Following a disappointing fourth quarter that saw earnings plunge 16% year over year as production slid 1.5%, ExxonMobil (XOM +0.53%), the world's largest publicly traded oil company, is eager to boost profits and production through a wave of new oil and gas projects slated to start up over the next few years. Let's take a closer look at the company's most recent new start-up and how it may, along with a wave of other new projects, help arrest the decline in its oil and gas output.
Exxon kicks off gas drilling in Malaysia
Exxon announced that it has commenced production at the Damar field offshore Malaysia -- a vast natural gas field located off the east coast of Peninsular Malaysia with a projected capacity of 200 million cubic feet of gas per day.
Exxon serves as the operator of the Damar field with a 50% interest, along with joint venture partner Petronas Carigali Sdn. Bhd., which owns the remaining 50% stake. The start-up at Damar follows on the heels of another major project in Malaysia -- the Telok gas project, which commenced production in March of last year.
These projects will not only be crucial in helping meet Malaysia' domestic power and industrial needs, but will also contribute to Exxon's global production over the next few years, as the oil giant attempts to grow its oil and gas output by 2%-3% annually.
Exxon's ongoing challenge
Despite its unparalleled global footprint and peer-leading capital efficiency, Exxon has failed to meaningfully grow its oil and gas production over the past few years. Fourth-quarter output fell by 1.5%, or 64,000 barrels of oil equivalent per day, as new projects such as Kearl in Canada were unable to offset declining production from existing fields.
The quarterly data mark the continuation of a worrying trend: Exxon's production is down by about 15% since 2010, the year it acquired XTO Energy, and is only slightly higher than it was in 2009. However, the company is eager to reverse this trend by bringing online a wave of new projects over the next few years.
In its fourth-quarter earnings conference call, Exxon highlighted the Kearl oil sands project and a liquefied natural gas project in Papua New Guinea as key drivers of near-term production growth. It also cited onshore U.S. shale fields in Texas, Oklahoma, and North Dakota and international opportunities in Russia, Argentina, Tanzania as additional drivers of output growth.
Challenges to growing production
However, even as new projects come online, they may not be enough to offset natural declines from the company's existing fields, as well as the loss of production due to regulatory and other reasons. In addition to its base decline, Exxon will lose a significant amount of production this year in the UAE, Netherlands, and Iraq.
In the UAE, the expiration of a 75-year contract to drill in Abu Dhabi's onshore oilfields will result in the loss of approximately 150,000 barrels per day for Exxon, as well as for BP (BP +1.05%), Shell (NYSE: RDS-A), and Total (TOT +0.00%), which also each maintained a 9.5% interest in the Abu Dhabi National Oil Co., the state-owned company developing the oilfields.
In the Netherlands, Exxon expects to lose 100 Mcf per day net production this year because of the mandated reduction in gas production at the Groningen field, while in Iraq, the company's net production will be slashed by about 150,000 boe/d as its stake in Iraq's West Qurna 1 field is reduced from 60% to 35% following a sale to PetroChina (PTR +0.00%).
Even for a company of Exxon's size, these are meaningful numbers, with the loss of Iraq production alone representing a 4% decline from fourth-quarter production volumes of 4.22 million barrels per day. Further, future production growth is subject to a great deal of risk and uncertainty, including geopolitical risk in countries such as Russia and Argentina, as well as execution and budgetary risks for large, capital-intensive, and technically complex projects.
The bottom line
Despite new project start ups such as Damar in Malaysia and dozens more over the next few years, growing oil and gas production at a targeted 2%-3% per year remains a tenuous proposition for Exxon, as well as for most of its peers. However, given Exxon's peer-leading capital efficiency, superior returns on capital, and extensive investments in long-lived LNG and oil sands projects, it may be better positioned to surmount this challenge than less efficient peers such as Shell and BP.
