The major oil companies racked up significant gains in net income for the third quarter by charging more for oil than they could a year ago, and making money refining it.
The companies also earned more from producing natural gas, but a couple have signaled that the current low price for gas could force a change in strategy.
Both oil and gas increased in price when compared with the average price from last year. Oil prices rose about 12 percent while natural gas increased 23 percent. As a result, Exxon Mobil Corp. on Thursday reported 55 percent higher profits for the third quarter, while on Wednesday, ConocoPhillips said profit doubled.
The ability to sell crude oil for more money helped Royal Dutch Shell overcome a billion-dollar asset write-off. It also offset expenses and a drop in Gulf of Mexico production tied to the government's monthslong ban on deepwater drilling in response to BP's giant oil spill. The moratorium was lifted two weeks ago, but tough new regulations should slow down exploration along the Gulf Coast.
Exxon, Shell, Conoco and others like Occidental Petroleum have joined the rush to develop America's underground deposits of shale, lured by the promise of large volumes of untapped gas. That's helped pump up U.S. supplies well above average and beyond what the country needs for its power plants and home heaters.
While supplies remain ample, U.S. natural gas demand will be flat next year, according to the Energy Information Administration.
This is good news for consumers, who should see prices continue to slide this year. But oil executives, who worry about declining profits, have been looking for ways to soften the blow.
Conoco CEO Jim Mulva said he's going to wait for natural gas prices to "become less dysfunctional" before putting Conoco's natural gas rigs back online.
"We're not willing to just push volumes to push volumes and essentially just break even," Mulva said. He wants to see gas consistently between $4 and $5 per 1,000 cubic feet before boosting production. Gas is currently priced at $3.89 per 1,000 cubic feet.
Occidental said last week it expects to keep production flat in the year's final quarter. Exxon, which became the largest natural gas company in the U.S. with this year's purchase of XTO Energy, said its plans haven't changed. But analysts noted that in the third quarter the world's largest publicly traded oil company needed to pump a lot more natural gas _ tripling volumes in the U.S. alone _ to achieve a modest increase in profits from its domestic production business.
"They're not acting rationally," Argus Research analyst Phil Weiss said. "They keep drilling and drilling, and prices continue to founder."
Weiss also said companies keep drilling because of contractual obligations. Or because, like Exxon, they recently made large purchases of natural gas assets.
The remedy for most companies appears to be to find wells that produce more oil than gas. And Big Oil is plowing billions of dollars into doing just that.
Shell increased capital spending 77 percent in its upstream operation to $9.6 billion. Exxon increased capital spending 55 percent to $7.6 billion in the third quarter. Conoco kept its capital spending program flat at $2 billion for its exploration and production arm.
Shell, one of the largest players in the Gulf, said fallout from the moratorium will cut production by 40,000 barrels per day next year.
"We can't drill the well, so we can't bring the production up," Shell Chief Financial Officer Simon Henry said. "Maybe we can catch up a bit next year, but we can't count on that."
David Rosenthal, Exxon's vice president of investor relations, said the company continues to review the Interior Department's new regulations, though it plans to move forward soon with a project in the Gulf.
"We plan to submit in the near term our next permit application to get that drill under way," Rosenthal told analysts in a conference call.
Exxon earned $7.35 billion in the third quarter as revenue rose 15.8 percent to $95.3 billion. The Irving, Texas, giant also cranked up oil production year-over-year. And its refineries made more fuel, and a profit of $1.2 billion, a reversal from last year when refiners struggled amid weak demand for products like gasoline and diesel. Profit was less than the $7.56 billion from the second quarter because corporate and financing costs rose while its chemicals business posted a lower profit.
Two years ago, Exxon set the all-time record for profits by a U.S. corporation with $14.8 billion in the third quarter of 2008.
Shell's quarterly profits climbed by 6.5 percent to $3.46 billion. Without special charges, earnings rose 88 percent. In Houston, ConocoPhillips reported Wednesday that net income more than doubled for the third straight quarter, earning $3.06 billion for the July-September period. And Occidental said last week that profits rose 28 percent as it set new company records in oil production.
Chevron Corp. is expected to report a 12 percent increase in third-quarter earnings on Friday. BP PLC will report its financial results on Tuesday.
AP Business Writer Toby Sterling contributed to this story from Amsterdam