interests in a wide cross-section of producing fields and, therefore, halt any bias in a sample that could arise from a smaller company's interest in an unusually profitable or low return field. The use of companies that are affiliated with one another provides for consistency in accounting principles and procedures. Income from the exploration and production operations has been adjusted for certain companies because reported E and P earnings were before interest and in some cases before overhead and taxes. In the cases of Exxon, Imperial, Gulf Canada, and Shell Canada, a share of interest expense, in the same proportion that E and P income was to total pre proportion that E and P income was to total pre interest income, was deducted from reported income to arrive at a net income figure. For Gulf Oil, the same procedure was applied to interest, taxes, and corporate changes. For Conoco and Hudson's Bay, a similarly prorated share of corporate overhead was deducted. The figures show that the rates of return range from 11 percent no 19 percent in the U.S. and 13 to 19 percent in Canada. In assessing and analyzing these data, it is worth noting that the Canadian companies conduct a much larger exploration program — relative to their size — than the U.S. counterparts. In Table II, I have related exploration expenses to E and P net income. For the Canadian companies, these expenses generally represent a higher ratio to net income than for U.S. companies.