Peak Oil is You
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Page added on April 14, 2013
For ExxonMobil, having oil is one thing, but pumping it is another
Here is a puzzle: ExxonMobil has sufficient proven oil and gas on its books to produce at current levels for 16 years. It has 55 years of supply in its total resource base, which is those proven reserves plus deposits to which it hasn’t yet committed the development dollars required before legally calling them “proven.”
In short, ExxonMobil’s oil and gas inventory—the largest of any company on the planet—is bursting.
Yet for six years running, the company has fallen short of production guidelines provided to Wall Street analysts. Last year, its oil and gas production fell by 5.9% to an average of 4.2 million barrels of oil equivalent (boe) per day, double the 3% decline that it forecast. For 2011, the company projected a production increase of 3%-4%; instead its production rose by only 1%.
In retrospect, the company’s 2001 guidance sounds breathless. It said that production would rise to well over 5 million boe a day by 2009. Instead, that year it was about the same as in 2001—about 4.3 million boe a day. The chart below, provided by Paul Sankey at Deutsche Bank, shows how it revises its projections every year, and most of the time, falls short. (That bump after 2009 comes from its purchase of XTO, America’s largest natural gas producer.)
The main difficulty you usually face as a Big Oil company is maintaining or increasing your reserves base when, as ExxonMobil does, you pump 1.5 billion barrels of oil a year. But we are talking about a different challenge—capitalizing on the reserves already in your possession. With such a backlog of inventory, why can’t Exxon just turn on the tap?
I asked ExxonMobil, and got back this boilerplate: “Actual production in any specific year can vary above or below what is reflected in our outlook due to variables such as price, quotas, divestments, weather, regulatory changes, geopolitics and unplanned downtime in our operations as well as unplanned downtime in those properties that are operated by others.”
Wall Street analysts, however, say ExxonMobil’s problem is time and cost. That is, Exxon’s current reserves are not equivalent to those that it exploited two and three decades ago, but are deeper, more dangerous and far more expensive to produce. “Like your good looks, [the reserves] are there. It’s just a question of exploiting them. [But it’s] not that easy,” Sankey told me.
Oppenheimer’s Fadel Gheit estimated that, once ExxonMobil acquires reserves, it can now take as long as two decades to actually develop them. “It takes more spending and a longer time,” he told me. (The Financial Times has a good piece (paywall) on the problem of runaway costs.)
One conclusion is that when oil companies say they are achieving “full reserve replacement”—i.e., finding more new oil in a given year than they pumped, which is taken as a sign of their sustainability—it doesn’t mean quite the same as it used to. ExxonMobil, for instance, has announced 19 consecutive years of full reserve replacement, but if it is a substantial challenge to exploit those reserves, then they’re not contributing as much to the company’s financial value.
That is not news to ExxonMobil. So the question nags—if you’ve missed the target once, missed it twice, and know that it will be hard to meet the next one, why keep setting possibly embarrassing targets?
I do not have an answer to that. It could be something as simple as the share price—Exxon may not wish to walk back its production estimates to a more realistic projection of more or less 4 million barrels a day.
Stay tuned, though. This year, Exxon says its production will fall by 1%, and then rise by 2%-3% from next year through 2017. Let’s see if it’s becoming more realistic.
8 Comments on "For ExxonMobil, having oil is one thing, but pumping it is another"
BillT on Mon, 15th Apr 2013 1:08 am
Peak production … it should be obvious by now. There is more oil, but it is not oil that can be marketed PROFITABLY in a contracting world economy. American’s paychecks have been shrinking for over 30 years. $50 oil was not a big problem, but $100 oil is. Soon it will hit the price limits in Asia also and then the the real crunch will begin. Wells will be shut down, when they no longer can make enough profit to be practical, and the oil will be left in the ground.
Never ending growth is NOT possible. We have about hit the wall for costs vs need.
Ditto for natgas as that bubble bursts and the prices climb as the profits decline. They too will hit a wall in the not too distant future. Too expensive to use. No customers. And coal is fast approaching that point also. But, will it be before we kill the ecosystem of the earth? That is the question.
MrEnergyCzar on Mon, 15th Apr 2013 1:53 am
Peak cheap easy oil is a bit#@h….
MrEnergyCzar
SilentRunning on Mon, 15th Apr 2013 5:08 am
I don’t understand how this is possible. The cornies keep telling us that there is an infinite amount of oil that’s out there just waiting to come to market.
Is it possible – that those infinitely stupid “peak oil types” could actually be correct?
rollin on Mon, 15th Apr 2013 12:13 pm
It is merely corporate growth control and mining management. Exxon-Mobil is busy investing in the gas market so investments in oil are being slightly curtailed at the moment. Also, why should they spend large amounts of money to use up their reserves at lower market values? Too much oil in the stream drops the prices and this oil will be worth more in the future. So that is when they will drill their reserves, in the future.
The fact that it is more expensive to drill means little to a company if they can sell it at a higher price. I would say Exxon-Mobil’s methods indicate proper management of their resources and that they think the resource will be worth more in the future.
SOS on Mon, 15th Apr 2013 12:18 pm
Ignorance is bliss. The majority of a well cost is drilling. After its drilled and initial costs recovered the cost of the oil is reduced to the cost of pumping. That’s about $10/barrel in the mid east.
The average life of a producing well in North Dakota is now up to about 60 yrs.
SOS on Mon, 15th Apr 2013 12:24 pm
Using 1companies corporate information to make broad judgments about the worlds supply of oil seems rather expansive. The information refers to a single company that is unique in the worl of energy. Use it to manage your investments in Exxon and you may do fine. Use it to formulate ideas and opinions about the worlds broader condition and you are certainly wrong in your conclusion.
Exxon is developing the Arctic with Russia. Their oil will be flowing in a big way in a couple yrs. initial development stages are underway now.
BillT on Mon, 15th Apr 2013 1:51 pm
“… The fact that it is more expensive to drill means little to a company if they can sell it at a higher price…”
You shot your argument in the foot with that statement. The problem for oil companies is that they cannot produce oil that sells profitable for much less than $90-$110/bbl. And that is the limits at which consumers cut back and stop buying.
Don’t tell me that they are not producing all they can. They have maxed out and their production is declining, not growing.
No, SOS, arctic oil will NOT be flowing in a few years. Those state sized ice floes blowing around will see to that. Nothing permanent can be put where it can be crushed at any time. Ask Shell.
Oil’s days are numbered. If you are under 50 you will live to see it’s end. Wait and see.
rollin on Mon, 15th Apr 2013 2:57 pm
Payback on a tight oil well is far less than one year. After that costs are small per barrel. They can drill a new well every year on 23 barrels a day output from an existing well. Average output now is 130 bpd in the Bakken for over 5000 operating wells. So they could be drilling 3000 or more wells a year and making profits. Until they run out of field, probably around 50,000 wells.
Right now they are drilling rig and output transport limited so no big rush.