Why Exxon Won't Produce More

From Business Week online March 20, 2008:

. . . If you want to understand why Exxon won't produce more, it helps to listen in to ExxonMobil's  presentation to analysts in New York City in early March. Halfway through the three-hour meeting, Exxon management flashed a chart that showed the company's worldwide oil production staying flat through 2012. . . .

Yet even with prices at the pump near all-time highs, Exxon isn't planning on producing any more oil four years from now than it did last year. That means the company's oil output won't even keep pace with its own projections of worldwide oil demand growth of 1.2% a year.  . . .

"We don't start with a volume target and then work backwards," Instead, he said, his team examines the available investment opportunities, figures out what prices they'll likely get for that output down the road, and places their bets accordingly. "It really goes back to what is an acceptable investment return for us."

-- Exxon Chairman Rex Tillerson

. . . Since 2000, Exxon's oil output from two of its largest regions, the U.S. and Europe, declined a startling 37%. That's 500,000 fewer barrels a day in just seven years. . . .

Exxon plans on bringing new fields online in Russia, the Middle East, and Africa over the next four years but they won't be enough to generate growth beyond what the company is losing due to the maturation of its fields in the North Sea and Alaska, the nationalization of its fields in Venezuela, and volumes lost due to production sharing agreements with other countries.  . . .

Big oil companies can continually miss their targets or even target no growth and still shine on Wall Street due to the peculiar nature of commodity businesses. Less supply of a commodity means higher prices. Higher oil prices mean more profits for the oil companies. Exxon shares have risen 21% in the past year—and even closed a bit higher on Mar. 5, the day of its analysts meeting.

Comments

[George Bruce]

The simple explanation is that the oil companies' share of world production is shrinking as more and more production is controlled by governments.

[George Bruce]

The simple explanation is that the oil companies' share of world production is shrinking as more and more production is controlled by governments.

[Ron Fischer]

Even simpler: it makes the most sense for Exxon-Mobil to maximize profit by doing nothing that would lower oil prices, such as expanding output significantly.

[Randy White]

Time to Break Glass In Case Of Emergency.

Municipalities had better digest what is in Portland Oregon's Peak Oil Task Force Report called: Descending the Oil Peak: Navigating the Transition from Oil and Natural Gas

http://www.portlandonline.com/shared/cfm/image.cfm?id=145732.

[bigTom]

The reality is that the IOCs (International Oil Companies) such as Exxon have been excluded from doing business is so much of the world that they have little capability to influence production and prices. It is correct that the interests of the IOCs -and even less of the National Oil Companies, are not the same as the short term interests of oil consumers. It should come as no surprise if the oil producers were to stretch some of their investments into future production, or even to not pump at maximum volume. This sort of behavior -if it is in fact occurring is actually to the benefit of the consumers, as it should stretch out the transition from cheap to dear oil. Many entities who believe they can benefit from blunting the message of peak oil are trying to do just that. The favorite technique is to argue that there is more oil in the ground than has been consumed so far. That is correct as far as it goes, but the reality is most of the remaining oil is much more difficult to produce than the older depleted fields. This means that capital and "lifting" costs will be much greater than had been the case. Also the amount of engineering expertise per barrel of oil produced is going to increase, at the same time as large numbers of aging petroleum engineers are reaching retirement age. Peak Oil does not mean that oil production will precipitously drop to zero, but is does mean that the age of cheap plentiful oil is over.

[Rod Adams]

If the major oil companies would recognize that they are in the heat supply business, not just the petroleum business, they would be able to find excellent prospects for investing their current cash surpluses. The end of plentiful energy is not over - there is a tremendous reserve of uranium and thorium that has just barely begun to be tapped.

Of course, the particular characteristics of that source of heat are quite different from those of petroleum, but the oil companies are full of smart, adaptable people who are well suited for taking advantage of those differences. The energy density, the lack of emissions, and the accessible reserves located in stable, democratic countries are all advantages that should be exploited.

Of course, it might mean some short term demand destruction for the company's current portfolio of income producing assets, but since that base is shrinking anyway, now is probably a great time for the inevitable transition.

[fjh]

Africa and the Arctic are the last two unexplored areas for fossil fuels. Nigeria and the Congo are getting finecombed by the Chinese; and the Russian GAZPROM has exploration teams throughout the Arctic.

37% is pretty dramatic...voluntary cutback to drive up prices to get revenue for a new binge of exploration and refinery building or a shortage of crude?

[Lori Glauser]

Can oil companies get refineries financed? Without a positive earnings outlook for 30 years (to pay down the debt) they probably can't get funded. Given no new refineries being built, this tells me the oil co's don't foresee 30 years of continued profits.

Unlike foreclosed homes, which can be resold by the bank, what does one do with a refinery that "foreclosed" due to lack of supply in 15 years?

Well, refineries do tend to sit on waterfront property just an electric car/monorail commute to big cities. Maybe the big oil companies' last gasp, around 2025, will be in the real estate business. ;)

[Clee]

I think oil companies see plenty of continued profits in the next 30 years from their existing refineries. They just don't see profit in building new ones. Continuing the real estate analogy, the home they have now suits their needs into the future. Buying a second home would be risky.