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* Oil groups produced much more than they found last year
* Oil and gas output fell in 2014, echoes trend over pastdecade
* Graphic on oil majors' output: http://link.reuters.com/huh93w
* Companies now making investment cuts to counter low oilprices
By Tom Bergin and Ron Bousso
LONDON, Feb 5 (Reuters) - Big oil companies had a poorrecord of finding and producing oil and gas last year, accordingto figures out in the past week - and big cuts in spending inresponse to falling crude prices could undermine their plans toturn that around.
Four of the world's six biggest oil firms by market value -Royal Dutch Shell, Chevron, BP andConocoPhillips - released provisional figures showingtogether they replaced only two-thirds of the hydrocarbons theyextracted in 2014 with new reserves.
Combined, those four and industry leader Exxon Mobil posted an average drop in oil and gas production of 3.25 percentlast year.
All predict their output will increase and new reserves willbe added in coming years. But the 2014 results echo longer-termtrends.
Over the past decade, the biggest Western oil companies haveseen reserves growth stall, production drop 15 percent andprofits fall by almost a fifth - even as oil prices almostdoubled, a Reuters analysis of corporate filings shows.
Analysts and industry executives have blamed the sector'sanaemic performance in that period, in part, on companies'approach to spending on new fields and infrastructure, tendingto ramp it up when oil prices rise and cut when prices plummet,such as in the late 1990s and after the 2008 financial crisis.
The latest collapse has seen prices halve since June. Inrecent months, the biggest oil groups on both sides of theAtlantic have announced sharp cuts in capital expenditure(capex) out as far as 2017, as they seek to preserve cash tomaintain dividends.
Investors have largely welcomed the focus on dividends. Butsome say the cuts could come back to bite the industry.
"Capex can't be cut forever. Cuts in capex are only storingup problems for the sector down the road," said Will Riley, fundmanager with the Guinness Global Energy Fund, which holds sharesin many of the big U.S. and European oil firms.
The ability of oil companies to replace reserves has notbeen as much of a concern for some executives and investors inrecent years due to the shale oil boom.
But the high cost of extracting shale oil makes doing soprofitably a challenge where prices are low - making traditionaland less expensive reserves more relevant in a downturn.
LOST OPPORTUNITIES
BP and Chevron have announced around 13 percent cuts incapex for 2015, while ConocoPhillips last week upped its plannedreductions in spending for 2015 to 33 percent. Shell and Exxonhave not issued budget plans yet.
"We have to prioritise cash flow instead of growth for thetime being," Gerhard Roiss, chief executive of Vienna-based oilproducer OMV AG, said last week as he announced anaround 30 percent reduction in investment in new projects.
Oil executives play down worries about the sector'sfundamental health. They say lower production reflects anincreased focus on returns, rather than output for its own sake,while falling reserves figures can be misleading.
"These (2014) reserve replacement numbers are a little lumpy... I am not too alarmed about this year's down(turn)," BP bossBob Dudley told reporters this week.
However, even executives accept that excessive pruning ofinvestments can cost them barrels and profits in the long term.
"Many of the things that you may do out of excessiveprudence basically means that you lose them (the opportunities).They won't come back anymore," Shell CEO Ben van Buerden toldinvestors last week.
Van Buerden said he would cut less than rivals to ensure hedid not crimp Shell's long-term prospects. Similarly, Exxon toldinvestors on Monday that while it would monitor spendingclosely, it would not "forego any attractive opportunities".
Nonetheless, Shell has shelved projects and put off $15billion of spending it might have committed to over the nextthree years. Analysts at Jefferies predict Exxon will announce a13 percent drop in capex when it presents its strategy plans inMarch.
Martijn Rats, head of oil companies research at MorganStanley in London, said in a research note this week that overlyaggressive cuts could have long-term repercussions.
The expertise needed to develop new fields andinfrastructure takes long periods to build up, he said. Hence,if companies lose this expertise, they may struggle to expandtheir portfolios when oil prices recover.
DEPLETION
Executives say the risk is not only that companies may losefuture growth opportunities but also that existing reserves maynot be fully exploited.
Production from oil fields falls over time, becausereservoir pressure drops as oil is extracted. Fields on averageexperience natural depletion rates of around 15 percent peryear, industry executives say, but companies generally reducethis to 3-5 percent by sinking additional wells, injecting gasor by using other capital-intensive techniques.
Cutting capex will increase depletion rates, if pastexperience is an indicator.
"That is a growing risk for the industry. If you go back tothe 2008 and 2009 period ... we saw an increase worldwide indecline rates for all companies, basically for the entireindustry, increase by a percent or two. And that's verysignificant," Chevron CEO John Watson told investors last week.
Using data going back to the oil drop in the mid 1980s,analysts at Bernstein calculated the rise in depletion rates was3 percentage points within two years after an oil price collapsebegan.
Across the industry, this could mean the loss of hundreds ofthousands of barrels of oil production each day.
Some investors and analysts say companies could yet use thedownturn to help build long-term reserves and production.
Paul Mumford, fund manager with Cavendish Asset Management,said lower oil prices and a drop in drilling activity wasleading to downward pressure on the prices firms which sellconstruction and drilling services to oil majors charge. Thiscould encourage some companies to drill and build more, he said.
And Charles Whall, fund manager with Investec, said strongercompanies should consider replacing reserves throughacquisitions.
Morgan Stanley's Rats added: "Sometimes, the best projectsare done at the bottom of the cycle."
(Additional reporting by Dmitry Zhdannikov; Editing by PravinChar)
