Margins Mask Exxon's Production Woes
Excerpt:
Yet, the real story has nothing to do with refining margins but with Exxon's -- and the other majors' -- inability to advance the ball when it comes to production. On an oil-equivalent basis, Exxon's oil and gas production dropped about 2% in the quarter. Now, that doesn't seem like such a big deal. After all, 2% should be pretty easy to get back.
Wrong. Production at ExxonMobil declined because the company's opportunity set for drilling new oil and gas wells is challenged, possibly severely challenged. And it isn't likely to get any better.
With oil at $90 a barrel, every oil and gas company is looking at every prospect they have for ways to increase oil and gas production. As a result, production should be moving higher. Yet, nearly every major oil company is producing fewer -- not more -- hydrocarbons than they were a year ago.
Naturally, skeptics will argue it's a vast oil company conspiracy: intentionally reduce production so prices move higher and then produce more oil, capturing bigger profits. Although that argument makes little sense at any price, it makes absolutely no sense with a barrel of crude oil approaching the century mark.
The last thing Exxon and other majors want is to post lower profits in the wake of near-$100 oil. After all, it's hard to believe an oil company isn't a proverbial currency printing press at these prices. Yet, earnings are lower this quarter when compared with last year and a quarter ago.
Refining margins had an impact, no question. And, earnings will likely continue to feel pressure in the fourth quarter as signs of refining margin recovery are slow to materialize. However, a focus on production volumes -- at Exxon and other majors -- provide an important clue to the future of crude oil prices.
My recent trip to the Middle East made it very clear that future production challenges will only worsen. Whether you are Saudi Aramco or Exxon Mobil, the best prospects are gone. Future oil production will come from more difficult, more expensive and less prolific prospects.
More wells will reveal less oil, with each incremental well producing less oil than the last. Existing wells will show signs of accelerating decline, creating the need to drill more new wells just to keep production even. The production treadmill will move faster and faster.
That doesn't mean we will run out of oil. However, it does mean each new barrel of oil will take more effort and resources. That does suggest the end of cheap oil is here. While prices will continue to move quickly, $100 oil does seem like reality. |
