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Record crude prices are no longer enough to keep oil producers' profit going up. ConocoPhillips and Occidental Petroleum, the top two U.S. exploration and production companies, both reported 2012 core profit down more than 15 per cent from 2011 while oil prices went up. The main reason – high production costs – is a worry for investors and suggests the floor under oil prices is rising.

It doesn't help that prices for natural gas and associated products fell. But in a year when Brent crude hit a record average price of $112 (U.S.) a barrel and both companies sold their oil for more than in 2011, that is far from a sufficient explanation. The fact is, oil is getting harder to find and more expensive to extract.

A $1.2-billion dip in ConocoPhillips' annual profit to $6.7-billion – after stripping out its spun-off refineries and some one-off items – was largely due to rising expenses. Outlays on production climbed by almost $400-million, while exploration spending surged even more. Occidental is battling similar pressures. Its adjusted earnings from oil and gas fell to $8.8-billion in 2012, down $1.5-billion from the year before.

Occidental CEO Stephen Chazen is hoping to trim U.S. drilling costs by 15 per cent in 2013 by using fewer contractors and eliminating unnecessary maintenance. These economies even started to take effect in the fourth quarter. Yet cost cutting can only go so far before it hits output. Capital spending at Oxy still rose 35 per cent. Increasingly, all the big oil groups are resorting to pricey techniques to extract oil from aging wells, shale or the deep sea. That puts pressure on the bottom line.

Higher costs also mean oil companies require more expensive crude to justify new projects. A sharp fall in prices would see plenty of them mothballed – ultimately reducing supply and curtailing any likelihood of sustained low prices. For the companies involved, as for some of the governments that depend on oil revenue, relatively high prices have become more of a necessity than a luxury. For consumers, that could mean getting used to them – and consigning the sub-$40 prices last seen at the height of the financial crisis to history.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 28/03/24 11:55am EDT.

SymbolName% changeLast
COP-N
Conocophillips
+0.47%127.44
OXY-N
Occidental Petroleum Corp
+0.93%64.8

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