The performance and strategy of Exxon Mobil Corp. is a good place to start in grasping the twilight years of the investor-owned oil sector that has dominated the extraction of petroleum resources since the industry began in the 1850s.
Putting aside the Valdez debacle of 1989, Exxon has been the best-managed of the oil majors.
Exxon is the world?s largest investor-owned oil firm, and produces more oil than any OPEC nation apart from Saudi Arabia and Iran. On staggering 2007 revenues of $404 billion (U.S.), Exxon posted earnings of $40.6 billion, the biggest annual profit in the history of capitalism. The market capitalization of Exxon, which began life as John D. Rockefeller's Standard Oil of New Jersey, has more than doubled over the past five years, to half a trillion dollars.
Thus ends the good news.
Exxon's production dropped 2.4 per cent last year, a fate shared with its biggest investor-owned peers. (Shell's production slumped 4 per cent.) On the exploration side, Exxon failed to replace 24 per cent of its production with new reserves, its worst "reserve ratio" showing in three years. With reserves increasingly difficult to find, drawing Exxon and its rivals into more costly, remote and politically volatile regions, Exxon has seen its failure rate of exploratory wells searching for commercially viable pools of oil or natural gas rise to 46 per cent, up from 36 per cent in 2006.
Exxon's production cost per barrel soared 18 per cent last year, following a 13 per cent rise the year before. The company in March committed to a 20 per cent increase in spending on exploration and refinery upgrades, to more than $25 billion, or an industry record of $68 million per day. But that hike will do little more than cover the spiralling cost of everything from drilling rigs to engineers.
At a March 5 conference with analysts in New York, Exxon unveiled an impressive number of new exploration and production projects, a dozen of which are set to begin this year alone. Exxon hopes to bring new fields into production in the Middle East, Africa and Russia by 2012; recently brought a large offshore Angola field into production; and is adding to its network of enormous liquefied natural gas (LNG) operations in Qatar.
But Exxon will be fortunate if its new projects make up for declining production at its aging fields in the North Sea and Alaska.
Last year, Exxon spent more money buying back its stock ? $36 billion ? than on reinvesting in the business. Since replacing his similarly unsentimental predecessor, Lee Raymond, in January of last year, Tillerson, 55, has raised capital spending just 18 per cent against a 75 per cent jump in expenditures on share buybacks.
That gambit increases earnings per share, but obviously doesn't add a drop of oil or gas to the firm's reserves in order to sustain the business. Yet Shell and Chevron Corp. also are furiously buying back their stock, at a rate that will see Exxon and Chevron retire all of their stock by about 2024. It comes down to this: buying back the company's stock is a far more certain bet on increasing investor returns than operating a new deep-water drilling program.
In the past, consolidation has been the industry?s response to declining reserves. Companies simply bought oil on the stock market rather than drilling for it, which accounted for the late-1990s merger wave that brought Amoco and Arco into the BP fold, the merger of Exxon with Mobil Corp., the amalgamation of French giants Total and Elf, and the creation of ConocoPhillips Co., among other combinations.
But mergers don't add to global oil supply. The merger rationale was that firms with a more substantial "critical mass" could better afford to undertake ever costlier megaprojects. That notion went out the window when the likes of Exxon Mobil learned that even the world's largest corporation can be stripped of its assets by the likes of Hugo Chavez. Indeed, all of the "super majors" created in the last merger wave have been forced to surrender production under contracts with producing nations by which those nations gain a larger share of output as crude prices increase.
Which suggests that the petroleum industry of the future will belong to the state-owned enterprises. After working in some cases for decades with the investor-owned giants, state oil firms have accumulated enough of the required technology to forsake joint ventures and go it alone. They have every incentive to do so in those many oil-producing nations in which oil and gas are the sole, or largest, source of export revenue, no longer to be shared with investors in companies based in London and Houston.
It's beginning to look like the investor-owned sector's long-term plan is to phase itself out of business, becoming a glorified annuity that returns outsized dividends to a dwindling number of investors from a dwindling reserve base. As early as 2001, oil analyst Charles Maxwell of Weeden & Co. of Greenwich, Conn., told Bloomberg News, the investor-owned oil majors will no longer be able to increase their production.
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