Exxon Mobil Corp.'s annual operations review, which dropped on Wednesday morning, could have been subtitled "Thank God for the Permian."
It formed a coda to the shale-centric strategy laid out by new CEO Darren Woods three weeks ago. In the review, Exxon lays out its queue of major projects scheduled to start up in the next few years and beyond. It is a long list. But it makes the case for a swing back into West Texas far better than any slide deck.
The first thing to note is that Exxon, or its partners, mostly delivered on the lineup for 2016. Major projects such as Gorgon Jansz (operated by Chevron Corp.) in Australia and the much-delayed first phase of Kashagan in Kazakhstan came onstream. Only Barzan, a natural gas project in Qatar, slipped.
Barzan joins a lineup of projects slated for 2017 and 2018 that is, apart from that one addition, essentially the same lineup previously slated to be up and running by the end of this year. Projects such as Hebron in Canada and the expansion of the Upper Zakum oil field in the United Arab Emirates were mentioned specifically in Woods' investment budget for 2017. The shift in timing in the annual review implies potential slippage for some of these projects compared to what was laid out this time last year. Still, it is a relatively slight one.
The more telling list is the one of projects designated as "2019+". Line it up alongside last year's "2018+" list, and you would have to look closely to find the differences. On the plus side, there are a couple of important additions, such as the Liza discoveries offshore Guyana and the additional liquefied natural gas resources in Papua New Guinea that come with the recently completed acquisition of InterOil Corp.
Overall, though, this a long-term lineup that, absent a sustained increase in energy prices, would appear to put the emphasis on "long term":
More than half of the projected production of 3.1 million barrels of oil equivalent from those projects is LNG and oil sands. The market for the former is glutted through the rest of this decade, at least, so sanctioning of those projects looks unlikely anytime soon. Oil sands -- where several majors have been withdrawing or, in Exxon's case, taking a write-down on earlier investments -- look similarly like candidates for the bottom of the investment to-do list rather than the top.
Trouble spots such as Iraq and Nigeria don't look like candidates for start-ups happening sooner rather than later, either. Indeed, Ben van Beurden, CEO of Royal Dutch Shell Plc, which partners with Exxon on some projects and also operates in both countries, had this to say when asked about them on the company's last earnings call:
So that's why we have a lot of focus right now on where are what we call stuck barrels, or what we now started calling the strategic battlegrounds to get these barrels really recovered. So think of the complications that we have. Simon [Simon Henry, Shell's recently departed CFO] mentioned in Nigeria, huge potential, but how on earth do you make it commercially sensible to invest in them if you have so many funding difficulties? Same with Iraq, the same of many positions that we have in our portfolio, where potentially we see all this running room, but there are lots of practical or strategical challenges to overcome.
Now Exxon isn't Shell, obviously, but the point is that the lineup is dominated by resources that look likelier to be developed later rather than sooner.
This, along with sanctions-related uncertainty around Exxon's plans in Russia, explains why Exxon has been gobbling up acquisitions in U.S. shale. The Permian has huge potential resources, which can be brought on relatively quickly and on relatively stable home turf.
Equally, it offers some explanation as to why Exxon's guidance on overall output through the end of the decade is flat -- even though it says it can roughly quintuple its Permian production by 2025 to more than 750,000 barrels of oil equivalent per day.
If Exxon is truly to thrive under potentially lower-for-longer energy prices, then success in shale is paramount.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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