ExxonMobil and the Oil Supply : The Bigger Picture

ExxonMobil CEO Rex W. Tillerson: What, me worry? Photo from Getty Images.

The good news and the, well...
Exxon says: No need to worry

By Roger Baker / The Rag Blog / February 17, 2010

Here is the good news as seen through the eyes of Texas-based global energy giant Exxon:

ExxonMobil is an industry leader in reserves replacement,” said Rex W. Tillerson, chairman and chief executive officer.“We have replaced more than 100 percent of production for 16 consecutive years, reflecting our strategic focus on resource capture, a disciplined approach to investment and excellence in project execution. Adding new reserves ensures that ExxonMobil will continue to develop new supplies of energy to meet future demand and support economic growth and improved standards of living.

This sounds like we don't need to worry very much, at least about Exxon's oil. But let us read between the lines.

We need to know that the world's cheap conventional oil on dry land probably peaked in 2005, whereas most of the new oil being added is very expensive. The average price of adding new oil is thought now to be about $70 a barrel, which doesn't leave much profit (today's Nymex price is $77). The new oil reserves being discovered and produced are mostly deep underwater, or arctic, or heavy crude, or tar sand oil etc.; this is the kind of oil you go after only when you run out of the easy reserves to produce.

Exxon now produces only about 3% of world oil production. It used to be called "big oil" but a better term nowadays would be "baby oil." Exxon already produced its main reserves in Texas etc., long ago.

The Mideast, OPEC politics, and, increasingly, Saudi production are now what really count in determining global oil price. They can keep the global price from sinking so much in a slack market, but they can't hold price down very well when the world is demanding and producing at maximum, as the world saw in mid-2008.

There are several ways that Exxon's news release paints too rosy a picture. First of all, what they carefully don't say is the degree to which they are replacing their old cheap reserves on dry land with much more costly oil and gas offshore, etc. Anyone can drill for and find some oil in certain known areas, but to what degree is it profitable?

These additions are based on the corporation’s definition of proved reserves, which utilizes the long-term pricing basis that the corporation uses to make its investment decisions. This is a different price basis than the SEC basis, which uses 12-month average prices for the 2009 year-end reserves calculation.

Exxon says that their analysis does not comply with SEC practice. Perhaps one reason is that they seem to be considering gas as an equal replacement for oil. Gas as a fossil fuel is very expensive (~10X) to move around when compared to oil; this is why they used to flare it in West Texas. Oil is inherently more valuable than gas as a liquid fuel. It is irreplaceable in powering the world's transportation, and it will be for a long time to come.

At year-end 2009, ExxonMobil's proved reserves base, utilizing the corporation’s definition of year-end reserves, increased to 23.3 billion oil-equivalent barrels, split approximately evenly between liquids and gas (51 percent liquids, 49 percent gas).

The third way Exxon can try to look good is by exploring the edges of their big old fields, which are some of the only rich areas left. There are certain tax advantages to the majors in underestimating their true reserves. When prices get high they can keep drilling and producing the dregs in their fields that are left over from their golden era:

The corporation’s reserves additions in 2009, the highest in the decade, reflect new developments with significant funding commitments as well as revisions and extensions of existing fields resulting from drilling, studies and analysis of reservoir performance.

This is not to say that Exxon reserves are not worth its stock price, whenever the global market tightens up and the global oil price soars again. However, Exxon's best days as an energy producer are numbered, and it doesn't like to admit that, or to discuss the implications of peak oil.

For those who want to understand the big picture, the sites Energy Bulletin and The Oil Drum are excellent places to go for the smart analysis needed to penetrate the cloud of corporate BS, as well as the popular oil addiction denial.

[Roger Baker is a long time transportation-oriented environmental activist, an amateur energy-oriented economist, an amateur scientist and science writer, and a founding member of and an advisor to the Association for the Study of Peak Oil-USA. He is active in the Green Party and the ACLU, and is a director of the Save Our Springs Association and the Save Barton Creek Association. Mostly he enjoys being an irreverent policy wonk and writing irreverent wonkish articles for The Rag Blog.]

• See "Roger Baker : Is America Already a Failed State?" by Roger Baker / The Rag Blog / January 23, 2010

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World Petroleum Congress : Pointing the Finger

OPEC: It's the speculators!
By Roger Baker / The Rag Blog / July 4, 2008

The world economy depends on cheap oil. So when it disappears it is
understandable that there is dissension and finger pointing among the
sellers.

Nevertheless, when the guys selling you the fluid to which you are
addicted tells you to back off, it is wise to listen. OPEC is trying
to promote the idea that speculators are driving up oil prices.

The OPEC desire to shift the focus to speculation as a reason for high
oil price ignores the fact that OPEC is running out of capacity at the
same time as world oil demand keeps rising along with population and
the growing Chinese economy. In other words the producer nations are trying to trick the oil consumer nations into relying on them to sell oil forever, by saying the apparent oil shortage causing a price rise is imaginary.

But we're wise to OPEC's lies. Speculation could never be a factor
without smart rich investors predicting even worse oil shortages and
buying up oil futures in preparation as world oil production peaks and
declines. Financial speculation is a financial symptom of a much worse problem; permanent oil shortages.

Worried oil chiefs fail to find consensus
By Adam Plowright / July 3,2008

One of the energy industry's biggest gatherings ended Thursday in the shadow of record crude prices, with concern growing about a third oil shock but with little consensus about what to do about it.

Divisions between consumer and producer countries on who is to blame for 140-dollar oil appeared to sharpen at the World Petroleum Congress, which brought together political and corporate oil bosses for four days of talks.

Saudi Arabia, the world's leading oil exporter, expressed concern on Thursday about new records for benchmark crude of 146 dollars a barrel and again said it was committed to dialogue between consumers and producers.

But those discussions show no sign of finding a solution to market tension, with both sides citing different reasons: consumers underline supply shortage fears while producers blame financial speculators and the falling dollar.

"We are concerned about high prices," Saudi Arabian Oil Minister Ali al-Nuaimi said on the sidelines of the meeting here, adding that Saudi "King Abdullah is leading the effort" for dialogue.

Top officials from consumer and producer countries met in Jeddah, Saudi Arabia on June 22 for talks on the problem of the runaway oil market, but prices have risen since then.

Benchmark prices of oil in New York and London set new record highs around 146 dollars a barrel on Thursday and the head of Russian energy giant Gazprom forecast they would "very soon" rise to 250 dollars.

Since the beginning of this week, as an estimated 3,000 delegates gathered here, prices have hit almost daily new records, with comments by Iran's oil minister that the country would react "fiercely" to an attack stoking tension.

In one of the final speeches, Nuaimi defended the industry against attacks from "politically popular" environmentalists, saying alternative energy sources could never replace carbon-based fuels.

"The fact is carbon-based fossil fuels still are the cheapest, most efficient and most reliable energy sources for our mobile society," Ali al-Nuaimi said.

"Nevertheless, it is politically popular these days to extol the virtues of so-called alternative fuels because of their lower carbon emissions."

Despite booming conditions in the industry, there was a notable lack of optimism, with those old enough to remember previous oil shocks recalling the busts that followed afterwards.

The executive director of the International Energy Agency, Nobuo Tanaka, reminded everyone on Tuesday that "with oil prices hitting 140 dollars, we are clearly in the third oil shock."

The head of Brazilian oil group Petrobas, which hopes to become a new powerhouse after announcing huge oil discoveries, said Thursday that no-one should expect a return to low oil prices, however.

"For the future we should not expect a dramatic fall in price," said Sergio Gabrielli, who explained this was because of rising production costs that would underpin the market.

The head of French group Total, Christophe de Margerie, had said earlier in the week that 80 dollars a barrel was likely to be a ceiling for prices for this reason.

There was also open disagreement between the Organisation of Petroleum Exporting Countries and the International Energy Agency, which represents the interests of rich, consumer nations.

In a look at the medium-term outlook for the industry, the IEA predicted a tight market for the next five years on Tuesday and warned of looming tensions from 2010 as demand for oil from Asia and the Middle East continues to grow.

It also went to great lengths to refute the notion that speculators were to blame.

"Seventy percent of crude contracts on the Nymex are held by speculators... Some form of regulation is needed," OPEC secretary general Abdallah El-Badri replied on Wednesday, referring to the US commodity futures exchange.

"The market has no shortage of physical crude."

He also called on the United States to stop "harassing OPEC countries."

OPEC president Chakib Khelil also called on the US to stop the fall of the dollar to stabilise oil prices and knocked back suggestions the cartel should increase production.

Source. / AFP / Yahoo News

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