Bush and Congress gave money to the oil companies in the energy bill with an opposite interest of solving the energy crisis. And now they are wondering why they took the money and did nothing!

By BusinessWeek

Reports of slackening demand sent oil down another 2.5% on Thursday to $101.84 per barrel. Crude prices have declined 7.6% since the beginning of the week. Not long ago, that would have been an astonishing plunge that shook the trading establishment. These days? Nah, that’s just the ho-hum volatility in the oil market. But how is it that crude can still trade above $100 a barrel, three times what it sold for at the start of the decade, despite a very wobbly economy?

If you want to understand that, it helps to listen in to ExxonMobil’s (XOM, news, msgs) presentation to analysts in New York City in early March. Halfway through the three-hour meeting, Exxon management flashed a chart that showed the company’s worldwide oil production staying flat through 2012.

Ponder that for a minute. Exxon is the largest publicly traded company in the energy business. In fact, it’s the most profitable company in the history of capitalism, earning a record $40.6 billion last year on sales of $404 billion. Yet even with crude oil prices near all-time highs, Exxon isn’t planning on producing any more oil four years from now than it did last year.

That means the company’s oil output won’t even keep pace with its own projections of worldwide oil demand growth of 1.3% a year.

Imagine a chief executive of another growth company making a similar announcement to that of Exxon Chairman Rex Tillerson. What if Steve Jobs said Apple (AAPL, news, msgs) wasn’t going to sell any more iPhones than it did in 2007? What if Howard Schultz said latte production at Starbucks (SBUX, news, msgs) would stagnate, at least until the next U.S. president embarked on his or her re-election campaign? Shares of both companies would plummet.

After the management presentations, Tillerson took questions from the audience. The first hand that shot up was that of Deutsche Bank (DB, news, msgs) oil analyst Paul Sankey, who wanted to know why the company wasn’t showing any volume growth.

“We don’t start with a volume target and then work backwards,” Tillerson explained. Instead, he said, his team examines the available investment opportunities, figures out what prices they’ll likely get for that output down the road and places its bets accordingly. “It really goes back to what is an acceptable investment return for us,” Tillerson said. In other words, producing more barrels just to ease prices for consumers is not part of the company’s calculations.

Last year, ExxonMobil led the industry with a return on capital of 32%.

Exxon’s flat oil forecast was even more surprising because it came during a meeting when the company was trumpeting a big increase in capital expenditures — to at least $25 billion a year going forward, up from $21 billion last year.

The company also outlined a slew of big projects, 12 of which are starting up this year. These include the 600 million barrel Kizomba C development off the coast of Angola that began producing on New Year’s Day and another in a string of giant liquefied natural gas facilities in Qatar. Unlike oil, Exxon’s production of natural gas — much of it liquefied and shipped in tankers to Asia and Europe — is projected to climb over the next four years.

But how could oil production be flat? Peer into Exxon’s historical numbers and you see the problem Tillerson faces. Since 2000, Exxon’s oil output from two of its largest regions, the United States and Europe, declined a startling 37%. That’s 500,000 fewer barrels a day in just seven years.

Exxon reported 100,000 fewer barrels per day last year alone due to the nature of the contracts big oil companies sign with countries such as Angola and Nigeria. In such contracts, foreign companies put up the capital to fund new projects, and they are paid back in barrels. If oil prices rise above certain levels, Exxon gets to keep fewer of those barrels as profit for itself.

Exxon plans on bringing new fields online in Russia, the Middle East and Africa over the next four years, but they won’t be enough to generate growth beyond what the company is losing due to the maturation of its fields in the North Sea and Alaska, the nationalization of its fields in Venezuela and volumes lost due to those production-sharing agreements with other countries.

“It has always been a challenge to grow volumes when you are working off of a base as large as ours,” Tillerson told the analysts.

Indeed, Tillerson got more bad news Tuesday when a British judge freed up the foreign assets that Exxon had sought to freeze in its ongoing dispute with the government of Venezuela.

Exxon’s flat forecast was, in a way, an admission of what’s been an open secret for the industry. Big oil companies almost always forecast production growth but they rarely make their own targets.

Posted by JohnKonop on Wednesday, May 28th, 2008 at 2:30 am | under Uncategorized | |RSS 2.0 feed | Comments and pings closed. |