Alexander Khurshudov: No indulgences for the sufferer Exxon
Moscow. The US Finance ministry decided not to make any exemptions from the anti-Russian sanctions and not allow Exxon and other American companies to drill in the RF, having consulted Donald Trump, the US president. According to the information published by Interfax on 21 April with reference to Stephen Mnuchin, the ministry head.
Alexander Khurshudov, the Oil and Gas Information Agency expert, comments the news.
There are interests of the world’s largest oil and gas corporation and the plans for the exploration of the most complicated oil-bearing area offshore Russia behind these brief phrases. So, I am going to comment in detail. The formation in question is called Tuapse Trough. But first let’s talk about ExxonMobil.
1. INDISPUTABLE WORLD LEADER
In 1999 ExxonMobil Corporation, created as a result of a merge between Exxon and Mobil companies, became the planet’s largest petroleum company. 14 years later its market capitalization reached $418.2 bln, which made it the leader among public companies. Later it had to give way to the fast-growing Microsoft, Apple and Google, but it still managed to stay in the top five.
This is a unique corporation. There was a time when its charter forbade shareholders to possess more than 3% of the stake. It was a kind of a billionaires’ union. Even now nobody owns the blocking stake; 98.5% of the stake are listed in the stock exchange. The major shareholders are Vanguard Group, Inc. (6.62 %) and State Street Corporation (4.47 %) investment groups. The company showed the highest profitability: for example, in 2008 its operating income amounted to $84.1 bln with the revenue of $477.4 bln.
ExxonMobil operates in 100 countries on six continents. It is the leader in the world’s , petroleum refining it has large stakes in 37 refineries. It has a significant share in the petrochemical industry: the company produces normal and aromatic hydrocarbons, glycols, plastics, rubber, lubricants, catalysts. Last year Exxon produced 85 mln tons of oil, 27 mln tons of other liquid hydrocarbons, 105 bln cubic meters of gas, processed 204 mln tons of oil, sold 250 mln tons of petroleum products and 25 mln tons of chemicals.
With the available financial reserves and new technology Exxon Mobil is very active in terms of business. 7 years ago, when it decided to pursue shale oil and gas production, it bought XTO Energy for $25 bln without much consideration. Exxon has been using hydraulic fracturing for 60 years, it was one of the first to implement LNG projects, put on-stream offshore production at the depth of 1,200 m in Nigeria. It was for its specialists to drill 9 out of 10 of the world’s longest wells 12.5 to 13.5 km long in Sakhalin. No wonder that it was Exxon which became Rosneft’s strategic partner; the super-complex projects they undertook together were the development of the Bazhenov and Abalak formations in Siberia and the exploration of the deep-water offshore in the Kara and the Black Seas.
Speaking about these amazing achievements there is just one thing that makes one uneasy, which is the fact that they all date 5-10 years back. It’s true that some decline in performance under the low oil prices seems quite justified. But it turned out that Exxon has other problems as well.
2. DEBTS INSTEAD OF INCOME
At the end of last year American media talked a lot about the article by Steve Spocco Big Trouble at Exxon Mobil. The author analyzed the major financial indicators’ trends and reached the following conclusions:
1) The company’s cash flow decreased 6.25 times over the last 5 years, from $24.4 to $3.9 bln, and with the dividends paid it has become a negative value (pic.1):
Pic.1. Free cash flow vs oil price
2) Capital expenditures almost doubled (pic.2), while oil production declined,
Pic.2. Capital expenditures vs liquid hydrocarbons production
3) Exxon spent $ 220 bln over the last 10 years to buy back 1.9 bln of its shares,
4) The total long-term debt tripled over the last 5 years and reached $29.5 bln.
During discussion at the forum the majority agreed that there is no need to worry: as soon as the oil prices grow, Exxon will restore its leadership. The company is indeed too big to fall, the cash flow from the sales of petroleum products and chemicals provide a good support. However, we shall go a little further and try to see into the root causes of its present state.
In its last year’s report the company briefly outlined its perspectives. Here they are.
Exxon has a 45% share in the development of Guiana deep-water offshore. The project gently called Liza is being implemented there. The company claims that a multilateral well drilled there found 130 mln tons of PROVED reserves (oil equivalent) and it is planning to construct facilities with a 5 mln t/year output. Besides, Exxon has another lease in Guiana ultradeep-water offshore covering 3.5 thousand square km.
Note: Sensational announcements that a SINGLE WELL discovered hundreds of millions tons of reserves always make me smile. I haven’t seen such cases in reality. These figures are based on seismic data under the assumption that the thickness and the characteristics of the formation don’t change across the area, there is no aquifer and the nature favors the explorers in general. Then everything turns out to be not so bright, the estimated reserves decrease manyfold, but nobody reports that. I feel equally doubtful about the single well that discovered 100 mln tons of oil reserves in the Pobeda oilfield in the Kara Sea. To prove such amount of reserves it normally takes to drill 10-20 exploration wells.
In Nigeria deep-water offshore the second phase of production drilling within the North Erkha project is completed. The new exploration well Owowo-3 discovered oil reserves, which were estimated a little more modestly, within 65-130 mln tons.
In Australia the third set of the joint project Gorgon Jansz with the output of 15.6 mln tons of LNG and 2.9 bln cubic meters of natural gas has taken off. Underwater wells will be drilled to produce gas in the West Australian offshore.
In Papua-New Guinea the recently constructed LNG plant reached the output of 8.3 mln t/year. Exxon also has an offshore lease covering the total of 8.5 thousand square km, an exploration well there discovered a gas flow.
In Canada the company has mineral rights for 10,400 square km onshore and 5,200 square km deep-water offshore. Last year 12 wells were drilled there. Besides, Exxon is producing oil bitumen in the area covering 1,120 square km.
In Kazakhstan the company is a part of the consortium developing the giant oilfield Kashagan in the North of the Caspian offshore; Exxon’s share is 16.7%. Last year the pilot operation, previously suspended because of the pipelines failure, resumed there.
It goes without saying that the fields, which previously came on-stream, continue to produce. They are the West Kurna in Iraq, Tengiz in Kazakhstan, Upper Zakum in the UAE, LNG production in Qatar offshore and Sakhalin-1 in Russia. But here much production increase can’t be expected. Exxon’s new reserves are primarily located in deep-water offshore, the work there is associated with an enormous risk and under the current prices is not feasible at all. For instance, the Hadrian South oilfield in the Gulf of Mexico at the depth of 2,400 meters was discovered in 2009, but hasn’t been developed yet.
Onshore Exxon focuses on hard-to-recover (shale) reserves in the US and Canada, besides, exploration is going on in Argentina. The costly XTO-Energy works in 14 American states with its major oil assets in the Permian Basin and Bakken fields, and gas assets in the Marcellus and Utica plays. They are undoubtedly the richest shale formations in the US. Last year XTO-Energy produced 9 mln tons of oil and 36 bln cubic meters of gas, but because of the horribly low prices the total revenue amounted to just $4.4 bln. With such rate of return, the invested $25 bln will never pay back; though, even if the prices double, the return of investment will take decades. So far the US oil and gas production cost Exxon $4 bln losses in 2016 (see the table 1)
The table shows that the revenues from refining and petro-chemistry have recently been stable, but not too high. It’s understood, since the global competition is growing, Chinese, Arabian, Russian companies are entering the market – one can’t be the market leader forever. At the same time the upstream revenue decreased manyfold.
Finally, let’s have a look at the oil and gas reserves owned by Exxon. The total value is impressive – 19.94 bln barrels of oil equivalent. Table 2 shows what they are made up of.
It turns out that natural gas accounts for 47% of the proved reserves, natural gas liquids account for another 7.7%, they are propane-butane-pentane traded at $16-21 a barrel. The reserves of oil actually being produced amount to 4.7 bln barrels (610 mln tons), and another 3 bln are awaiting in the deep-water offshore… There doesn’t seem to be a source for future super-profit.
So, with the oil prices increase Exxon’s trouble won’t be over. You can say that its ex-head Rex Tillerson joined politics just in time. It was he who was heading the company when it dived and his seat must have been on fire even then.
As a preliminary summary I can say that good reserves are the MAIN source of income for oil and gas companies. One can work miracles drilling complex wells, but if each of them produces as little as 100 thousand barrels one has to face losses. One can make money on processing and sales, but there is a competition for every cent there. While Sakhalin-1 project has no competition, at its peak every well produced half a million tons of oil a year, they paid back many times and still continue to bring a huge profit. Is it clear now why Exxon is so eager to work in Russia?
3. TUAPSE TROUGH
Tuapse Trough is on the coastal slope of the Black Sea in the depth varying from 40 to 2,100 m. The trough is 270 km long and 40 km wide (pic.3). The oil and gas exploration license belongs to Rosneft.
The total potential resources are estimated at 1.5 bln tons. The seismic survey conducted there identified 33 perspective structures, a part of them ready for exploratory drilling. According to the license terms an exploration well is to be drilled this year and it is supposed to discover the first oil.
There might be submerged ancient cities in the lease territory. In the North-West part of the trough mud volcanoes have been discovered. At the depths over 200-300 m the water is infected with bacterial hydrogen sulfide. This toxic gas can cause brittle fracturing of resistant steel and also affects some types of plastics and rubber. These problems can be solved technically, but they increase the cost of equipment and safety.
The assumed rocks structure of the Tuapse trough is shown in pic.4. Oil may certainly be found in the upper Miocene horizons as well, but the reserves there are unlike to be significant. Most Mesozoic deposits are buried 3-5 thousand meters under the seabed and are overlaid by clays up to 4 km thick. This is where abnormally high formation pressures within 1,000-1,200 bar can be expected.
I don’t know a place in the world with more complicated conditions for oil producing. In case of an accident similar to that in the Gulf of Mexico, the oil spill may reach a million tons, which would mean a disaster for ALL the Black Sea resorts.
We shouldn’t even try to recover this oil. The time for it hasn’t come yet. Also there is no pressing need for it: Russia is going to decrease production in the years to come. It’s time to stop selling crudes under low prices.
So, in conclusion let me express my profound gratitude to the US administration for the beneficent sanctions, which work to prevent this extremely risky project. Luck is on Russia’s side: it’s not the first time that the actions of its opponents do a world of good to it.