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* Companies sought more price exposure ahead of crudecollapse
* Profits increasingly sensitive to oil price moves
* Firms still hope oil prices will rise and justify strategy
By Tom Bergin
LONDON, April 13 (Reuters) - The drop in big oil companies'profits in the past eight months isn't just a function of lowercrude prices - it also reflects strategic choices.
A Reuters examination of corporate filings by some of thebiggest players in the industry, including BP, Shell and France's Total, shows the sensitivity ofthese companies' earnings to changes in oil prices has risen inrecent years.
This means that for every dollar the oil price drops, theirprofits sink more than they might have done five years ago.
Of course, that wasn't the plan. Choices made by several oilmajors that built more exposure to prices into their portfolio,mainly through the kinds of contracts they opted to sign, wasaimed at enjoying prices that were historically high.
"In simple terms it (oil price sensitivity) has increasedand that's been a deliberate choice," Simon Henry, ChiefFinancial Officer at Royal Dutch Shell Plc, Europe's largest oilgroup by market value, told Reuters.
"We took a view that prices were going to go up and that ourportfolio was less exposed than it should be in that environmentbecause of the types of contracts we had in place," he said.
Shell made the decision in the early 2000s and it tookaround a decade for that to have a real impact on the company'sbottom line, Henry said.
In 2009, Shell's then-CEO Peter Voser said a $1 move in thecrude price would shift earnings up or down by around $200million. In January, Henry estimated the impact of a dollar moveon earnings was around $330 million and increasing.
Brent crude averaged $54 per barrel in the first quarter of2015 - half of what it was in the same period last year. If thecurrent price holds, the hit to Shell's pre-tax earnings fromthe increased sensitivity alone could run to billions of dollarsa year compared to what it would have been if the 2009 linkagebetween profits and oil prices had held steady.
Filings from Europe's second and third largest oil groups,London-based BP and Paris-based Total, show a similar trend.
In early 2013, London-based BP said a $1 change in the oilprice would lead to a $250 million change in annual pre-taxreplacement cost operating profit in its oil and gas productiondivision. In March, the company said on its website that a $1movement in Brent would change earnings by $300 million.
Total said in 2013 that a $1 rise in Brent would liftadjusted net operating income by $140 million. Earlier thisyear, it said the impact would be $170 million.
The increase in sensitivity is despite the fact thatproduction levels - the main determinant of how much oil priceshit earnings - have fallen at all three companies.
SLOW TURNAROUND
Many oil companies missed out on much of the benefit of theoil price surge from 2004 to 2008. Instead governments grabbedmost of the gains, in part due to the contracts the companieshad signed years earlier.
Historically, companies bought exploration licenses andagreed that, if they struck oil, they would pay governments aroyalty - often a share of output - even if no profit wasdeclared.
During the 1990s, when oil prices were low and profitmargins tight, companies signed an increasing number ofProduction Sharing Agreements (PSAs), which offered returnsbased on the cash they invested. That meant companies had abetter chance of getting their money back.
But the safety came at a cost.
"You're protected on the downside, but you lose some of theupside," said Neill Morton, oil analyst with Investec.
Morton said the contracts became less popular with investorsas oil prices soared in the mid-2000s.
Shell was one of the first companies to make the shift toprojects with greater oil price sensitivity. It increasedinvestments in OECD countries, which do not typically offerPSAs, and, where it did sign PSAs, it sought to link the returnsto prices rather than accept a fixed return on money invested.
Others followed its lead.
"It was a general trend. Companies were keen to capture theupside from oil prices," said Tom Ellacott, at consultants WoodMackenzie.
In February 2008, Philippe Boisseau, president for Gas &Power at Total, told investors that his company was reducing theshare of its production that came from production-sharingcontracts that only offered a fixed return.
In July 2008, BP's then-CFO Byron Grote told investors thegroup was accelerating its exploration programme and looking foropportunities "especially in our key tax and royalty areas, thatallow us to capture price upside".
Total declined to comment on its current strategy in respectto oil price exposure. BP said the company didn't target aspecific exposure but rather managed its portfolio over time tomaximize returns and balanced investments between PSAs and taxand royalty regimes.
BG Group, which last week agreed a $70 billion takeover byShell, said its oil price sensitivity increased simply becausethe historically gas-focused company discovered a lot of oil.
The world's largest oil company by market value, Exxon Mobil has seen no change in its sensitivity to oil prices inrecent years, while Chevron does not publish figures. Bothdeclined comment.
Ellacott said that while the strategy of gaining moreexposure to oil prices may hurt today, oil projects had a longlife and most oil companies remain optimistic about long termoil prices.
Shell is unapologetic about its decisions. CFO Henry saidthe world's growing energy needs would support crude prices inthe years to come.
"We still firmly believe that absence war, pestilence andfamine, demand will continue to grow," Shell's Henry said. (Reporting by Tom Bergin; Editing by Sonya Hepinstall)
