In my last couple of posts I looked at the difficulty of meeting ambitious targets for cutting greenhouse gas emissions (GHG) without help from the lower-emitting portions of our current energy mix. Last week ExxonMobil announced that it is pursuing a new pathway for capturing carbon from power plant exhaust. That could help revive another important strategy for large-scale emissions reduction from our existing energy sources.
Carbon capture and sequestration (CCS) has fallen out of favor, lately, mainly due to the high cost and technical challenges of the early prototypes for large-scale implementation of the technology. Not only are the initial investment costs of today's CCS hardware still very high, but it is also inherently expensive to operate. That's because of the high energy consumption of the process, resulting in a "parasitic" load on the host power plant that reduces its net output by up to 20%, making the remaining output much more expensive. That creates a large deterrent in any market that doesn't provide either direct subsidies for carbon removal, or a high carbon tax or price for traded emissions offsets.
Another reason that CCS has received less attention recently is that the costs of renewable energy technologies like wind and solar power have kept falling. To some they now look cheap enough, especially with further cost improvements extrapolated, to enable us to reach our emissions goals mainly through wider deployment of solar modules and wind turbines.
Even if that were technically feasible, like most other energy industry experts I have met I am convinced that the deep emissions cuts desired for mid-century will require implementing or retro-fitting CCS onto the fleet of coal and gas-fired power plants that will likely still be in service decades from now. CCS underpins several of the emissions stabilization wedges pioneered by Princeton engineering professor Rob Socolow and his colleagues ten years ago.
What makes the approach that ExxonMobil and FuelCell Energy, Inc. have described so attractive is that, instead of being a drain on power generation, capturing CO2 via fuel cells would actually add significantly to a facility's reliable power output. It would increase revenue, rather than curtailing it.
The clever bit, and its potential advantage over current carbon-capture technology, is that CO2 capture in a carbonate fuel cell occurs as a byproduct of the power generation step. That means that it doesn't require a big, expensive, power-hungry process unit, the only function of which is to strip CO2 from flue gas and concentrate it for subsequent shipment and storage.
These fuel cells would still require natural gas for fuel, and they would produce CO2 emissions in the process of generating electricity, though at a lower rate than the coal or gas-fired plant with which they would be partnered. However, both their direct emissions and the CO2 extracted from the power plant exhaust would come out in a highly purified form suitable for geological sequestration and stay out of the atmosphere.
That brings up an important advantage of this approach over various schemes to capture CO2 directly from the atmosphere. Although the article on the Exxon/Fuel Cell Energy development in MIT Technology Review described the CO2 concentration in power plant flue gas (5%-15%) as "low", that is still hundreds of times higher than its concentration in air.
400 parts per million of CO2 in the atmosphere may be worrying from a climate perspective, but it is still just 0.04% of air that remains mostly nitrogen and oxygen. And the lower the concentration, the harder--and normally more expensive--it is to extract. (Green plants can do this trick cheaply thanks to billions of years of evolution combined with cost-free sunlight.)
The press release makes it very clear that this new carbon-capture technology has so far only been demonstrated in the lab. Scaling it up will require additional work, and success is uncertain. Many other promising innovations, including a host of cellulosic biofuel technologies, have failed to scale. However, its potential applications are compelling enough to justify a lot of patience and persistence. I wish them luck.
Showing posts with label exxonmobil. Show all posts
Showing posts with label exxonmobil. Show all posts
Tuesday, May 10, 2016
Tuesday, April 22, 2014
ExxonMobil Confronts the Carbon Bubble
Companies and investors are squaring off over the potential impact of government climate policies on asset values, particularly in the fossil fuel industry.
ExxonMobil gave its shareholders data and assurances of asset resilience under various policies but dismissed the scenario of greatest interest to sustainability investors.
Unsurprisingly, ExxonMobil’s management reassured investors that, “none of our hydrocarbon reserves are now or will become ‘stranded’.” Wisely avoiding past tendencies to question interpretations of climate science, their analysis appears to be grounded in mainstream views of climate change. It focuses on the costs and achievability of an extreme low-carbon scenario, and on the resilience of the company’s portfolio under various climate policies.
Exxon's analysis is based on the company’s latest Outlook for Energy, an annual global forecast broadly similar to the main “New Policies” scenario of the International Energy Agency (IEA). It has fewer similarities to the IEA’s “450″ scenario that underpins carbon bubble claims. The company expects energy demand to grow at an average of about 1% annually over the next three decades–faster than population but much slower than the global economy–with increasing efficiency and a gradual shift toward lower-emission energy sources: Gas increases faster than oil and by more BTUs in total, while coal grows for a while longer but then shrinks back to current levels. Renewables grow fastest of all, producing about as much energy in 2040 as nuclear power does today. As a result of these shifts global greenhouse gas (GHG) emissions peak around 2030 and then decline gradually.
That forecast won’t impress those advocating prompt and aggressive changes in the global energy mix to head off serious climate change, but it is not very different from the most recent global forecast of the US government’s Energy Information Administration. If anything, Exxon expects slower growth of energy and emissions than the EIA.
Ultimately, ExxonMobil's argument that it isn’t running outsized carbon asset risks depends heavily on its estimate of the implicit costs of achieving a much deeper and more rapid transition to renewables, compared to its--and others’--forecasts. It gauges this on the intensity of governments’ future climate policies, expressed in terms of their effective cost per ton of CO2 abated, and on the affordability of such measures to energy consumers, especially in the developing world, where emissions are increasing rapidly.
Without directly disputing the technical feasibility of achieving such large and rapid emissions cuts, the company's management essentially questions whether any government would or could impose the extraordinary costs necessary for that to occur. Their proxy estimate of $200/ton of CO2 for such policies is sobering. Even if the sums that would raise were all efficiently recycled by those governments–a heroic assumption–the resulting diversion of investment and increase in energy costs would adversely affect overall economic development.
The sustainable investor groups that raised this issue with ExxonMobil were apparently disappointed with the answer they got. That's not surprising, but having participated in similar exercises at Texaco, Inc., I think ExxonMobil went well beyond the kind of perfunctory reply the investors might have expected. In particular, it has provided enough data to support a more serious dialog with investors on this subject.
For example, Exxon indicated that it “stress tests” its projects and acquisitions at proxy costs of up to $80/ton of CO2, compared to current levels of $8-10/ton in the EU’s Emission Trading System. Implicit in that is the question of whether investors would reasonably expect them to test projects at $200/ton., which would equate to around $100 per average barrel of oil--roughly today's price--based on the nifty “seriatim” chart at the end of the report.
The document also includes information addressing the resiliency of the company’s assets and operations under a lower-carbon future, with their emphasis on natural gas and a global average cost of production under $12 per oil-equivalent-barrel (BOE). Climate policies would have to raise those costs and shrink the associated revenues very significantly to jeopardize current production, nor are low oil prices generally consistent with a low-carbon world. Investments in future production are another matter, though Exxon refers to the IEA’s 450 scenario to demonstrate how much additional oil and gas development would still be required in the next 20 years, even in a world that was determined to constrain global temperature increases to no more than 2°C.
ExxonMobil’s response to investors will not end the debate over the carbon bubble. While providing a lot of information, the company essentially argued that the extreme low-carbon scenario associated with the risks of a carbon bubble is irrelevant, because it can’t be achieved any time soon, irrespective of the risks associated with current emissions levels. That is close to my own view, but it is unlikely to resonate with those who are more focused on the risks of climate change than on the nuts and bolts of what it would take to avert them.
Interestingly, the company’s report on carbon risks was issued on the same day as the latest iteration of the predicted consequences of further warming from the Intergovernmental Panel on Climate Change (IPCC). In a sense each report provides context for the other, so that investors who accept the IPCC’s analysis can weigh the potential costs of global warming against the cost and scale of the changes that would be required to put the world on a crash program to avert the worst climate-change-related outcomes. They can then buy or sell accordingly.
A different version of this posting was previously published on Energy Trends Insider.
Tuesday, January 28, 2014
The Pros and Cons of Exporting US Crude Oil
- Calls for an end to the effective ban on exporting most crude oil produced in the US are based on a growing imbalance in domestic crude quality.
- At least recently, the ban has likely benefited refiners more than consumers. Assessing the impact of its repeal on energy security requires further study.
This isn't just a matter of politics, or of self-interest on the part of those benefiting from the current rules. Questions of economics and energy security must also be considered. The main reason these restrictions are still in place is that for much of the last three decades US oil production was declining. The main challenges for the US oil industry were slowing that decline while ensuring that US refineries were equipped to receive and process the increasingly heavy and "sour" (high sulfur) crudes available in the global market. The shale revolution has sharply reversed these trends in just a few years.
No one would suggest that the US has more oil than it needs. Despite the recent revival of production, the US still imported around 48% of its net crude oil requirements last year. Even when production reaches its previous high of 9.6 million barrels per day (MBD) as the Energy Information Agency now projects to occur by 2017, the country is still expected to import a net 38% of refinery inputs, or 25% of total liquid fuel supply. The US is a long way from becoming a net oil exporter.
The driving force behind the current interest in exporting US crude oil is quality, not quantity, coupled with logistics. If the shale deposits of North Dakota and Texas yielded oil of similar quality to what most US refineries have been configured to process optimally, exports would be unnecessary; US refiners would be willing to pay as much for the new production as any non-US buyer might. Instead, the new production is mainly what Senator Murkowski's report refers to as "LTO"--light tight oil. It's too good for the hardware in many US refineries to handle in large quantities, and for most that can process it, its better yield of transportation fuels doesn't justify as large a price premium as for international refineries with less complex equipment.
As a result, and with exports to most non-US destinations other than Canada or a few special exceptions effectively barred, US producers of LTO must discount it to sell it to domestic refiners. Based on recent oil prices and market differentials, producers might be able to earn as much as $5-10 per barrel more by exporting it. Meanwhile the refiners currently processing this oil are enjoying something of a buyer's market and are able to expand their margins. The export issue thus pits shale oil producers and large, integrated companies (those with both production and refining) such as ExxonMobil against independent refiners like Valero.
Producers are justified in claiming that these regulations penalize them and threaten their growth as available domestic refining capacity for LTO becomes saturated. Additional production is forced to compete mainly with other LTO production, rather than with imports and OPEC.
I believe producers are also largely correct that claims that crude exports would raise US refined product prices are mistaken. The US markets for gasoline, diesel fuel, jet fuel and other refined petroleum products have long been linked to global markets, with prices especially near the coasts generally moving in sync with global product prices, plus or minus freight costs. I participated in that trade myself in the 1980s and '90s. What's at stake here isn't so much pump prices for consumers as US refinery margins and utilization rates.
Petroleum product exports have become a major factor in US refining profitability, and refiners are reportedly investing and reconfiguring to enhance their export capabilities. This provides a hedge against tepid domestic demand. Nationally, refined products have become the largest US export sector and contributed to shrinking the US trade deficit to its lowest level in four years. If prices for light tight oil rose to world levels US refineries might be unable to sustain their current export pace. It's up to policymakers to assess whether that risk is merely of concern to the shareholders of refining companies or a potential threat to US GDP and employment.
The quest to capture the "value added"--the difference between the value of manufactured products and raw materials--from petroleum production is not new. It helped motivate the creation of the integrated US oil companies more than a century ago and impelled national oil companies such as Saudi Aramco, Kuwait Petroleum Company, and Venezuela's PdVSA to purchase or buy into refineries in Europe, North America and Asia in the 1980s and '90s.
On the whole, OPEC's producers probably would have been better off investing in T-bills or the stock market, because the return on capital employed in refining has frequently averaged at or below the cost of capital over the last several decades. It's no accident most of the major oil companies have reduced their exposure to this sector. When today's US refiners argue that it is in the national interest to preserve the advantage that discounted LTO gives them they are swimming against the tide of oil industry history.
The energy security case for crude exports looks harder to make. An excellent article from the Associated Press quoted Michael Levi of the Council on Foreign Relations as saying, "It runs against the conventional wisdom about what oil security means. Something seems upside-down when we say energy security means producing oil and sending it somewhere else." The argument hinges on whether allowing US crude exports would simultaneously promote more production and increase the pressure on global oil prices. That makes sense to me as a former crude oil and refined products trader, but it will be a harder sell to Senators, Members of Congress, and their constituencies back home.
The politics of exports may be easing somewhat, though, as a Senate vacancy in Montana could lead to a new Chair at Energy & Natural Resources who would be a natural partner for Senator Murkowski on this issue. (That shift may incidentally be part of a strategy to help Democrats retain control of the Senate.) Will that be enough to overcome election-year inertia and the populist arguments arrayed against it?
As for logistics, the administration could ease the pressure on producers without opening the export floodgates by exempting the oil output from the Bakken, Eagle Ford and other shale deposits from the Jones Act requirement to use only US-flag tankers between US ports. That could open up new domestic markets for today's light tight oil, while allowing Congress the time necessary to debate the complex and thorny export question.
Senator Murkowski wasn't alone in calling for an end to the oil export ban. In his annual State of American Energy speech presented the day as the Senator's remarks, Jack Gerard, CEO of the American Petroleum Institute, noted, "We should consider and review quickly the role of crude exports along with LNG exports and finished products exports, because of the advantages it creates for this country and job creation and in our balance of payments." In a similar address on Wednesday, the head of the US Chamber of Commerce stated, "I want to lift the ban. It's not going to happen overnight, but it's going to happen." I'd wager he at least has the timing right.
A different version of this posting was previously published on the website of Pacific Energy Development Corporation.
Tuesday, January 17, 2012
More Long-Term Pressure on Oil Prices
A pair of items in today's Financial Times could signal a longer run of high oil prices, even if Europe were to slip into recession and economic growth elsewhere slow. The first article (registration required) reported that Saudi Arabia has raised its target oil price to $100 per barrel, up from the $75 level that King Abdullah had previously endorsed as "fair." Meanwhile, Venezuela has announced that it would withdraw from a World Bank body for arbitrating contractual disputes, preferring them to be resolved within its own judicial system. That can't be welcome news for companies that had been considering new investments in the country's oil and gas sector. Taken together, these stories suggest both less future supply and a greater likelihood that OPEC would respond to any significant weakness in oil prices by restricting output.
With markets currently tense over the prospect that Iran might make good on its threat to close the Strait of Hormuz, the prospect of Saudi Arabia boosting output if necessary to keep prices from going much beyond $100/bbl must seem welcome, at least in the short term. But as the FT explains, the choice of that figure, rather than a lower one, reflects the fiscal realities of a broad group of Middle East producers. The Saudis, Iran, Iraq, and the UAE all require oil prices north of $80/bbl in order to balance national budgetary requirements. Considering that the cost of producing much of this oil is likely still in either the single digits or low double-digits, that is an extraordinary commentary on just how much these countries depend on oil revenues to fund the social expenditures that maintain their respective domestic status quos. So while Saudi oil minister al-Naimi may have intended his comment to convey a comforting price ceiling, it probably said as much about his government's view of where the floor should be. With UK Brent crude currently trading at roughly the same $111/bbl level that set a full-year price record last year, I'm not sure how many of us would find that reassuring.
The decision by Venezuela's dictator to exit the World Bank arbitration mechanism shouldn't have come as a surprise, with an estimated $40 billion in international claims outstanding for his past actions in nationalizing assets and arbitrarily altering contractual terms in a variety of industries. The recent ruling by the International Chamber of Commerce in favor of an ExxonMobil claim might just have been the final trigger. Yet despite the obvious expediency of such an exit, it seems grossly counterproductive in the context of a producing country that depends increasingly on foreign investment to stem a long-term decline in output. Since President Chavez punished his nation's oil industry by firing its most capable managers and engineers following a strike in 2002-3, Venezuelan oil production has fallen by at least 15%, and it only avoided a larger drop due to the contribution of the big Orinoco production and upgrading projects built by foreign firms such as ExxonMobil, Chevron, ConocoPhillips and Total--some of which are now seeking compensation for expropriation of assets and other grievances.
Requiring disputes to be resolved within a court system that has been stacked with Chavez loyalists hardly seems like the recipe for reducing political risk and reassuring companies that have already seen past investments turn sour. While companies that have too much at stake to leave will try to make the best of this, others would be well-advised to steer clear. However this turns out for the industry, the likely outcome for Venezuela is lower production in the future and even greater support for hawkish price policies within OPEC, to prop up the oil revenues upon which Chavez's redistribution policies depend.
Of course none of this guarantees high oil prices in perpetuity. After all, OPEC was unable to prevent prices collapsing to below $40/bbl in late 2008, though it did restrain output enough to get them back to around $80 within a year. However, both stories should remind us that in a world in which oil prices are set to suit producers better than consumers, our primary focus should be on actions and policies that enhance our energy security. That means substituting plentiful natural gas for oil and its products where we can, promoting conservation and efficiency, pursuing cost-effective renewables, and ensuring that we have access to as much oil from domestic and trusted international sources as possible. Rejecting the Keystone XL Pipeline, instead of committing to find a way to make it work while addressing reasonable concerns about it, would be nothing less than a gift to OPEC.
Disclosure: My portfolio includes investment in Chevron, which is mentioned above and owns projects and facilities that could be affected by these events.
With markets currently tense over the prospect that Iran might make good on its threat to close the Strait of Hormuz, the prospect of Saudi Arabia boosting output if necessary to keep prices from going much beyond $100/bbl must seem welcome, at least in the short term. But as the FT explains, the choice of that figure, rather than a lower one, reflects the fiscal realities of a broad group of Middle East producers. The Saudis, Iran, Iraq, and the UAE all require oil prices north of $80/bbl in order to balance national budgetary requirements. Considering that the cost of producing much of this oil is likely still in either the single digits or low double-digits, that is an extraordinary commentary on just how much these countries depend on oil revenues to fund the social expenditures that maintain their respective domestic status quos. So while Saudi oil minister al-Naimi may have intended his comment to convey a comforting price ceiling, it probably said as much about his government's view of where the floor should be. With UK Brent crude currently trading at roughly the same $111/bbl level that set a full-year price record last year, I'm not sure how many of us would find that reassuring.
The decision by Venezuela's dictator to exit the World Bank arbitration mechanism shouldn't have come as a surprise, with an estimated $40 billion in international claims outstanding for his past actions in nationalizing assets and arbitrarily altering contractual terms in a variety of industries. The recent ruling by the International Chamber of Commerce in favor of an ExxonMobil claim might just have been the final trigger. Yet despite the obvious expediency of such an exit, it seems grossly counterproductive in the context of a producing country that depends increasingly on foreign investment to stem a long-term decline in output. Since President Chavez punished his nation's oil industry by firing its most capable managers and engineers following a strike in 2002-3, Venezuelan oil production has fallen by at least 15%, and it only avoided a larger drop due to the contribution of the big Orinoco production and upgrading projects built by foreign firms such as ExxonMobil, Chevron, ConocoPhillips and Total--some of which are now seeking compensation for expropriation of assets and other grievances.
Requiring disputes to be resolved within a court system that has been stacked with Chavez loyalists hardly seems like the recipe for reducing political risk and reassuring companies that have already seen past investments turn sour. While companies that have too much at stake to leave will try to make the best of this, others would be well-advised to steer clear. However this turns out for the industry, the likely outcome for Venezuela is lower production in the future and even greater support for hawkish price policies within OPEC, to prop up the oil revenues upon which Chavez's redistribution policies depend.
Of course none of this guarantees high oil prices in perpetuity. After all, OPEC was unable to prevent prices collapsing to below $40/bbl in late 2008, though it did restrain output enough to get them back to around $80 within a year. However, both stories should remind us that in a world in which oil prices are set to suit producers better than consumers, our primary focus should be on actions and policies that enhance our energy security. That means substituting plentiful natural gas for oil and its products where we can, promoting conservation and efficiency, pursuing cost-effective renewables, and ensuring that we have access to as much oil from domestic and trusted international sources as possible. Rejecting the Keystone XL Pipeline, instead of committing to find a way to make it work while addressing reasonable concerns about it, would be nothing less than a gift to OPEC.
Disclosure: My portfolio includes investment in Chevron, which is mentioned above and owns projects and facilities that could be affected by these events.
Monday, May 02, 2011
The Oil Earnings Backlash
Another oil industry earnings season bolstered by high oil prices has sparked the customary controversies about price gouging and industry subsidies. Last Thursday I participated in ExxonMobil's press call following the release of that company's first quarter earnings. In addition to the responses to my questions about access to non-US energy resources and the progress of the company's algae venture with Synthetic Genomics, I was intrigued by the answer of Ken Cohen, VP of Public and Government Affairs, to a question concerning Exxon's crude oil sales to other refiners. It resonated with my own experience in commodities trading at Texaco in the 1980s and '90s. Not only do major companies like Exxon, Chevron, Shell and BP control only a small fraction of the world's petroleum reserves and production, but they are often large net buyers of crude oil for their refining operations. Understanding the relationship between industry profits, gas prices and the federal tax deductions and credits designed to promote domestic energy production requires a deeper look into the results.
It's discouraging how much confusion still exists in the media concerning oil prices and gasoline prices, as noted in an excellent posting on the topic by Robert Rapier. Members of the public who are convinced that oil companies are manipulating prices to gouge them can always find some poorly reported news story or garbled explanation to justify their belief. Yet while it's certainly true that oil companies benefit from the higher oil prices that result when global demand for petroleum products is strong and supply is constrained and/or subject to unusual risks--both factors are at work today--their interests are not quite as divorced from those of gasoline consumers as they appear, because they are, to a very large extent, also consumers themselves.
A quick look at ExxonMobil's 1Q11 earnings release shows their net global production of crude oil and natural gas liquids at 2.4 million barrels per day (MBD). Meanwhile the company's refineries processed nearly 5.2 MBD in support of global refined product sales of nearly 6.3 MBD. In other words, Exxon had to buy more crude oil from other suppliers than it produced itself in order to feed its refineries, and then still had to acquire more than a million barrels per day of additional refined products from other refiners to meet its marketing demand. Meanwhile, 81% of its nearly $10.7 billion of first quarter earnings was attributable to oil and gas production, and 85% of that was from production outside the US. By comparison, just 6% of that $10.7 billion came from the domestic refining and marketing activities affected by US gasoline prices.
That's a fairly typical pattern for the majors, which have generally been short of crude oil for their refining systems since the big wave of nationalizations and expropriations in the 1970s. My old company, Texaco, refined about twice as much oil as it produced and sold roughly half-again more products than it refined. That meant that my trading colleagues and I were in the market every day, buying crude oil and refined products from our competitors, in order to keep our refineries and marketing outlets supplied. When supplies were tight, the only way to secure what we needed was to bid more than the next company, and that reinforced the dynamic of rising prices until supplies expanded or demand slackened. I see that as of the first quarter, Texaco's successor Chevron Corp. (of which I am a shareholder) produced about as much oil globally as it refined, though not in the US, where it processed 80% more crude than it produced domestically. Global product sales exceeded refinery throughput by more than a million barrels per day. Royal Dutch Shell's results exhibit an even more pronounced case of net purchases of both crude oil and refined products.
So while higher oil prices are good for some parts of these companies' businesses--the exploration and production divisions that contribute the majority of profitability in most years--other business segments find higher prices a mixed blessing, at best. That's particularly true for the parts of these companies with which US consumers have the most contact.
As for the questions I posed to Mr. Cohen, I was somewhat surprised to hear that ExxonMobil isn't looking for the US government to provide it with any assistance in gaining access to resources around the world. Foreign governments routinely help their national and quasi-national oil companies to negotiate for access. ExxonMobil seems able to compete in this arena without help from the US government but is much more concerned about the latter's restrictions on access here at home, and its efforts to tax non-US income that has already been taxed by host governments overseas. And with regard to ExxonMobil's activities in algae, I was informed that R&D is progressing well in both California and in Baytown, TX, where a large pond has just been completed. Mr. Cohen stressed that it was still early days for algae.
The purpose of drawing my readers' attention to the distinction concerning oil companies' large net oil and product purchases isn't to solicit sympathy for an industry that's obviously having a very profitable run, but to remind you that the oil and gasoline price situation is a lot more complicated than suggested by the sound bites we often hear. The biggest companies make most of their profits producing oil and gas outside the US, while refining and marketing here remains a capital-intensive and relatively low-return sideline that many of them have been quietly exiting for years. Ending the industry's tax breaks outside of the comprehensive tax system reform I believe to be necessary probably wouldn't harm the big oil companies as much as it would accelerate their shift away from operations in the US that contribute less to company profits than they do to US energy security.
It's discouraging how much confusion still exists in the media concerning oil prices and gasoline prices, as noted in an excellent posting on the topic by Robert Rapier. Members of the public who are convinced that oil companies are manipulating prices to gouge them can always find some poorly reported news story or garbled explanation to justify their belief. Yet while it's certainly true that oil companies benefit from the higher oil prices that result when global demand for petroleum products is strong and supply is constrained and/or subject to unusual risks--both factors are at work today--their interests are not quite as divorced from those of gasoline consumers as they appear, because they are, to a very large extent, also consumers themselves.
A quick look at ExxonMobil's 1Q11 earnings release shows their net global production of crude oil and natural gas liquids at 2.4 million barrels per day (MBD). Meanwhile the company's refineries processed nearly 5.2 MBD in support of global refined product sales of nearly 6.3 MBD. In other words, Exxon had to buy more crude oil from other suppliers than it produced itself in order to feed its refineries, and then still had to acquire more than a million barrels per day of additional refined products from other refiners to meet its marketing demand. Meanwhile, 81% of its nearly $10.7 billion of first quarter earnings was attributable to oil and gas production, and 85% of that was from production outside the US. By comparison, just 6% of that $10.7 billion came from the domestic refining and marketing activities affected by US gasoline prices.
That's a fairly typical pattern for the majors, which have generally been short of crude oil for their refining systems since the big wave of nationalizations and expropriations in the 1970s. My old company, Texaco, refined about twice as much oil as it produced and sold roughly half-again more products than it refined. That meant that my trading colleagues and I were in the market every day, buying crude oil and refined products from our competitors, in order to keep our refineries and marketing outlets supplied. When supplies were tight, the only way to secure what we needed was to bid more than the next company, and that reinforced the dynamic of rising prices until supplies expanded or demand slackened. I see that as of the first quarter, Texaco's successor Chevron Corp. (of which I am a shareholder) produced about as much oil globally as it refined, though not in the US, where it processed 80% more crude than it produced domestically. Global product sales exceeded refinery throughput by more than a million barrels per day. Royal Dutch Shell's results exhibit an even more pronounced case of net purchases of both crude oil and refined products.
So while higher oil prices are good for some parts of these companies' businesses--the exploration and production divisions that contribute the majority of profitability in most years--other business segments find higher prices a mixed blessing, at best. That's particularly true for the parts of these companies with which US consumers have the most contact.
As for the questions I posed to Mr. Cohen, I was somewhat surprised to hear that ExxonMobil isn't looking for the US government to provide it with any assistance in gaining access to resources around the world. Foreign governments routinely help their national and quasi-national oil companies to negotiate for access. ExxonMobil seems able to compete in this arena without help from the US government but is much more concerned about the latter's restrictions on access here at home, and its efforts to tax non-US income that has already been taxed by host governments overseas. And with regard to ExxonMobil's activities in algae, I was informed that R&D is progressing well in both California and in Baytown, TX, where a large pond has just been completed. Mr. Cohen stressed that it was still early days for algae.
The purpose of drawing my readers' attention to the distinction concerning oil companies' large net oil and product purchases isn't to solicit sympathy for an industry that's obviously having a very profitable run, but to remind you that the oil and gasoline price situation is a lot more complicated than suggested by the sound bites we often hear. The biggest companies make most of their profits producing oil and gas outside the US, while refining and marketing here remains a capital-intensive and relatively low-return sideline that many of them have been quietly exiting for years. Ending the industry's tax breaks outside of the comprehensive tax system reform I believe to be necessary probably wouldn't harm the big oil companies as much as it would accelerate their shift away from operations in the US that contribute less to company profits than they do to US energy security.
Friday, November 06, 2009
Cheap Oil
When the US invaded Ba'athist Iraq, many ascribed that action to a desire to seize the country's vast oil reserves and develop them on terms favorable to us, presumably to keep the days of cheap oil rolling on. After six years of oil prices far above their pre-war level, the last vestiges of that theory should be laid to rest by a careful reading of today's headlines concerning the announced production deal between the Iraqi government and ExxonMobil and Shell. The terms looks anything but lucrative for the Supermajors, which have won the opportunity to revamp output at one of Iraq's largest mature oil fields, West Qurna. However paltry the returns might look for the firms involved, this development could have a bigger impact on oil price--and sooner--than some of the splashier recent announcements concerning big oil finds off Brazil and West Africa.
The reported terms of the deal struck by Exxon and Shell in Iraq continue the trend of allowing access only on the basis of working as contractors, rather than as partners with an ownership interest in the underlying resource via a typical production-sharing contract. According to the story in today's Wall St. Journal, the companies will receive just $1.90 per barrel for their efforts to boost the flagging output of the super-giant West Qurna field, the output of which could increase by more than the current oil production of Texas (including the Gulf of Mexico.) Moreover, because the project entails virtually no exploration risk--the reserves are well-established--and minimal technical risk, and is already connected to infrastructure, the only real limitation on how fast it could begin ramping up is the local security environment and the ability of the firms to line up equipment and workers. This will still require several years, but it should happen a lot quicker than the time required to develop a new field with tricky geology in deep water.
So what does this mean? Well, for ExxonMobil and Shell it offers a relatively quick boost in production and revenue. $1.90/bbl is skimpy compared to what companies can make on their own discoveries, but over volumes this large it could translate into an extra $700 million of annual cash flow for the next 20 years. As attractive as that sounds, though, it comes without the ability to book new reserves, which are so critical to the valuations of oil companies.
The implication for oil prices will depend on many other factors, but the steady growth of Iraq's oil production from the current 2.5 million bbl/day to a level commensurate with the country's reported 115 billion bbls of reserves could at least compensate for some large declines elsewhere and help maintain a reasonable cushion of spare production capacity as the global economy gets back on track. This hardly bodes a return to $20 oil prices--an eventuality that would be much less welcome in the carbon-constrained world we're entering than just a few years ago--but it could buy us enough time for fuel efficiency and vehicle electrification to match Peak Demand to an inevitable peak in global production.
The reported terms of the deal struck by Exxon and Shell in Iraq continue the trend of allowing access only on the basis of working as contractors, rather than as partners with an ownership interest in the underlying resource via a typical production-sharing contract. According to the story in today's Wall St. Journal, the companies will receive just $1.90 per barrel for their efforts to boost the flagging output of the super-giant West Qurna field, the output of which could increase by more than the current oil production of Texas (including the Gulf of Mexico.) Moreover, because the project entails virtually no exploration risk--the reserves are well-established--and minimal technical risk, and is already connected to infrastructure, the only real limitation on how fast it could begin ramping up is the local security environment and the ability of the firms to line up equipment and workers. This will still require several years, but it should happen a lot quicker than the time required to develop a new field with tricky geology in deep water.
So what does this mean? Well, for ExxonMobil and Shell it offers a relatively quick boost in production and revenue. $1.90/bbl is skimpy compared to what companies can make on their own discoveries, but over volumes this large it could translate into an extra $700 million of annual cash flow for the next 20 years. As attractive as that sounds, though, it comes without the ability to book new reserves, which are so critical to the valuations of oil companies.
The implication for oil prices will depend on many other factors, but the steady growth of Iraq's oil production from the current 2.5 million bbl/day to a level commensurate with the country's reported 115 billion bbls of reserves could at least compensate for some large declines elsewhere and help maintain a reasonable cushion of spare production capacity as the global economy gets back on track. This hardly bodes a return to $20 oil prices--an eventuality that would be much less welcome in the carbon-constrained world we're entering than just a few years ago--but it could buy us enough time for fuel efficiency and vehicle electrification to match Peak Demand to an inevitable peak in global production.
Thursday, July 23, 2009
Big Algae?
In spare moments during the last week I've been mulling over the implications of ExxonMobil's announcement of a very large investment in research and development on producing biofuels from algae, in collaboration with a leading biotech firm, Synthetic Genomics, Inc. While the reported figure of $600 million wouldn't buy much in the way of actual deployment, it could sure pay for a heck of a lot of R&D. The joint conference call about the announcement emphasized that the companies will be pursuing several possible technological pathways, though all appear to be focused on producing biofuel from algae continuously, rather than in a batch mode more analogous to farming. That would certainly increase the attractiveness for Exxon, which after all operates some of the world's biggest continuous production processes, in the form of its oil & gas fields, refineries, and chemical plants. The timing of this announcement is also interesting, coming just a few weeks after the US House of Representatives passed the first cap & trade bill to make it through either chamber of Congress.
The fundamental question I've been pondering is "why"? Why algae, and why ExxonMobil? For all of algae's enormous potential to produce large quantities of useful fuel, skepticism that this could ever be done economically on a useful scale abounds. And until now, Exxon had made a virtue of avoiding investments in renewable energy, generally seeing them as delivering returns well below those of the large oil & gas projects that have earned Exxon a sterling reputation for capital discipline. The answer to both questions likely resides in a word that appears frequently in the press release, in news coverage of the announcement, and in the press conference: scale. Two aspects of scale are relevant, here. First, in order to contribute meaningfully to our energy and climate problems, an alternative energy technology must be capable of being scaled up rapidly to a level comparable to today's oil, gas and coal industries. Current biofuels, solar power and wind still don't come close to matching the energy delivery of conventional sources. Exxon's website indicates potential liquid yields from algae of 2,000 gallons per acre, presumably in the form of the hydrocarbon-based "biocrude" emphasized repeatedly in the press conference. Even that relatively conservative estimate--my own back-of-the-envelope upper-bound estimate was 6,000 gal./acre--is at least ten times the current US yield of corn ethanol, after adjusting for energy content. Simplistically, if the acreage currently devoted to growing corn for ethanol were devoted to oil-excreting algae, it could replace nearly 60% of our gasoline supply from crude oil, rather than the 5% or so we get from ethanol.
Scale is also crucial for a firm of Exxon's size. A report in today's Wall St. Journal caught my eye. Occidental Petroleum announced its discovery of a 200 million barrel onshore oilfield in the middle of one of the most mature oil provinces in the world, in the San Joaquin Valley of California. I know that territory very well from my oil trading days, and it's an exciting development. However, Exxon is so big that it must find the equivalent of 8 such fields every year, just to stay even with its production. When I listen to the way Exxon describes its algae investment, I get the distinct sense that it views this arrangement as analogous to a very large oil exploration project, one that would be material to the results of the largest oil SuperMajor--and perhaps with similar odds of success. Now, it would be meaningless and of no value to Exxon if algae could produce the equivalent of hundreds of thousands of barrels per day of oil, but at a cost of $1,200/bbl. Exxon appears to be convinced that algae can contribute at a price very close to today's hydrocarbons, and probably without subsidies, knowing the firm's distaste for them. That has implications beyond algae.
In the conference call, Exxon's VP of R&D indicated that the company had assessed all of the advanced biofuels technologies and concluded that algae offered the best hope for producing fuels that would compete economically, with acceptable environmental impacts. That says something very worrying about the near-term prospects for cellulosic ethanol and the other "second-generation" biofuels technologies on which companies such as BP, Shell, and many others have pinned their hopes. Indeed, the US Congress pinned the whole country's hopes on the prompt commercialization of these unproven technologies in the remarkably ambitious national Renewable Fuels Standard they enacted in late 2007. If Exxon has concluded correctly that algae--which faces many serious hurdles of its own--is the best bet, then the entire US alternative fuels strategy could be in trouble.
There is also another way to look at this announcement. Exxon has been under enormous pressure to take a big stake in renewable energy. I vividly recall a Congressional hearing last year when committee chairman Ed Markey (D-Mass.) berated and belittled the Exxon representative for doing so little in this area. More recently, an environmental group took out full page ads targeting Exxon's opposition to cap & trade. I can't find the ad on the internet, but it said something like, "Poor Exxon, all alone in opposing Waxman-Markey." That has to get old, even for Exxon.
Could the algae tie-up with Synthetic Genomics, with its impressive expenditures contingent on achieving a series of unspecified milestones, be intended mainly to get this particular monkey off their backs? I doubt it, even though all the other advanced biofuel technologies being touted by their promoters also involve a substantial element of PR, until they actually produce commercial outcomes. If Exxon merely wanted to create some "green cred", it could have taken the same money and bought a dozen bankrupt corn ethanol plants or a few medium-sized wind farms. If the Exxon/Synthetic Genomics collaboration is about making Exxon greener, then it is certainly doing it the Exxon way, investing in something that, if successful, would neatly and profitably slot into their existing business model--and by the way into the hundreds of existing refineries and hundreds of millions of internal combustion engine vehicles globally. It's probably too early to imagine Big Oil becoming Big Algae, but the possibilities have obvious appeal, apparently even for the world's most successful oil company.
The fundamental question I've been pondering is "why"? Why algae, and why ExxonMobil? For all of algae's enormous potential to produce large quantities of useful fuel, skepticism that this could ever be done economically on a useful scale abounds. And until now, Exxon had made a virtue of avoiding investments in renewable energy, generally seeing them as delivering returns well below those of the large oil & gas projects that have earned Exxon a sterling reputation for capital discipline. The answer to both questions likely resides in a word that appears frequently in the press release, in news coverage of the announcement, and in the press conference: scale. Two aspects of scale are relevant, here. First, in order to contribute meaningfully to our energy and climate problems, an alternative energy technology must be capable of being scaled up rapidly to a level comparable to today's oil, gas and coal industries. Current biofuels, solar power and wind still don't come close to matching the energy delivery of conventional sources. Exxon's website indicates potential liquid yields from algae of 2,000 gallons per acre, presumably in the form of the hydrocarbon-based "biocrude" emphasized repeatedly in the press conference. Even that relatively conservative estimate--my own back-of-the-envelope upper-bound estimate was 6,000 gal./acre--is at least ten times the current US yield of corn ethanol, after adjusting for energy content. Simplistically, if the acreage currently devoted to growing corn for ethanol were devoted to oil-excreting algae, it could replace nearly 60% of our gasoline supply from crude oil, rather than the 5% or so we get from ethanol.
Scale is also crucial for a firm of Exxon's size. A report in today's Wall St. Journal caught my eye. Occidental Petroleum announced its discovery of a 200 million barrel onshore oilfield in the middle of one of the most mature oil provinces in the world, in the San Joaquin Valley of California. I know that territory very well from my oil trading days, and it's an exciting development. However, Exxon is so big that it must find the equivalent of 8 such fields every year, just to stay even with its production. When I listen to the way Exxon describes its algae investment, I get the distinct sense that it views this arrangement as analogous to a very large oil exploration project, one that would be material to the results of the largest oil SuperMajor--and perhaps with similar odds of success. Now, it would be meaningless and of no value to Exxon if algae could produce the equivalent of hundreds of thousands of barrels per day of oil, but at a cost of $1,200/bbl. Exxon appears to be convinced that algae can contribute at a price very close to today's hydrocarbons, and probably without subsidies, knowing the firm's distaste for them. That has implications beyond algae.
In the conference call, Exxon's VP of R&D indicated that the company had assessed all of the advanced biofuels technologies and concluded that algae offered the best hope for producing fuels that would compete economically, with acceptable environmental impacts. That says something very worrying about the near-term prospects for cellulosic ethanol and the other "second-generation" biofuels technologies on which companies such as BP, Shell, and many others have pinned their hopes. Indeed, the US Congress pinned the whole country's hopes on the prompt commercialization of these unproven technologies in the remarkably ambitious national Renewable Fuels Standard they enacted in late 2007. If Exxon has concluded correctly that algae--which faces many serious hurdles of its own--is the best bet, then the entire US alternative fuels strategy could be in trouble.
There is also another way to look at this announcement. Exxon has been under enormous pressure to take a big stake in renewable energy. I vividly recall a Congressional hearing last year when committee chairman Ed Markey (D-Mass.) berated and belittled the Exxon representative for doing so little in this area. More recently, an environmental group took out full page ads targeting Exxon's opposition to cap & trade. I can't find the ad on the internet, but it said something like, "Poor Exxon, all alone in opposing Waxman-Markey." That has to get old, even for Exxon.
Could the algae tie-up with Synthetic Genomics, with its impressive expenditures contingent on achieving a series of unspecified milestones, be intended mainly to get this particular monkey off their backs? I doubt it, even though all the other advanced biofuel technologies being touted by their promoters also involve a substantial element of PR, until they actually produce commercial outcomes. If Exxon merely wanted to create some "green cred", it could have taken the same money and bought a dozen bankrupt corn ethanol plants or a few medium-sized wind farms. If the Exxon/Synthetic Genomics collaboration is about making Exxon greener, then it is certainly doing it the Exxon way, investing in something that, if successful, would neatly and profitably slot into their existing business model--and by the way into the hundreds of existing refineries and hundreds of millions of internal combustion engine vehicles globally. It's probably too early to imagine Big Oil becoming Big Algae, but the possibilities have obvious appeal, apparently even for the world's most successful oil company.
Thursday, August 21, 2008
Defining Speculation
Oil market speculation is back in the news, because Vitol S.A., one of the world's largest oil-trading firms, has apparently been re-classified as a "non-commercial" market participant by the Commodity Futures Trading Commission (CFTC). That marks them as a speculator, this year's scarlet letter. Before we pass judgment on the influence of such firms on the price of oil, and thus on the petroleum products consumers buy, it's worth considering what we really mean by speculation, and how this might be distinct from the activities of the participants that the CFTC deems "commercial", i.e. those conducting futures, options and swap transactions in conjunction with their physical production or consumption of various forms of energy. More importantly, we should evaluate whether speculation is an important enough factor in the oil market to merit distracting us from the urgent pursuit of solutions that would expand energy supplies and shrink demand.
As big as they are, Vitol hardly fits the profile of the kind of speculators that stand accused of driving up the price of oil and everything connected to it to unprecedented levels. Vitol has been trading oil since the 1960s, and I did my first deal with them in the 1980s, when I traded petroleum products for Texaco's West Coast refining and marketing subsidiary. I got a much better sense for just how large a player they were in the physical markets for oil, feedstocks and refined products when I traded international products in London in 1989-91. There were few markets in which Vitol didn't participate, and a few niches that they dominated. Although I haven't had any contact with them in at least 14 years, their growth during that interval has been impressive. So I was hardly shocked to learn that they had apparently accounted for a significant fraction of the open interest in crude oil on the New York Mercantile Exchange (NYMEX) earlier this year. Any non-producer transacting the volumes of physical oil and products deals they do could not manage their business properly without extensive use of futures, options and over-the-counter swaps, little of which could fairly be called speculation.
Texaco's trading division had very firm rules about speculation on futures or options, which it defined as long or short positions that weren't directly linked to a like quantity of physical oil or products we were buying, selling, or holding in inventory, contemporaneously. Even for a group focused on "wet" cargoes--actual liquids on ships, barges, or in pipelines--that was sometimes limiting, because it meant we had to do the physical transaction first, and then scramble to hedge it. But while we couldn't take "naked" long or short positions in the market, we could transact "spreads" that were basically bets on some aspect of the market, such as a widening or narrowing of the price difference between futures contract months, or between different products, or different locations. While we weren't speculating on the absolute price, risking large swings in profit and loss, we were certainly risking smaller amounts on these other market attributes. I think most people would consider that speculation, since we didn't have to do it to support our physical trading or the company's much larger producing and refining businesses. But aside from some modest, inconsistent profits it gave us insights into market trends that passive observers don't usually gain: if you really want to understand a market, you have to be in the market.
Now consider Vitol, buying and selling oil and product cargoes all over the world and owning interests in oil terminals on three continents, a few oil fields, and a small refinery in the Persian Gulf. That doesn't put them in the same league as ExxonMobil--which, unless things have changed a great deal since the Exxon-Mobil merger in 1999, doesn't trade on the NYMEX at all--or legitimize every position they take as non-speculative. However, it's a far cry from the stereotypical view of asset-class commodity speculation by pension funds and hedge funds, executed by twenty-somethings who wouldn't know an octane from an antelope. That's important, because long-established oil trading firms like Vitol have institutional memories that span many up and down cycles of the oil market and know that a trend can turn when you least expect it. It doesn't mean they wouldn't risk a big loss to make a big profit, but in my estimation it makes them poor candidates to be the driving force behind a wave of speculation perceived to have pushed the price of oil beyond the level that could be explained by the fundamentals alone.
The roughly 20% drop in oil prices since the beginning of July should calibrate our estimates of the influence of such speculation. It was clearly not sufficient to maintain momentum in the face of weakening fundamentals of demand, supply and risk. At the same time, our response ought to distinguish between the kind of speculation represented by oil market neophytes hoping to cash in on an attractive investment trend, and the speculation that is an absolute requirement of a smoothly-functioning commodities market. Anyone who thinks the oil market would work just fine with only producers, refiners and end-users has never spent a day trading, or seen liquidity vanish just when a specific transaction was most desirable or necessary, because there was no middleman willing to take it on as a bet. But regardless of whether one variety of speculation should concern us more than another, the market's dramatic response to sliding demand serves notice to policy makers that their best and most productive avenue for addressing the impact of high oil prices is surely prompt and meaningful action on supply and demand, rather than rounding up today's version of the usual suspects.
As big as they are, Vitol hardly fits the profile of the kind of speculators that stand accused of driving up the price of oil and everything connected to it to unprecedented levels. Vitol has been trading oil since the 1960s, and I did my first deal with them in the 1980s, when I traded petroleum products for Texaco's West Coast refining and marketing subsidiary. I got a much better sense for just how large a player they were in the physical markets for oil, feedstocks and refined products when I traded international products in London in 1989-91. There were few markets in which Vitol didn't participate, and a few niches that they dominated. Although I haven't had any contact with them in at least 14 years, their growth during that interval has been impressive. So I was hardly shocked to learn that they had apparently accounted for a significant fraction of the open interest in crude oil on the New York Mercantile Exchange (NYMEX) earlier this year. Any non-producer transacting the volumes of physical oil and products deals they do could not manage their business properly without extensive use of futures, options and over-the-counter swaps, little of which could fairly be called speculation.
Texaco's trading division had very firm rules about speculation on futures or options, which it defined as long or short positions that weren't directly linked to a like quantity of physical oil or products we were buying, selling, or holding in inventory, contemporaneously. Even for a group focused on "wet" cargoes--actual liquids on ships, barges, or in pipelines--that was sometimes limiting, because it meant we had to do the physical transaction first, and then scramble to hedge it. But while we couldn't take "naked" long or short positions in the market, we could transact "spreads" that were basically bets on some aspect of the market, such as a widening or narrowing of the price difference between futures contract months, or between different products, or different locations. While we weren't speculating on the absolute price, risking large swings in profit and loss, we were certainly risking smaller amounts on these other market attributes. I think most people would consider that speculation, since we didn't have to do it to support our physical trading or the company's much larger producing and refining businesses. But aside from some modest, inconsistent profits it gave us insights into market trends that passive observers don't usually gain: if you really want to understand a market, you have to be in the market.
Now consider Vitol, buying and selling oil and product cargoes all over the world and owning interests in oil terminals on three continents, a few oil fields, and a small refinery in the Persian Gulf. That doesn't put them in the same league as ExxonMobil--which, unless things have changed a great deal since the Exxon-Mobil merger in 1999, doesn't trade on the NYMEX at all--or legitimize every position they take as non-speculative. However, it's a far cry from the stereotypical view of asset-class commodity speculation by pension funds and hedge funds, executed by twenty-somethings who wouldn't know an octane from an antelope. That's important, because long-established oil trading firms like Vitol have institutional memories that span many up and down cycles of the oil market and know that a trend can turn when you least expect it. It doesn't mean they wouldn't risk a big loss to make a big profit, but in my estimation it makes them poor candidates to be the driving force behind a wave of speculation perceived to have pushed the price of oil beyond the level that could be explained by the fundamentals alone.
The roughly 20% drop in oil prices since the beginning of July should calibrate our estimates of the influence of such speculation. It was clearly not sufficient to maintain momentum in the face of weakening fundamentals of demand, supply and risk. At the same time, our response ought to distinguish between the kind of speculation represented by oil market neophytes hoping to cash in on an attractive investment trend, and the speculation that is an absolute requirement of a smoothly-functioning commodities market. Anyone who thinks the oil market would work just fine with only producers, refiners and end-users has never spent a day trading, or seen liquidity vanish just when a specific transaction was most desirable or necessary, because there was no middleman willing to take it on as a bet. But regardless of whether one variety of speculation should concern us more than another, the market's dramatic response to sliding demand serves notice to policy makers that their best and most productive avenue for addressing the impact of high oil prices is surely prompt and meaningful action on supply and demand, rather than rounding up today's version of the usual suspects.
Friday, August 01, 2008
Petro Profits
This energy crisis has given rise to a new American ritual: every quarter, after ExxonMobil's earnings are announced, the media breaks them down into dollars per hour, minute and second, and then cues to reaction shots of consumers expressing outrage that any company should benefit so much from their pain at the gas pump. Although I'm not suggesting we should all feel warm and cozy about oil company profits, we might be better served to focus our fulminating on the dog that doesn't bark. If the largest US oil company produces only 3% of the world's oil and still made nearly $12 billion last quarter, what did the national oil companies that own most of the world's oil make, and who paid for that?
Considering the average price of oil in the 2nd quarter, no one should be surprised that Exxon had stellar results, in spite of earning 54% less on refining and marketing and a third less on chemicals than they did last year at the same time. Allocated over the 26 billion gallons of petroleum products they sold around the world in the quarter, these profits equate to an average of 45¢ per gallon, with 87% coming from finding and producing the oil that went into making those products. It's not unreasonable for consumers paying roughly $4 per gallon to grouse about that, though it does say something about our current national mood that the media chooses to highlight that reaction, rather than someone seeing the results enjoyed by Exxon's shareholders and wanting a piece of the action, no matter how small. But whatever the US oil companies, including Chevron, ConocoPhillips, Marathon, and numerous others make, at least most of their profits get recycled into the US economy, in the form of new investments and the savings and spending of the millions of us who collect their dividends, directly or indirectly. The same can't be said for the profits of Saudi Aramco, the National Iranian Oil Co. (NIOC), Kuwait Petroleum Co., PdVSA, Rosneft, and so on.
Consider NIOC, the second-largest producer among national oil companies, at 4.15 million barrels per day, about 60% of which is exported. Iran is a relatively low-cost producer, though probably not as low as Saudi Arabia. If their total costs per barrel averaged more than $15 per barrel, I'd be surprised. So at an average price for Iranian Heavy for 2Q08 of $113.85/bbl., that works out to a quarterly gross profit just on exports in the neighborhood of $22 billion, excluding NIOC's earnings from domestic sales, refining and its substantial production of natural gas. Those might add another $10 billion to the total. Lop off a billion or so for overhead, and NIOC is probably reporting to its sole shareholder second-quarter results north of $30 billion. That'll buy a few centrifuges.
So go ahead and grumble about big US oil companies making record profits, while we pay near-record prices at the pump. But don't forget that we import 12 million barrels per day of oil and petroleum products, for which each and every quarter we must send roughly $135 billion outside the country, at current prices. Mr. Pickens is right to bemoan this enormous and unsustainable transfer of wealth. In that context, a smart national energy policy would not bog down in trying to choose among expanded drilling, conservation, and renewable energy, as though these were mutually exclusive options; it would pursue all of them, vigorously, and without vilifying companies for wanting to produce more energy here in the US.
Considering the average price of oil in the 2nd quarter, no one should be surprised that Exxon had stellar results, in spite of earning 54% less on refining and marketing and a third less on chemicals than they did last year at the same time. Allocated over the 26 billion gallons of petroleum products they sold around the world in the quarter, these profits equate to an average of 45¢ per gallon, with 87% coming from finding and producing the oil that went into making those products. It's not unreasonable for consumers paying roughly $4 per gallon to grouse about that, though it does say something about our current national mood that the media chooses to highlight that reaction, rather than someone seeing the results enjoyed by Exxon's shareholders and wanting a piece of the action, no matter how small. But whatever the US oil companies, including Chevron, ConocoPhillips, Marathon, and numerous others make, at least most of their profits get recycled into the US economy, in the form of new investments and the savings and spending of the millions of us who collect their dividends, directly or indirectly. The same can't be said for the profits of Saudi Aramco, the National Iranian Oil Co. (NIOC), Kuwait Petroleum Co., PdVSA, Rosneft, and so on.
Consider NIOC, the second-largest producer among national oil companies, at 4.15 million barrels per day, about 60% of which is exported. Iran is a relatively low-cost producer, though probably not as low as Saudi Arabia. If their total costs per barrel averaged more than $15 per barrel, I'd be surprised. So at an average price for Iranian Heavy for 2Q08 of $113.85/bbl., that works out to a quarterly gross profit just on exports in the neighborhood of $22 billion, excluding NIOC's earnings from domestic sales, refining and its substantial production of natural gas. Those might add another $10 billion to the total. Lop off a billion or so for overhead, and NIOC is probably reporting to its sole shareholder second-quarter results north of $30 billion. That'll buy a few centrifuges.
So go ahead and grumble about big US oil companies making record profits, while we pay near-record prices at the pump. But don't forget that we import 12 million barrels per day of oil and petroleum products, for which each and every quarter we must send roughly $135 billion outside the country, at current prices. Mr. Pickens is right to bemoan this enormous and unsustainable transfer of wealth. In that context, a smart national energy policy would not bog down in trying to choose among expanded drilling, conservation, and renewable energy, as though these were mutually exclusive options; it would pursue all of them, vigorously, and without vilifying companies for wanting to produce more energy here in the US.
Tuesday, May 20, 2008
Crossing the Rubicon?
Although I haven't made any great study of the history of shareholder revolts, I suspect that it is fairly unusual for one to occur when a company is enjoying record earnings, not only relative to its own past performance, but when compared against the performance of any firm in any industry at any time. And yet, that's where ExxonMobil finds itself today, with no less a group of stakeholders than the descendants of the firm's founding dynasty weighing in on the subject of its investment choices, particularly with regard to alternative energy. The Rockefellers have been joined in this effort by other investors and shareholder advisers. Whatever you may think about the shareholder resolutions in question, or indeed about the issues that they raise, the corporation's Annual Meeting is precisely the right venue for addressing them.
You might recall that when I wrote about a recent Congressional hearing on oil prices, I wasn't terribly sympathetic to the way that Chairman Markey pilloried ExxonMobil for pursuing alternative energy less enthusiastically than some of its competitors, or than the Congress might wish. When the Congress or the President can direct the portfolio decisions of publicly-traded companies on matters that do not involve their compliance with any known law or regulation, our political and economic system will have lost all resemblance to the one established by the Founders. However, the management and board of a corporation are still answerable on such issues to their shareholders, however silent the latter may be most of the time, especially when a company's fortunes are prospering.
Many of my readers regard investing in renewable energy as an obvious choice at this juncture, in light of the uncertainties of climate change and Peak Oil, more restrictive access to resources, and the rapid technological changes sweeping the global energy sector. I have long believed and advised that any integrated energy corporation that doesn't participate in the development of alternative energy puts its future success and image at risk. However, that doesn't mean that a company's management can't weigh all of these factors and conclude that it is still better off focusing on the areas in which it has excelled, a strategy that the landmark business text, "In Search of Excellence" referred to as "Sticking to the Knitting"--one of a handful of key lessons the authors gleaned from their study of successful companies. (Among other things, Peters and Waterman also extolled "A Bias for Action" and experimentation.)
The question that ExxonMobil's shareholders are effectively posing is whether its otherwise admirable capital discipline prevents management from seeing the long-term potential of a set of developments that could prove as significant as the original oil boom 150 years ago. John D. Rockefeller's vision of the growth of an oil-based economy, and how to capitalize on it, made Standard Oil--the precursor of the modern ExxonMobil--one of the most successful organizations in history, even after being broken up and only partially reassembled in the late 1990s. Even if you are skeptical, as I am, that we are on the verge of ending oil's key role as a source of primary energy and a superior energy carrier, it seems quite likely that the winners of the ongoing competition to crack the challenges of biofuels, solar power, and other alternatives will make new, Rockefeller-scale fortunes. A company should only turn its back on that kind of opportunity after some serious soul-searching and a frank discussion with its owners.
Some perspective seems necessary, as well. While the shareholder challenge to Exxon's management is a significant event within the larger trend of the greening of business, it would be a mistake to view it as a crusade. If the proposals currently being voted on by ExxonMobil's owners succeed, they will not end America's addiction to oil or bring the millennium. If they fail, that will not signify that we have passed the baton of moral or technological leadership to any other country or group of countries. The alternative energy revolution will stand or fall on its own merits, with or without Exxon. The company's shareholders must now decide whether or not the reverse is also true. Although I'm not endorsing any of these resolutions, I sincerely hope that both sides treat this as a unique and valuable opportunity to rethink their assumptions, scenarios and strategies concerning the future of energy.
I don't own any ExxonMobil stock, except in the manner in which millions of Americans do, as a component of various mutual funds.
You might recall that when I wrote about a recent Congressional hearing on oil prices, I wasn't terribly sympathetic to the way that Chairman Markey pilloried ExxonMobil for pursuing alternative energy less enthusiastically than some of its competitors, or than the Congress might wish. When the Congress or the President can direct the portfolio decisions of publicly-traded companies on matters that do not involve their compliance with any known law or regulation, our political and economic system will have lost all resemblance to the one established by the Founders. However, the management and board of a corporation are still answerable on such issues to their shareholders, however silent the latter may be most of the time, especially when a company's fortunes are prospering.
Many of my readers regard investing in renewable energy as an obvious choice at this juncture, in light of the uncertainties of climate change and Peak Oil, more restrictive access to resources, and the rapid technological changes sweeping the global energy sector. I have long believed and advised that any integrated energy corporation that doesn't participate in the development of alternative energy puts its future success and image at risk. However, that doesn't mean that a company's management can't weigh all of these factors and conclude that it is still better off focusing on the areas in which it has excelled, a strategy that the landmark business text, "In Search of Excellence" referred to as "Sticking to the Knitting"--one of a handful of key lessons the authors gleaned from their study of successful companies. (Among other things, Peters and Waterman also extolled "A Bias for Action" and experimentation.)
The question that ExxonMobil's shareholders are effectively posing is whether its otherwise admirable capital discipline prevents management from seeing the long-term potential of a set of developments that could prove as significant as the original oil boom 150 years ago. John D. Rockefeller's vision of the growth of an oil-based economy, and how to capitalize on it, made Standard Oil--the precursor of the modern ExxonMobil--one of the most successful organizations in history, even after being broken up and only partially reassembled in the late 1990s. Even if you are skeptical, as I am, that we are on the verge of ending oil's key role as a source of primary energy and a superior energy carrier, it seems quite likely that the winners of the ongoing competition to crack the challenges of biofuels, solar power, and other alternatives will make new, Rockefeller-scale fortunes. A company should only turn its back on that kind of opportunity after some serious soul-searching and a frank discussion with its owners.
Some perspective seems necessary, as well. While the shareholder challenge to Exxon's management is a significant event within the larger trend of the greening of business, it would be a mistake to view it as a crusade. If the proposals currently being voted on by ExxonMobil's owners succeed, they will not end America's addiction to oil or bring the millennium. If they fail, that will not signify that we have passed the baton of moral or technological leadership to any other country or group of countries. The alternative energy revolution will stand or fall on its own merits, with or without Exxon. The company's shareholders must now decide whether or not the reverse is also true. Although I'm not endorsing any of these resolutions, I sincerely hope that both sides treat this as a unique and valuable opportunity to rethink their assumptions, scenarios and strategies concerning the future of energy.
I don't own any ExxonMobil stock, except in the manner in which millions of Americans do, as a component of various mutual funds.
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