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Financial Analysis of Exxon Mobil

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Financial Analysis of Exxon Mobil - February 8th, 2011

The Exxon Mobil Corporation, or ExxonMobil, is an American multinational oil and gas corporation. It is a direct descendant of John D. Rockefeller's Standard Oil company,[3] and was formed on November 30, 1999, by the merger of Exxon and Mobil. Its headquarters are in Irving, Texas.
ExxonMobil is one of the largest publicly traded companies in the world, having been ranked either #1 or #2 for the past 5 years. However they are currently 4th according to Forbes Global 2000. Exxon Mobil's reserves were 72 billion oil-equivalent barrels at the end of 2007 and, at then (2007) rates of production, are expected to last over 14 years.[4] With 37 oil refineries in 21 countries constituting a combined daily refining capacity of 6.3 million barrels, Exxon Mobil is the largest refiner in the world,[5][6] a title that was also associated with Standard Oil since its incorporation in 1870.[7]
ExxonMobil is the largest of the six oil supermajors[8] with daily production of 3.921 million BOE (barrels of oil equivalent). In 2008, this was approximately 3% of world production, which is less than several of the largest state-owned petroleum companies.[9] When ranked by oil and gas reserves it is 14th in the world with less than 1% of the total.

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Despite these strengths, ExxonMobil remains at the mercy of market maker OPEC, an organization of petroleum-producing nations that controls global oil prices by holding about 40% of the world's crude oil supply.[6] And while oil & gas hold a monopoly over the world's supply of energy, alternative energies such as biofuels pose a long-term threat to the industry. Nevertheless, the company forecasts that global energy demand will grow by 35% through 2030 and that fossil fuels will continue to supply 80% of the that energy, led by economic progress in developing nations. [2]

Business and Financials

Third Quarter 2010 Summary

At the end of October 2010, Exxon Mobil reported earnings of $7,350 million, up 55% as compared to the third quarter in 2009. The rise was due larely to higher crude oil and natural gas realizations, improved refining margins, and solid chemical results. Revenue also increased 16% as compared to the previous year to $95,298 million, supporting this increase oil-equivalent production rose more than 20% from levels in the third quarter of 2009.[7] Also noteable was the fact the company puchased shares to reduce outstanding shares by $3 billion and dividends per share were $0.44, this was an increase of 5% from the previous year, which resulted in over $5 billion returned to shareholders.[7]

Second Quarter 2010 Summary

At the end of July 2010, Exxon Mobil reported that its net income nearly doubled from the same period in 2009 to $7.56 billion. Its revenue increased by 24% to $92.5 billion as compared to the second quarter of 2009.[8]

The company benefited from the fact that it has a small portion of business in the Gulf of Mexico, where deepwater exploration has been halted. The majority of its revenue came from oil and natural gas production in Africa, Asia, and the Middle East. Income additionally benefited from an increased demand for its oil refining and chemicals businesses.[8]

First Quarter 2010 Summary

At the end of April 2010, Exxon Mobil reported 1Q 2010 earnings of $6.3 billion, an increase of 38 percent as compared to the same period in 2009. Earnings were supported by higher crude oil realizations and strong chemical margins.[9] However, its downstream business earnings dropped $1.1 billion to $37 million, due primarily to lower refining margins. Lower demand also pushed petroleum product sales down by 290 kbd as compared to the first quarter of 2009, to 6,144 kbd. Even with such a drop in its downstream segment Exxon Mobil continues to invest in capitol and exploration at record levels, spending was $6.9 billion up 19 percent from last year.[9]

In January of 2010 Exxon and Shell signed a deal with the Iraqi government to develop the West Qurna Stage 1 field in southern Iraq. The deal was for twenty years during which the consortium would develop the 8.6 billion barrel field. The deal could be extended for an additional five years.[10]

Fourth Quarter 2009 Summary

Earnings for the fourth quarter of 2009 were $6.1 billion down $1.8 billion as compared to the fourth quarter in 2008.This was due primarily to reductions in the downstream segment.[11]

Full year 2009 earnings were $19.3 billion, which was down $25.9 billion as compared to the full year of 2008. The decrease in earnings were due to lower commodity prices, weaker margin and lower demand from the weak economy. Earnings included a charge of $140 million related to Valdez litigation.[11]

Third Quarter 2009 Summary

Revenue for the third quarter of 2009 was $82.3 billion and earnings were $4.7 billion, down 65% as compared to the same period in 2008. Earning were negatively impacted by weak margins and lower commodity prices. During the quarter two liquefied natural gas facilities commenced production with annual production of 7.8 million tons each and are two of the largest LNG facilities in the world. Additionally, ExxonMobil formed an alliance with Synthetic Genomics Inc. to develop biofuels from algae. If milestones are met ExxonMobil expects to spend more than $600 million under the program.[12]

Second Quarter 2009 Summary

Total revenue for the second quarter of 2009 was down 47% to $74.5 billion and earnings were down 66% to $3.95 billion as compared to the same period in 2008. The drop in earnings were primarily due to reduced demand, volatility of commodity prices and charges related to Valdez litigation.[13]

First Quarter 2009 Summary

With oil prices half what they were in 1Q08, quarterly income fell 58% YOY. Higher margins in the company’s downstream segment boosted earnings by $700 million, but was not enough to counteract the loss of $4.4 billion from lower crude oil prices and $500 million from lower natural gas prices in its upstream segment, and $300 million from lower margins and volume in the company’s chemicals segment. Further, increased CapEx increased expenses by about $300 million. [14]

2009 Proved Reserves by Location & Type[5]
United States Canada/South America Europe Africa Asia Pacific/Middle East Russia/Caspian
Crude Oil and Natural Gas Liquids 1,972 172 517 1,907 2,894 1,443
Natural Gas 11,802 1,368 16,173 920 35,589 2,155
Exxon Mobil Earnings & Production[5]
Fiscal Year Upstream
Earnings Downstream
Earnings Chemicals Earnings Earnings Net Liquids Production
(thousands of bpd) Natural Gas Production
(millions of cubic feet daily) Refinery Throughput
(thousands of bpd) Chemical Sales
(thousands of metric tons)
2007 $26,497M $9,573M $4,563M $40,610M 2,616 9,384 5,517 27,480
2008 $35,402M $8,151M $2,957M $45,220M 2,405 9,095 5,416 24,982
2009 $17,107M $1,781M $2,209M $19,280M 2,387 9,273 5,350 24,825
2009 Earnings Breakdown by Segment & Location (Million)[5]
Total Earnings Upstream Downstream Chemical Corporate & Financing Total
U.S. $ 2,893 $(153) $769 $3,509
Non-U.S. $14,214 $1,934 $ 1,540 $16,688
Total $17,107 $1,781 $2,309 $(1,917) $19,280
Upstream (88.1% of 2009 earnings): ExxonMobil’s upstream segment is involved in the exploration & production (E&P) of oil and natural gas, and earned $17 billion in 2009.[2] The majority of its reserves are in the U.S. and Russia and Caspian Sea region, with 28% of the company’s total reserves each.[15]

Downstream (9.3% of 2009 earnings): ExxonMobil’s downstream segment is involved in the refining and marketing of oil and natural gas, and earned $1.8 billion in 2009.[2] The company had a refining capacity of 6.3 million BPD, which it uses to turn crude oil into gasoline. Its fuel products are sold in more than 28,000 retail sites. Petroleum product sales were 6.4MBD in 2009.[2] The company also produces diesel oil, jet fuel, and heating oil.

Chemicals (11.9% of 2009 earnings): ExxonMobil’s chemicals segment uses oil to manufacture and market commodity petrochemicals, like plastics, and earned $2.3 billion in 2009.[2]

Exxon Strengthens it Presence in Shale with Acquisition of XTO Energy
On December 14, 2009 Exxon announced a deal to acquire XTO Energy through an all-stock transaction valuing XTO at $41 billion. It is the largest U.S. petroleum takeover since 2006 and highlights Exxon’s continual move into shale based oil and natural gas. XTO has a strong hold in shale plays in America, including the Marcellus, the Haynesville and the Bakken basins. The acquisition will boost the company’s resource base by 10%, leveraging the fact that XTO is one of the nation's largest independent oil and gas producers.[16] XTO Energy’s current unconventional resource base consists of 45 trillion cubic feet of gas.[17]

The acquisition was completed at the end of the second quarter of 2010. To finance the acquisition, Exxon issued 0.7098 shares for each common share of XTO. XTO will retain its identity and its head office in Fort Worth, Texas.[17]

XTO is among companies that have driven a surge in U.S. fuel output by exploiting so-called shale plays, where rock formations are fractured with water and sand to make gas flow.[16] This may begin a wave of acquisition as major producers look to exploit resources from shale formations. Other players such as Anadarko Petroleum Corp., Ultra Petroleum and Chesapeake Energy Corp. are among companies that have demonstrated the ability to exploit shale and may be prime candidates for acquisition. This demonstrates that oil companies are trying to boost production through takeovers. Declines in gas prices have changed the overall landscape ,favoring acquisitions over joint ventures, due to lower company values.[18]

The acquisition compliments Exxon’s presence in other shale areas such as the Piceance Basin in Colorado. The company has been producing natural gas from the basin for more than 50 years and in June 2009 completed new facilities with the capacity to handle 200 million cubic feet per day of natural gas. The Piceance Basin has an estimated 1.525 trillion barrels of in-place oil shale resources.[19]

U.S. Concerns over Fracing May Affect Natural Gas Extraction Methods
The U.S. congress is currently examining the possibility of banning "fracing". The method is widely used to collect natural gas, especially from the Marcellus Shale which is estimated to contain 500 trillion cubic feet of natural gas. The method has come under fire, because it is thought that the chemicals and fluids used to fracture the shale contaminate nearby water supplies. This contamination has led congress to investigate a ban on the method [20].

This is a key method through which natural gas companies are collecting gas and oil from shale reserves. The impact of regulations against the method was highlighted by the fact that Exxon-Mobil's takeover of XTO, would have been terminated if congress were to prohibit or make "fracing" commercially unviable[21].

Since 2003, under a voluntary agreement with EPA, companies have not used diesel fuel as a carrier fluid during fracing, however companies have been found to possibly be in violation of this agreement. During 2005-07 Halliburton reported using more than 870,000 gal of seven diesel-based fluids, while BJ Services Company stated it used 2,500 gal of diesel-based fluids in several frac jobs. The two companies also indicated that they used chemicals such as benzene, toluene, ethylbenzene, and xylene, which could pose environmental risks in their fracing fluids. These companies and others have come under close scrutiny over possible violations of the 2003 agreement and how they are currently disposing of chemicals used during extractions. On February 18, 2010 the Energy and Environment Subcommittee Chairman Edward J. Markey sent letters to eight oil field service companies requesting information about chemicals used in hydraulic fracturing fluids.[22]

Working in shale increasingly involves working with the U.S. government. Over 70% of American oil shale is on federal land, primarily in Colorado, Utah and Wyoming. The National Environmental Policy Act (NEPA) requires that exploration and production on federal lands be thoroughly analyzed for environmental impacts and is tightly regulated by federal or state organizations. In October 2009 the Department of the Interior stated it would offer additional opportunities for energy companies to conduct oil shale research, development and demonstration (RD&D) projects on public lands.[23] This signals that the government understands the value of shale deposits, but also that they must be handled carefully. The results of continued research on shale projects and the success of current methods to safely extract hydrocarbons will have a dramatic effect on Exxon’s investments in these areas.

In March 2010, the Pennsylvania state House Majority Policy Committee held hearings regarding a five-year moratorium on additional leasing of state forest land for drilling in the Marcellus Shale.[24] The moratorium, which was voted out of committee in March, has the potential of effecting the nearly 700,000 acres of state forest land that is leased for drilling, as well as the ability of companies operating in the region to expand their operations in the Marcellus Shale region.[25] Although the fate of the moratorium has yet to be determined, its proposal is capable of impacting how companies operate and plan their future strategy for their operations in the Marcellus shale.[26]

Exxon is Making Large Investments, Despite Falling Profits
Despite the falling price of oil, the company intends to increase its capital expenditures (investment spending) by 11% in 2009, to $29 billion, and will spend up to $150 billion over the next 5 years.[27] In the first quarter of 2009 alone, when earnings fell 58% YOY, the company increased CapEx by 5%, to $5.8 billion.[14]

In the beginning of January 2010, Exxon announced it was looking to sign a $1 billion contract with Transocean to build and rent a rig that is capable of drilling in the Arctic. The price represents a daily rate close to the record high that Transocean signed in mid-2008 when oil was near its peak.[28]

Large Expansion into Natural Gas to Further Diversify Revenues
In an effort to explore new opportunities ExxonMobil has begun to place more and more investments in natural gas. As of August 2009 the company was nearing completion of a $30 billion project to develop the world's largest natural gas field, deemed the North Field. The field is located in the Persian Gulf state of Qatar. It is expected to boost the company's gas production 12% to 9.9 billion cubic feet per day, making ExxonMobil the world's largest natural gas producer. It will also boost total oil and gas output to an equivalent of 4.3 million barrels a day. The North Field is expected to contain 900 trillion feet of natural gas.[29]

Comparison of Carbon Emissions[29]
ExxonMobil has increased its investments in natural gas because it has lower carbon emissions than coal and petroleum and because of its plentiful deposits. This particular opportunity is appealing because of its proximity to the port of Ras Laffan. The port is a large industrial zone for natural gas with 145,000 workers devoted to production of natural gas.[29]

In addition to the benefits of natural gas the field has an abundance of propane and butane. These are expected to supply 300,000 barrels per day and will generate $5.8 billion a year, at current prices. These molecules will also be much cheaper than natural gas to move ~$350 million a year as compared to $3.3 billion a year for natural gas.[29]

To further expand its portfolio in natural gas, in September of 2009 ExxonMobil agreed to a joint venture with Royal Dutch Shell and Chevron to construct a liquefied natural gas facility on Barrow Island off the coast of Australia. Chevron will own 50% of the facility while Shell and Exxon will each have 25%. The facility will almost double Australia's liquefied natural gas output with an annual capacity of 15 million tonnes per year.[30]

Shell has already signed a 20 year deal with PetroChina to buy two million tonnes per year of LNG directly from the facility.[30] While Chevron already has interest in the facility from suppliers in Japan and Korea. It has already agreed to supply 3 million tons per year of LNG to Osaka Gas, Tokyo Gas and GS Caltex from Korea. Additionally Chevron has finalized a 15 year deal with Kora Gas to provide 1.5 million tons per year.[31]

With the deposits of natural gas ExxonMobil expects to keep consumer demand steady through plentiful supply and low prices. It will also leverage the ability to restrict supply to increase prices or rely on the additional revenue from propane and butane deposits if needed.[29]

Exxon Likes Buybacks
ExxonMobil spent $29 billion of its cash flow on repurchases in 2006, $28 billion in 2007,[32] and $32 billion in 2008,[33] which when added to past purchases puts it's treasury stock at almost $150 billion.[34] Buybacks have two purposes:

Reducing the number of shares in circulation improves per share ratios, like earnings per share (EPS). Executive Compensation is often tied to measures like that.
When a firm believes that it is unable to return more value to its investors in the form of additional spending for things like E&P over what its shareholders could earn by themselves.
The second is true for ExxonMobil, as it hasn't given out stock options since 2001.[35] At the same time, buybacks are preferable over dividends because they can be used with more flexibility. Once the level of dividend payouts have increased, investors expect similar or higher payouts in the future. At the other end, buybacks are regarded as one-time actions, so if cash flows are weak the company doesn't have to sacrifice retained earnings to maintain expectations. Further, dividend earnings are taxed twice, while buybacks are only taxed once.[35] Nevertheless, it's true that money spent on buybacks is money unavailable for investment spending, like for boosting production or researching alternative energy. Short term or not, the buybacks are considered a factor in buoying the company's share price during oil's collapse in Q408.[36]

Trends and Forces

Oil Majors Develop Response System for Deepwater Oil Spills
In an effort to respond to criticism from members of Congress and to reassure the public after the Deepwater Horizon rig disaster, some of the oil majors have come together to prepare for deepwater oil spills.[37] In July 2010 ExxonMobil, Chevron Corporation (CVX), CONOCOPHILLIPS (COP) and Royal Dutch Shell (RDS'A) agreed to pool $1 billion to establish a new company, which would be tasked to respond to offshore oil spills at up to 10,000 feet underwater. The company would deploy equipment that could arrive within days and be operational in weeks of a spill.[37]

The company would be a nonprofit organization called the Marine Well Containment Company and would operate the response system that would be used for any spills.[37] The response system would use underwater equipment designed to seal busted wells and have the ability to separate oil from gas and bring it to the surface where the gas would be burned off and oil would be stored in containers. The equipment should be useful in depths up to 10,000 feet.[37]

The establishment of the company is an effort for the oil majors to demonstrate that plans are in place to minimize any potential damage of deepwater drilling. All four companies rely significantly on offshore drilling, while Shell and Chevron have significant operations in the Gulf of Mexico. All companies will participate, however ExxonMobil will lead the effort.[37]

Fears of oil leaks like the BP (BP) oil spill and the six month moratorium on offshore drilling in the Gulf of Mexico
On April 20, 2010, an explosion and fire aboard Transocean's Deepwater Horizon drilling rig off the coast of Louisiana ruptured an oil well, causing the worst oil spill in U.S. history. The rig was operated by BP (BP). In light of this, the U.S. government conducted an environmental and economic analysis of the offshore drilling industry in the Gulf of Mexico. President Barack Obama ordered a six-month moratorium on drilling in waters 500 feet and deeper while a government commission investigated the disaster.[38] The six-month moratorium on exploratory offshore drilling closed 33 deep water drilling platforms and the Louisiana Economic Development department estimated that 3,000 to 6,000 jobs could be lost in the first three weeks and over 10,000 within the six months.[38]

Then in October 2010, the Obama administration lifted its moratorium on deepwater oil and gas drilling in the Gulf of Mexico.[39] Although the costs to oil drillers have been less than predicted, oil drillers have the potential of facing higher levels of regulation concerning deepwater drilling in the Gulf.[40]

Oil Prices
ExxonMobil’s E&P revenues depend on how much oil it produces, and for how much it can sell it. At the same time, ExxonMobil’s refining and chemicals improve their bottom-line when the price of their greatest input, oil, goes down. As a whole, ExxonMobil benefits when oil prices increase, as it makes more from E&P than it does from refining and chemicals, and a drop off in oil prices is often caused by a slowdown in economic growth, which causes demand destruction for all of its products. Factors affecting demand include:

Economic growth, especially in underdeveloped economies like China
Economic contractions, like the global recession that began in 2008
Development of oil-substitutes, like electric cars and ethanol, which is itself driven by high oil prices
Factors effecting supply include:

Production cuts, like those made by OPEC to buoy falling oil prices
Peak oil, which means that oil production has reached a plateau or is declining
Technological developments, which can increase the amount of economically recoverable oil
Light sweet crude oil futures (US$/barrel) with an August, 2009 delivery date:

Projected Price of Oil[41]
2009 2010 Inflation Adjusted
Price of Imported Q2 Q3 Q4 Q1 Q2 Q3 Q4 2011 2012 2013 2015 2017 2020 2025 2030
Crude Oil ($ per barrel) 52.67 56.00 59.00 60.67 62.33 63.67 65.00 85.58 94.84 99.75 108.52 110.73 112.05 115.33 124.60
Demand Growth Forces Prices Up
Demand for oil, as well as demand for energy in general, is closely tied to the global economic cycle. In periods of economic growth, new factories consume energy, shipping companies transport more goods and consumers take more trips. Burgeoning underdeveloped economies like China are expected to make the Asia Pacific natural gas market grow faster than any other regional gas market in the world. China's demand for oil is lower than other countries' at 2 barrels per person per year (bpy)—America’s is 25 bpy and Japan’s 16 bpy.[42]

World Energy Consumption (Forecasts by EIA)[43]
1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030
Quadrillion Btu 283.7 308.6 347.4 365.0 397.8 462.2 512.5 563.0 608.4 651.8 694.7
The long-term trend is clear – energy consumption is going to increase. However, these projections were made in June of 2008; a slight downward revision is likely in the next release in May of 2009.

Demand Destruction
Demand for oil, as well as demand for energy in general, is closely tied to the global economic cycle. During periods of economic contraction such as recessions, demand for oil and other types of energy tends to fall, leading to reductions in price. Demand destruction - primarily in the United States - is likely responsible for most of the drop in oil prices that occurred during the third quarter of 2008.[44]

In 2008 world oil consumption of liquid fuels was 85.75 million barrels per day (bbl/d),[45] 3% less than forecasts made by the International Energy Agency at the end of 07.[46] World oil consumption was forecasted in April of 2009 by the EIA to fall 1.35 million bbl/d in 2009.[47]

Much of this demand destruction is likely rooted in the 2007 Credit Crunch, the 2008 Financial Crisis, and the resulting recession; when unemployment rises, people stop spending and start saving. When people stop spending, companies stop producing. When companies stop producing, demand for energy falls. When demand for energy falls, the price of oil falls. Hence, it is likely that oil prices will remain lower than before until the world economy recovers from its recession.

Production Cuts
The global oil supply is dependent on the ability of oil companies to produce and the willingness of oil-exporting countries to export. Historically, periods of oil price spikes have been caused by oil-exporting countries placing embargoes on certain countries. In 1973, for example, the world's largest oil cartel, OPEC, placed an embargo on oil exports to the Netherlands and the United States, in response to the countries' support of Israel in the Yom Kippur War; the price of oil acquired by refiners increased by approximately 100%, and the U.S. experienced widespread shortages.[48] In 2007, however, despite a 57% increase in prices, the amount of oil exported by the world's top exporters fell 2.5%. Demand for oil in the world's six largest exporters (Saudi Arabia, United Arab Emirates, Iran, Kuwait, Iraq and Qatar) increased by more than 300,000 barrels, while their exports fell by over half a million barrels.[49] In this case, growing demand in each company acted as a natural embargo, forcing them to meet their own needs before exporting to the rest of the world.

The Financial Crisis of 2008 has laid waste to oil prices, by causing a recession so deep even expectations of large supply cuts can't force prices up. In December 2008, OPEC announced a production cut of 2.2 million barrels - it's largest ever - and oil futures actually fell, as traders ignored decreasing supply and focused on decreasing demand.[50]

Peak Oil – Falling Production
Peak oil refers to the "peak" on the graph of global oil production. Oil must first be discovered, then produced, and will eventually be depleted. Oil production has already peaked in the USA and more than 50 other oil producing countries.[51] Once the halfway point "peak" has been passed, production begins to fall and oil prices will rise. This is not good for Exxon. Although oil prices will rise, production costs will also rise, as traditional oil producing basins dry and reliance on expensive deepwater reserves increases. Production will also likely fall for Exxon, just like with any other oil company. Worse, as demand further outstrips supply and oil prices skyrocket, alternative energies will become increasingly competitive.

Production Costs
ExxonMobil’s bottom line depends on how much it costs to produce the oil that it eventually refines and/or sells. About 30% of its oil came from expensive, nonconventional reserves in 2008. As its traditional oil-basins mature, that percent is expected by the company to rise to 40% by 2013.[52]

Nonconventional Reserves
Nonconventional reserves include arctic and deepwater reserves, heavy oil, tight gas, and liquefied natural gas.[52] Even in the low price environment of 2008 and 2009, producing from nonconventional reserves makes sense for ExxonMobil, as does increasing its CapEx. For new projects it can take up to 10 years for actual production to begin, meaning that the future price of oil determines profitability, not the current price. Also, ExxonMobil is locked into many long-term contracts with rig operators, under which terms it costs almost as much to idle as it does to produce. [53] However, if ExxonMobil spends billions on setting up new production and oil prices do not rise as expected, the company’s margins will shrink.

Deepwater Oil E&P
ExxonMobil expects that by 2010, deepwater oil and gas will account for more than 20% of its total production.[54] New deepwater production costs $95 a barrel or more.[55] The higher cost of production comes predominantly from the $20-50 million plus that must be spent on drilling and setting up a new well.[56]

Oil Sands
One-third to half of the world’s petroleum reserves may rest in the form of oil sands.[57] ExxonMobil’s leases in the Kearl oil sands, located in Alberta, Canada, have proven reserves of 1,137 million barrels,[58] which represents 15% of the company’s total oil reserves[59], but will, with the development of better extraction and refining technology, double or triple into reserves of two to four billion barrels.[60] The leases are part of a joint venture with Imperial Oil Limited. Imperial holds 71% of the interest and ExxonMobil Canad Properties holds the other 29%. Notably, ExxonMobil Corporation holds a 70% interest in Imperial Oil and 100 percent of ExxonMobil Properties. In addition to a strong position in the Kearl oil sands, the majority ownership enables Exxon to leverage the fact that Imperial has 140 years worth of proven oil and natural gas preserves without additional drilling.[61]

However, oil from sand deposits is very thick, and must be highly processed before it can flow and be distributed for use. These nonconventional reserves cost, on average, $35/barrel to pump and convert into synthetic fuel, as compared to $3 a barrel in Saudi Arabia and release three times as much CO2 as during conventional production.[62][63] That means that the implementation of a carbon tax or carbon trading scheme would make oil sands production even more expensive. More troubling for the company, the cost of new production can exceed $75 a barrel, as production in easy to reach places has already been set up. At the same time, ExxonMobil has taken a long-term perspective on its CapEx. It expects oil prices to be higher in 2012, by which time production from its expanded program will begin. [60]

Global Presence: Blessing or Burden?
While ExxonMobil is less at risk than some of its US competitors from restrictive legislation because ExxonMobil is not focused only in the US, this global presence brings problems from foreign politics and exchange rate risk as well. About 60% of the world’s supply of oil comes from geopolitically unstable countries including Saudi Arabia and Venezuela.[64] High oil prices in 2007 and 2008 gave these oil exporting countries greater power to demand contract changes and tax raises, and greater incentives to nationalization private oil holdings, like Venezuela did of Exxon's holdings in 2007.[65] In 2009, with oil prices back to historical levels, many countries are providing more favorable contracts in hopes of attracting much needed development money.[66]

Note to socially responsible investors: The company's operations in politically unstable countries often force Exxon to hire mercenaries or request a country's soldiers to guard refineries and oil fields. The actions these mercenaries or soldiers take while working for Exxon sometimes come under fire by human rights groups, as in 2001 when Indonesian mercenaries allegedly kidnapped, tortured/abused, and killed separatists on the grounds of the company's natural gas plant in the Aceh province of the country. Exxon is being sued in U.S. federal court by public interest groups for its role in these human rights violations, and in June 2008 the Supreme Court rejected an appeal that will allow the case to go forward.
Exxon Mobil has a substantial presence in countries such as Nigeria and though it has substantial reserves, the company has dealt with considerable violence against its workers and facilities from militant groups. As an example, in November 2010, eight people were kidnapped off one of Exxon Mobil's offshore oil platforms in Nigeria. In response, LNG and condensate production of 45,000 bpd were shut down as a precautionary measure. Militants have damaged large portions of Nigeria's oil production averaging 2.2 million bpd and have cost it as much as $1 billion a month in lost revenues. Militants continue to promise operations that will affect all oil facilities in the Niger Delta.[67]
Exchange Rate Risk Looms Large
Whenever a company does business in multiple countries, it is subject to exchange rate risk - the risk that exchange rates will change in the future. For Exxon, cashflows going back to its headquarters in the U.S.A. need to be converted into dollars. In 2007, when the dollar was weak, more favorable exchange rates allowed the company to gain $1.8 billion.[68] In 2008, as the dollar strengthened against other currencies, the company lost $2.5 billion.[68] The company does not hedge away this risk because it feels that, on average, the net gain or loss will be small.

Venezuela and Nationalization of Exxon's Assets
In 2007, Hugo Chavez of Venezuela nationalized Exxon's holdings in the country.[65] The company has filed for international arbitration of the dispute, but the process will be costly and time-consuming.

On February 7th, 2008, a U.K. court ordered the freezing of $12 billion worth of assets currently owned by Petroleos de Venezuela SA, that were previously owned by Exxon.[69] This followed a similar, $12 billion freeze-order by a Netherlands court, as well as a $300 million freeze by a U.S. court.[70] Then, in late March, a British judge canceled the freeze order, setting Exxon's efforts back.[71]

On February 10th, Venezuelan President, Hugo Chavez, publicly stated that if Venezuelan assets were frozen and the Venezuelan business was harmed, he would freeze oil exports to the United States; given that Venezuela accounts for 12% of the United States' oil imports[72], this threat appears to have very sharp teeth - though the idea that Chavez would halt sales to his biggest customer is one that many analysts scoff at. In another retaliatory move, on February 13th, Petroleos de Venezuela SA cut off crude sales to Exxon, in an attempt to stop the oil giant from pushing its case in other courts; with so much of its business focused on exploration and production, however, and with an international crude purchasing arm that buys oil in 35 different varieties[73], no one expects any negative effects to Exxon from Chavez's embargo.

In early 2009 Venezuela invited tender offers to develop over 10 billion barrels of oil in a minority stake with a joint-venture with PDVSA. Exxon did not participate.[74]

Environmental Legislation
Fossil fuels, though highly cost-efficient forms of energy, are heavy polluters when burned. Increasing environmental concern over environmental degradation and global climate change is fueling a consumer-driven push away from dirty forms of energy toward cleaner forms like wind energy and solar power. These concerns are also causing political movements, which are leading to increased regulation in the fossil fuels market. Government regulations like emissions caps, renewable energy subsidies, and carbon trading schemes all facilitate transitions away from dirty, nonrenewable fuels.

Carbon Trading
An increasingly popular response to global warming is carbon trading. Markets have been implement in the EU and through the Kyoto Protocol, and may soon find a home in the U.S. How much do they cost Exxon? The average barrel of oil that passes through U.S. refineries produces about 100kg of CO2 emissions.[75] The cost of permits for polluting one ton of CO2 in Europe has ranged from €30/tonne to €0.03/tonne. [76]That translates into only $.004/barrel to $4/barrel. In a properly functioning carbon trading market (or tax equivalent) it’s estimated that the cost/tonne should hover around $20-$40 dollars, which is $2/barrel - $4/barrel.[77] Only a portion of that cost was and will be borne by Exxon, although the resulting higher price of oil does reduce demand (which translates into lower revenues). Taking the hypothetical case that Obama is able to push through Congress to create a carbon trading market in the U.S., Exxon’s largest market, the company would lose a couple billion dollars a year.[78]

Access to ANWR
The quantity of economically recoverable oil underneath the Arctic National Wildlife Refuge (ANWR) is estimated to be at around 10 billion barrels.[79] Concerns over the area’s wildlife has prevented competitor Shell from drilling in its ANWR blocks. Gaining control of even one-tenth of the area’s oil would boost Exxon’s oil reserves by 14%.[79][59]

The Future for Fossil Fuels Remains Bright
Alternative energy challenges like low production volume, low production efficiency, and lack of infrastructure (some new fuels require distribution infrastructure separate from existing oil pipelines) all have yet to be overcome. That in mind, Nature forecasts that fossil fuel use will increase 45% by 2030.[80] That’s more than enough to keep Exxon running.

Exxon’s Response to Renewable Energy
Exxon has traditionally focused on rising costs in the form of carbon trading or taxation, rather than in demand being stolen by renewable energy. However, in the middle of 2009 the company announced renewed investments in biofuels.

Prior investments included:

The investement of more than $100 million in Controlled Freeze Zone (CFZ) technology, which can make carbon capture and storage more affordable.[81] That would reduce the environmental impact of oil and gas.
The company has developed a lithium-ion battery for use in electric and hybrid cars[81]
Hedging against the development of a hydrogen economy, the company has developed an on-vehicle hydrogen generation system[81]
In July of 2009 Exxon announced a $600 million investment in producing biofuels from algae. The investment involves a partnership with a biotechnology company, Synthetic Genomics. $300 million will be used for in-house studies, while the additional $300 million will be allocated to Synthetic Genomics based off meeting research and development milestones.[82]

Large scale commercial plants to produce algae-based biofuels are reported to be at least 5 to 10 years away, but have the potential to yield more than 2,000 gallons of fuel per acre of production each year. In comparison: palm trees produce 650 gallons, sugar cane 450 gallons and corn yields just 250 gallons per acre a year.[82]

Natural Disasters
Natural disasters can significantly disrupt Exxon’s oil production operations. For instance, hurricane activity can damage and destroy refineries, oil rigs, pipelines, and other equipment. In 2005, production declined 15% and Exxon lost 33 MBOED (million barrels oil equivalent per day) of production due to the impact of Hurricanes Katrina and Rita on Gulf Coast oil production operations owned by the company.[83] In 2008, production declines and repair expenses attributed to the damage caused by Hurricanes Gustav and Ike lowered fourth quarter earnings by $570 million.[84]


Exxon Mobil is the biggest of the supermajors, the six largest public energy companies in the world - Royal Dutch Shell, Chevron, BP, Total S.A., and ConocoPhillips. Exxon's efficiency is attributable to several advantages over its competitors:

Production operations and reserves are large, diverse, and firmly established in the major petroleum basins (North America, Europe, West Africa, the Middle East, and Asia Pacific).
Exxon has one of the largest E&P portfolios, allowing the company to selectively choose investments and lower technical and political risks.
Technological advances increase efficiency and allow the development of resources such as tight gas, heavy oil, and liquified natural gas.
But unlike some of its foreign competitors, the American ExxonMobil is constrained by economic sanctions that ban it from doing business with some of the world's largest oil states, including Iran, estimated to have the second largest reserves of conventional crude oil in the world.

Another growing concern for public energy companies worldwide is the increasing competition coming from national oil companies like Saudi Aramco and NIOC of Iran.[85]

Comparison to Competitors - 2008
Oil and Gas Liquids
(Millions of barrels) 5,817[86][87] 3775[88] 7,576(2)[59] 7,350[89] 10,353[90] 15,715[91] 3,219[92] 5,695[93]
Natural Gas
(Billions of cubic feet) 24,948[94] 40,895[95] 31,402(2)[59] 23,075[89] 45,208[90] 27,921[96] 18,090[92] 26,218[93]
Oil and Gas Liquids
(Thousand b/d) 1,108[97] 1,695[88] 2,405[98] 1,649[99] 2,401[100] 1,954[101] 1,020[92] 1,456[102]
Natural Gas
(Million cf/d) 4,970[97] 8,595[95] 9,095[98] 5,125[99] 8,334[100] 1,586[103] 4,114[92] 4,837[102]
(1) Latest data is for 2007 (2) Does not include reserves of equity affiliates

Refining Industry 2008 Metrics
Refinery Capacity
(Million BPD) 0.91[105] 2.139[106] 2.99[107] 6.2[108] 3.678[109] 3.376[110] 0.238[111] 1.986[112] 2.678[113] 1.135[114][115] 0.544 2.604[116]
Number of Refineries (including partial interests) 5[117] 18[106] 16[118] 37[108] 40[119] 17[120] 4[121] 12[112] 17[113] 9[122] N/A 25[116]
Number of Retail Gas Stations (thousands) 7.8[123] 25[124][125] 5.8[118] 28.6[4] 45[126] 29[127] .2[128] 8.3[129] 22.6[130] 6.3[131] 6.4 (in Europe) 16.4[116]
(1) Latest data is for 2007

Global Oil Industry Operational Data

Company Reserves (MM boe) Current Years of Production Oil & Gas Production (1000s boe/d) 2006 Oil & Gas Production Growth (%) 2006
BP 17,368 10.4 3,926 -1.9
ChevronTexaco 11,020 10.9 2,667 6.1
ExxonMobil 21,518 11.3 4,238 3.8
Royal Dutch Shell 11,108 6.7 3,474 -1.0
Hess 1,243 7.9 358 7.0
BG Group 2,149 6.2 601 19.0
ConocoPhillips 6,676 8.7 2,359 29.7
ENI 6,406 11.2 1,770 5.8
Marathon 1,262 7.1 377 9.0
Norsk-Hydro 1,916 9.3 573 2.0
Petro-Canada 1,301 8.4 345 -3.1
Repsol YPF 2,600 5.2 1,128 -3.0
Petrobras 11,458 14.2 2,287 4.5
CNOOC 503 3.0 455 11.7
Gazprom 144,668 39.7 9,965 6.0
LUKOIL 18,144 27.2 1,838 4.5
PetroChina 16,260 15.6 2,907

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