Big is no longer beautiful in oil business For ExxonMobil, the oil business is all about many, many happy returns. More specifically, return on capital employed, or ROCE. In his book Private Empire: ExxonMobil and American Power, Steve Coll tells how legendary chief executive Lee Raymond campaigned on Wall Street to have ROCE recognised as the main measure by which oil corporations should be judged. He had a point. The supermajors invest mind-bogglingly large amounts of capital in projects that stretch decades into the future. What, then, is the point of using short-term metrics such as share price fluctuations or quarterly profits to assess them, Mr Raymond asked. Instead, the focus should be on how these companies managed their investments. Exxon's performance in this regard is stellar. It is renowned for its ability to maintain strict capital discipline across myriad projects over many years. Exxon's ROCE has traditionally been significantly higher than that of its competitors. Not any longer. Exxon has lost its crown to smaller rival Chevron. According to figures compiled by Barclays Capital, Exxon's return on average capital employed in its upstream - or exploration and production - division has fallen behind Chevron's since 2010. This year it is 20.8 per cent, compared with Chevron's 24.5 per cent. Research by PFC Energy, a consultancy, tells a similar story. It says Chevron's upstream net income stood at nearly $18 per barrel of oil equivalent last year, compared with $15/boe at Exxon. Exxon's profitability has always been its badge of honour, the symbol of its success and power. The company is still a large cash machine - it made $9.6bn in profits in the third quarter alone - but the ROCE issue reveals a new vulnerability that is hard for such a group to swallow. A lot of this is tied to its $41bn acquisition of XTO Energy in 2010, which turned it into one of the biggest participants in US shale gas. But US gas prices have plummeted on the back of the shale boom. Rex Tillerson, Exxon's chief executive, admitted in June that the company was losing its shirt. The issue of Exxon's diminishing returns has crystallised other concerns about the company, such as difficulties replenishing its reserves and increasing production. To many investors, Exxon is beginning to lose its lustre. "If the fundamental challenge of oil groups is to create repeatable investments that create scale and return, then Chevron now outperforms Exxon," says Robin West, head of PFC Energy. Although it has great strength, the enormous scale of Exxon compounds the challenge. But any Exxon Schadenfreude should be tempered by the fact that all the majors are in the same boat. Last week, Chevron announced a $15bn budget blowout on its big Gorgon gas project in Australia. You wonder what that will do to its returns. It is problems like these that explain why the supermajors are being eclipsed by smaller, growth-oriented, exploration-focused companies such as Anadarko and Apache. "Investors say, "We don't buy "bigger is better" any more,"" says Fadel Gheit of Oppenheimer Co. Exxon's problems reflect a broader trend. In the decade to 2010, upstream returns for all the supermajors rose to untold heights, averaging 25 per cent, almost double what they achieved in the previous decade, according to BarCap. That profitability prompted them to go out and invest heavily in new opportunities. In so doing, they increased their capital employed in non-producing projects. As a result, their upstream returns fell even as oil prices rose to historic highs in 2007-2008. It looks like the windfall profits of 2000-2010 might have been something of an aberration. Exxon has acknowledged the problem. It says its ROCE will be under pressure until projects nearing completion in places such as Singapore and Papua New Guinea - which, like Gorgon, is badly over budget - start contributing to earnings. Mr Tillerson has acknowledged that Exxon is carrying a lot of incomplete construction that would not be producing for some time. "It is a larger percentage of the capital employed than it has been historically," he said in March. But on the issue of gas, Exxon is sanguine, convinced that, over the long term, its investment in shale will pay off. Energy companies are switching from coal to gas in power generation, which should push up gas demand and prices and increase the profitability of Exxon's shale business. Mr Tillerson says Exxon's big shale portfolio will end up being a "kind of cash cow return machine sitting underneath all the future new investments." The question is whether, these days, a cash cow is really what investors want. Guy Chazan is the Financial Times's Energy Editor