Major players in the oil industry are facing some difficulty as of late with profits failing to meet expectations due to rising project costs.
According to an article on OilPrice.com, both Exxon Mobil and Shell spent billions in 2013 in an attempt to increase production, only to find that they are getting comparatively little for their dollar.
Shell, for example, issued a "significant" profit warning in January in response to a late 2013 earnings report that showed profits had fallen nearly in half, from $5.6 billion in 2012 to $2.9 billion in 2013. Shell argued that high exploration costs were responsible for this drop.
Exxon Mobil reportedly experienced project delays in both Canada and Kazakhstan, resulting in a 1.8 percent drop in oil and gas output. As a result, earnings fell by 16 percent in 2013, from $10 billion to $8.4 billion. Revenues were also significantly below expectations.
Chevron is also facing difficulties. A report by the Fuel Fix blog found that the company's production fell in the fourth quarter of 2013 by about 4 percent. This did not bode well for company stock, which the news source expected to drop.
The problem is that falling income is making it more difficult for these companies to support the extensive exploratory projects that they had funded, working under the impression that the recent oil drilling boom would allow for strong investments.
The news source reported that Shell is planning to suspend number of initiatives, such as its Arctic drilling program in Alaska, despite having invested more than $5 billion. It also plans to sell assets in Australia and Brazil, and possibly even sell off its stake in Woodside Petroleum Ltd.
"We have lost some momentum in operational delivery, and we can sharpen up in a number of areas," Shell CEO Ben van Beurden said in a statement. "2014 will be a year where we are changing emphasis, to improve our returns and cash flow performance."
Chevron, too, will need to be careful about its spending. OilPrice.com reported that the company has spent $54 billion on its Gorgon LNG project—even though it was only supposed to cost about $34 billion originally.
Increasing oil production leads to higher compliance costs
Rising project costs aren't the only issues facing oil companies. As this blog has mentioned in the past, the rapid increase in domestic oil drilling has led to difficulties in relation to compliance with federal, state and local regulations pertaining to health, safety and the environment.
It should be noted, for example, that the aforementioned Arctic drilling program that Shell is suspending may face other roadblocks—and might even end altogether. That's because the a U.S. Court of Appeals ruled that the Department of Interior violated the law when it auctioned off parts of Alaska's Chukchi Sea for drilling.
Given the numerous issues at play here, it makes sense for these companies to work with environmental consultants so that they can mitigate potential liabilities at the lowest possible cost.