Exxon Mobil Bites a Big One
By Vladimir Posted in Energy | Exxon Mobil | Oil Reserves — Comments (2) / Email this page » / Leave a comment »
Exxon Has Off Year Discovering New Oil
(Feb. 16 Wall Street Journal, p.2; link requires subscription)
None of this is good for the consumer, or for our economy. A less profitable Exxon ultimately means higher gasoline prices. And if you look at the reasons behind their apparent lack of success in 2007, it doesn't bode well, either. Before the first Arab oil embargo in 1973, the "Seven Sisters" (American firms Exxon, Mobil, Chevron, Amoco, and Gulf, plus British Petroleum and Anglo-Dutch Shell) pretty well called the shots in the worldwide oil market. Now, 70 to 80% of worldwide reserves are in the hands of national oil companies, many of those controlled by regimes which are hostile to American interests.
The world's biggest publicly traded oil company by market capitalization said Friday that it replaced just 76% of the oil and gas it produced last year, using a reserves-accounting method favored by the Securities and Exchange Commission. Using a different accounting method that Exxon says is more representative of its business, the company said it replaced 101% of its production last year.
Either way, Exxon was less successful in 2007 than in prior years in finding new fossil fuel. Exxon said its 101% reserve-replacement number in 2007 was the company's lowest in 14 years.
[snip]...more...
The lackluster reserve-replacement numbers are a symptom of the difficult operating environment Western oil companies face. Much of the remaining oil, Exxon Mobil Senior Vice President Mark Albers said this week, is "found in complex geologic formations, in remote locations and under harsh conditions."
What's more, rising resource nationalism is making Exxon's job more difficult. A big part of the reason Exxon had such a low reserve-replacement number was Venezuela's appropriation of Exxon assets there. Excluding the Venezuelan appropriations, and also excluding the smaller effect of property sales, Exxon said its reserve-replacement ratio in 2007 was 132%. [emphasis added]
A short treatise on oil and gas reserves follows...
"Reserve Replacement" is one of the most significant metrics in determining the health of an oil and gas firm. If a company consistently fails to find enough new reserves to replace the production that comes out of its wells each year, it is essentially holding a "going out of business sale" with each barrel that comes out of the ground.
"Proved Reserves" are analogous to inventory for a retail or manufacturing firm, but with several crucial differences. If you have a warehouse full of widgets, for example, you can count them to a high degree of precision. But with oil and gas, quantities in the ground, even in discovered, developed and producing reservoirs, are subject to so many geological and engineering estimates that often the reported quantity is a glorified SWAG.
To compound matters, "Proved Reserves" are those quantities under a company's ownership and control, net of royalty payments due the owner of the minerals (either a private party or a sovereign nation). In the United States, under the rule of law, that's rarely an issue. But foreign regimes can and do change the rules from time to time, which has the effect of reducing a company's reserves. Notable recent examples are Russia (Shell) and Venezuela (Exxon Mobil and others), but even friendly Canada has unilaterally increased its contractual share of production.
The engineering definition of Proved Reserves calls for a "high degree of certainty" (say, 90%) that the quantity can be produced under "existing economic conditions" - commodity prices, capital and operating costs. Normally, when commodity prices go up, so do reserves, as more marginal fields can continue to produce. For some large producers, the opposite has happened; high commodity prices have triggered economic caps in their foreign contracts, thereby increasing the take of the foreign regime at the expense of the company.
Notwithstanding the dour faces of the MSM talking heads when they report quarterly profit numbers, a healthy and robust oil industry is not a bad thing for the consumer. Big companies like Exxon do not "rat-hole" their profits, or stuff them under a mattress; this year's profits finance next year's drilling. When more capital flows into oil and gas, more wells get drilled, reserves and inventories increase, and the price of the finished product ultimately falls. Leasing, regulatory, environmental and tax policy should encourage, not discourage, capital to flow into the oil and gas sector.
good grief, I heard nothing but oxymorons from her lips, she is passionate about saving the planet and turning the green movement into a market opportunity. LOL
Too bad restricting oil drilling offshore and in Alaska is a bipartisan effort that is part of the current majority. Global Warming is a RNC talking point from their 2004 platform, $120/ barrel oil must be around the corner- can't wait to save the planet when I start riding a bicycle to work for 10 miles each way;)
National oil companies are notoriously poor oil producers. A lot of the money generated is used to fund government, and not to find more oil or increase investment in infrastructure as they do in private oil companies.
Venezuela is going to implode at some point down the line. Chavez's socialist policies have led to a brain drain in that country, and most of the top petro-engineers have left. The chief reason PDVSA is able to pump that heavy sour crude is largely because American and British oil companies consulted with the Venezuelans on the drilling. This, of course, was pre-Chavez. Their oil production is declining year after year, and with most of the revenues used to fund social welfare programs and thus not investment in their oil & gas industry, they aren't going to be able to sustain their production.
I don't really know where the current state of the industry leaves firms like Exxon. Our government stupidly shuts ourselves off from our own oil reserves. With all the oil nationalization going on, I don't really know where private oil companies go find new fields. Central Asia/Caucuses? Deep-water gulf? Africa?
“.....women and minorities hardest hit”