Peak Oil

Exxon Has an Oil Shortage

WSJ,

28 November, 2012

On a forested plain in Alberta next month, massive mechanical shovels will start scooping tons of oil-rich sands and loading them into three-story-tall dump trucks.

The trucks will haul the sands to the $11 billion Kearl oil-sands-processing facility, which will sift out the prized Canadian crude and provide Exxon Mobil Corp. XOM +0.02% with up to 170,000 barrels of oil a day for decades to come.

The world's largest publicly traded oil company by market capitalization is counting on Kearl and 20 other new projects to jump-start its slumping oil and gas output, which plummeted to three-year lows in its most recent quarter.

Exxon shares have gained 3.9% so far this year, though they are little changed from where they stood five years ago. The shares closed at $88.10 on Wednesday on the New York Stock Exchange.

Some analysts are skeptical the spate of projects—from Indonesia and Papua New Guinea to the deep waters off West Africa—will begin by 2014 as Exxon predicts and deliver the infusion of oil and gas it anticipates. Exxon estimates the projects could increase its daily oil production by up to 880,000 barrels, or about 22% of its current daily output.

"Delays are the rule, not the exception, in this industry," said Fadel Gheit, an analyst with Oppenheimer & Co.

Analysts with UBS expect Exxon's 2012 production to be down 5.7% for the year, compared with an expected 2.9% drop for Chevron Corp., CVX +0.20% a 2.7% decline for BP BP.LN 0.00% PLC and a 2.2% increase for Royal Dutch-Shell.

Increasing oil output has become daunting for energy companies such as Exxon, because big oil fields in easy to reach locations have gotten scarce, and government-controlled oil companies from countries such as Russia and China have become more aggressive, spending freely to outbid Western firms for the rights to the best projects.

There are other obstacles to production growth, including depletion of existing oil fields, which generally lose 5% to 7% of their output per year, according to analysts.

Lysle Brinker, director of energy-equity research for IHS-CERA, said Exxon has a good record for completing major projects close to budget and schedule. "They'd be the first to admit it doesn't always go smoothly, but Exxon has a better reputation than most for hitting its deadlines," Mr. Brinker said.

Exxon declined to discuss the start-up risks associated with specific projects. In discussions with analysts and investors, its executives have stressed they aren't looking to increase production overnight or at the expense of profitability, but bet on big projects that will provide significant profits for the long haul.

Exxon's annual spending on exploration and production projects has increased sharply: It now plans to spend around $37 billion per year through 2016, up from less than $20 billion in 2009.

Off the coast of Angola, Exxon is expecting additional production from an expansion of its Kizomba project, a series of deep-water oil wells that were among the first for that West African nation. With a 40% stake, Exxon will get 40,000 barrels per day of the targeted output.

In Indonesia, an offshore project known as Banyu Urip is expected to produce about 165,000 barrels per day by the end of 2014, with roughly 75,000 barrels for Exxon, a 45% owner.

In Papua New Guinea, meanwhile, a liquefied-natural-gas project is expected to export up to 940,000 cubic feet of gas—equivalent to 166,000 barrels of oil—to China and other Asian markets by 2014.

But the venture is proving more costly than anticipated: Exxon increased the price tag on the project by 21% to $19 billion this month, citing changes in foreign-exchange rates and delays from work stoppages.

The brunt of its projected production growth through 2014, 37%, comes from Canadian oil-sands projects such as Kearl, which has been in the works since 2009.

But the oil-sands projects are in remote locations that require many workers and billions of dollars in capital. They are also hamstrung in reaching customers outside of Canada due to limited pipeline capacity.

The 700,000-barrel-per-day Keystone XL pipeline, which will carry Canadian crude to Gulf coast refiners, is seen as one way around those limitations, but the project has faced stiff opposition from environmentalists.

Final approval of the project was delayed by President Barack Obama because of environmental concerns, but with the election over he is expected by many observers to give final approval. That approval may come with additional environmental requirements, however, which could add costs to and slow development of future oil-sands pipelines.

Even if all of the new projects come to pass, they wouldn't make up for Exxon's possible exit from a burgeoning project in southern Iraq that was expected to produce up to 1.6 million barrels a day for the company by 2016.

Iraqi officials said Exxon recently notified them that it plans to sell its 60% operating stake in the West Qurna project to another firm. The Iraqi government has said Exxon must choose between operating in southern Iraq or in semiautonomous Kurdistan in the north, where Exxon last year signed an agreement to explore for oil in defiance of Baghdad. Exxon has declined to comment on its plans in southern Iraq.

Still, despite the company's challenges, some analysts are loath to bet against Exxon. They estimate that investments such as the Kearl project, and the company's recent $1.6 billion purchase of Denbury Resources Inc.'s DNR +0.46% holdings in the Bakken Shale oil field in and around North Dakota, will help the company rebound.

Next year "should look better," for Exxon, said Raymond James & Assoc. analyst Pavel Molchanov, who expects the company's output will grow 3%.