Integrated Oil and Gas Round-Up Q2 2014: Upstream Production

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The integrated oil and gas companies operate in both upstream and downstream segments of the industry. The upstream division of these companies is primarily responsible for exploration and production of hydrocarbons, while the downstream division focuses on producing refined petroleum products such as gasoline, diesel and lubricants. The valuation of the upstream division primarily depends upon four main drivers that include net hydrocarbon production, crude oil prices, sales volume-mix, and capital and exploratory expenditures. In this article, which marks the beginning of our quarterly oil and gas industry review, we highlight the key factors that drove net hydrocarbon production reported by Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX), BP Plc. (NYSE:BP) and Petrobras (NYSE:PBR) during the most recent quarter. We will be taking a closer look at other drivers in separate articles.

See Our Complete Analysis For Exxon MobilChevronBP Plc.Petrobras

Exxon, Chevron, BP and Petrobras together produced over 11 million barrels of oil equivalent per day during the second quarter. The table below, which has been compiled using data from SEC filings, summarizes average daily net hydrocarbon production reported by these companies in each of the last 10 quarters. These figures represent total upstream production in thousands of barrels of oil equivalent per day, which includes their share of hydrocarbon production reported by their equity affiliates as well. The last column of the table also highlights the year-on-year percentage change in net hydrocarbon production reported by each of these companies during the most recent quarter. [1]

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While Chevron’s net hydrocarbon production, which is expected to remain largely flat this year, declined slightly due to increased downtime and normal field declines, both Exxon and BP reported a sharp 6% decline in upstream production during the second quarter, primarily because of the expiry of the Abu Dhabi onshore concession agreement. The companies lost their 75-year rights to the emirate’s oldest producing fields this January, when the Second World War-era contract expired. These oilfields together account for around 50% of Abu Dhabi’s total oil output (almost 3 million barrels per day) and hold more than a 100 billion barrels of oil and oil equivalent. Until a new concession agreement is signed, Abu Dhabi National Oil Company (Adnoc) will be the sole-risk shareholder of the Abu Dhabi Company for Onshore Oil Operations (Adco), the current concession’s joint-venture operator. As a result, BP, Exxon and other foreign oil companies, which were previously involved in the concession, will not be able to lift equity oil or book reserves from these oil fields. [2]

Adjusting for the impact of the Abu Dhabi onshore concession expiry, the decline in Exxon’s upstream production was more moderate (around 1.5%), and BP’s net hydrocarbon production actually grew by 3.1% y-o-y, as production from new project start-ups more than offset the impact of natural field declines. This year, BP has already started production from five major projects including the Chirag Oil project in Azerbaijan, the Mars B and phase 3 of the Na Kika project in the Gulf of Mexico, the North Atlantis Expansion 2, and the CLOV project in Angola, which is operated by Total (NYSE:TOT). In addition, BP is also working on bringing up two new projects later this year. These projects include the Kinnoull project in the North Sea and the Sunrise Phase I project in Canada. During the second quarter earnings call, BP reported that construction work on the Kinnoull project is complete and commissioning is over 80% complete. The company also announced that the Sunrise Phase I project is on track, with the construction of the central processing facility over 70% complete. We therefore expect BP’s average daily hydrocarbon production rate to bottom out by the end of this year and gradually increase thereafter. [3]

Petrobras is the only integrated oil and gas company we cover that posted a year-on-year growth in net hydrocarbon production during the second quarter. The company’s crude oil production grew by 2.1% y-o-y, primarily driven by the new pre-salt wells it has brought online over the past few months. It recently announced that oil production from fields operated in the pre-salt areas of the Santos and Campos Basins offshore Brazil, which averaged just 302 MBD last year, hit a record level of 546 MBD on July 13. Petrobras plans to grow its average daily crude oil and natural gas liquids production by 6.5-8.5% y-o-y this year. However, given the progress made so far, we believe the target to be very ambitious and have factored in a 4% y-o-y increase in its total upstream production for the full year. [4]

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Notes:
  1. SEC Filings, sec.gov []
  2. Abu Dhabi to Run Onshore Oilfields as Foreign Tie-Ups End, bloomberg.com []
  3. BP Second Quarter 2014 Earnings Call Presentation, bp.com []
  4. 2Q14 Webcast, investidorpetrobras.com []