Speaking of bumpy plateaus

Exxon average daily oil production, by year, 1997-2005. Click to enlarge. Believed to be all liquids. Source: Exxon annual reports and new press release for 2005 production. Hat tip to Southsider1.

Anyone care to estimate the price elasticity of oil supply from this time series? Let's see, if you double or triple the price, and supply doesn't change at all, 0/N = 0. At least as perceived by Exxon, oil supply appears to be completely inelastic - no response to price whatsoever.

It's because the market isn't really free.  Darn treehuggers blocking drilling in the best areas.  And socialist countries like Venezuela and Saudi Arabia won't open their oil fields to capitalism.  It's all those libruls fault.
Don't forget the crazy scientists tooling around in their Mr. Fusion-powered DeLoreans.  That does more to keep the oil numbers down than most people realize.
Of course.

Doesn't matter any more, there's not much more oil to find and Lee Raymond knows that. They've got their current projects and there are few more to put onstream.

This is why I believe Lee only reads the financial reports but is unconcerned with the actual production data.

Why would he care--given his mission to increase company and stockholders profits? So the bottom line is that consumption is inelastic given flat production and the profits go up and up and up and up and up.....

Win-Win for Ray. Lose-Lose for us.

Lee retired.  Rex Tillerson is the new standard-bearer--and whipping boy, I guess.
You're right, of course. I guess I've been so used to despising Lee for so long that I can't get used to this Rex thing.
From Morningstar, here's  the revenue stream for Exxon since 1994:

The year 2005 (not shown) saw revenue of $340,000,000,000, a significant jump over 2005.

Exxon doesn't need to increase production to grow it's revenues.  I would think the company is simply managing it's reserves, much like an insurance company, in order to smooth the growth path.


"The year 2005 (not shown) saw revenue of $340,000,000,000, a significant jump over 2004".

That's a damn lotta zeros.
What's the lead time on new projects?  Just because the near-term (near-month future or spot) price jumps doesn't mean the assumed planning price (the internal "price deck") changes at all.

One other thing you don't capture is Exxon's status as a "baseline producer."  It is the marginal producers that increase production in response to pricing changes, and based on the ramp up of the Canadian oil sands (a whole colony of marginal producers) and the money spent on production enhancement technologies (fracing and pumping), pricing does have some impact on supply.

Oil is relatively inelastic, I'd imagine (especially at high prices where all marginal fields are profitable), but it isn't as cut and dry as you portray with your simplistic charts.

The response time for new projects is anywhere from 2-6 years (or more) depending on the complexity of the project (a simple tie-back to an existing platform, versus a major new development in an area with little infrastructure). So there's been time for a response to show up.

The EIA appears to believe that US oil production would have at least some elasticity (they show substantially different production profiles based on price). Of course Exxon is only one data point, but as either the largest or second largest of the oil majors, and a highly diversified one, they are exposed to a significant cross-section of the industry, so that the fact that they cannot (or won't) increase production is significant. Most of the other majors are actually in decline:

The main exception, BP, has primarily been benefiting from significant exposure to a Russian subsidiary.

I should add that their annual reports generally show an intent to increase production. Eg. spot checking Exxon's 2001 and 2004 reports, in 2001 they intended to grow production by around 3% annually, and in 2004 they intended to grow at about 3 1/2% a year to 2007. However, it doesn't seem to pan out that way.

Here's their exploration spending from the 2004 annual report. Doesn't look like we should expect a fundamental change in the next few years.

I'd love to see this an Excel 'Area'-type chart with 100% area including these OIC numbers as a percentage of the total liquids daily production for the same period.
I think this is a model of sustainable business. Every year there is the same amount of oil production, but it generates ever-increasing sales and profits. How cool is that?

Furthermore, "ExxonMobil's reserves life at current production rates is 14.5 years." Since they replaced 112% of production, roughly the same as they do each year, the business can go on this way forever.

I also take comfort in the fact that "The portion of proved reserves already developed increased to 64 percent." It's good to know there aren't many more places they need to drill ...

Just like last year, though, if you read Exxon's reserve press release, virtually all of their reserve additions came via the pen, signing LNG contracts with Qatar, rather than through the drillbit, total oil field visualization, or whatever magic wand will find all that high-tech oil...

This years reserve release:

IRVING, Texas--(BUSINESS WIRE)--Feb. 15, 2006--Exxon Mobil Corporation (NYSE:XOM) announced today that additions to its worldwide proved oil and gas reserves totaled 1.7 billion oil-equivalent barrels in 2005, excluding the effects of using single-day, year-end pricing. Production totaled 1.5 billion oil-equivalent barrels in 2005, with 917 million barrels of liquids and 3.7 trillion cubic feet of gas produced. The corporation replaced 112 percent of production including property sales, and 129 percent excluding property sales.

Consistent with our significant investment and growing participation with Qatar Petroleum in the development of liquefied natural gas and pipeline gas sales from Qatar's North Field, proved reserves additions in Qatar totaled 1.6 billion oil-equivalent barrels.

Compare this with last year's release:

IRVING, Texas--(BUSINESS WIRE)--Feb. 18, 2005--Exxon Mobil Corporation (NYSE:XOM) announced today that additions to its worldwide proved oil and gas reserves totaled 1.8 billion oil-equivalent barrels in 2004, excluding the effects of using single-day, year-end pricing. The Corporation replaced 112 percent of production including property sales, and 125 percent excluding property sales.

Consistent with our significant commitment and growing participation with Qatar Petroleum in the development of liquefied natural gas from Qatar's North Field, proved reserve additions in Qatar totaled 1.7 billion oil-equivalent barrels.

What Exxon has done is found a way to add reserves in Qatar essentially without exploration in a convenient manner, evidently massaged to give 112% reserve replacement.  They are VERY quiet about their liquid base, hiding it in the depths of their annual report.  Liquids production was 935,000 bbl/d in 2004, and 917,000 bbl/d in 2005, for reference.

The NYT (login req) recently looked at Exxon's capital investment vs dividend payment history since 1976. Whereas they used to invest $2 for every $1 returned to shareholders, this dropped to $1:$1 after 1997, and was only $0.70:$1 in 2005.

I checked back to 1976, and found that until 1997, Exxon always invested more than it made. Now it invests less than half of profits.

One way to monitor what Exxon Mobil does with its money is to compare the amount it distributes to shareholders, via share repurchases and dividends, with the amount it invests in capital spending, exploration and research and development.

A decade ago, Exxon invested more than $2 for every dollar it distributed to shareholders. Last year the figure was 70 cents.

In 2005, it reduced the number of shares outstanding by 4 percent.

There is a phrase for that strategy: gradual liquidation. It is an excellent strategy for a company in a declining industry with few investment opportunities. Let us hope that is not the case here.

No sense making long term investments in a short term industry.
They said they have 14.5 years assuming current rate. Does that meanthey have a reserve of 14.5 x 1.5 = 22 billion oil-equivalent barrels at the end of 2005 (including new 1.7 billion oil-equivalent barrels). If I've got this right, then another way to look at this is that the depletion rate is 1/14.5 = 6.8%.
From Exxon to Total, production is flat, yet profit has soared.  Is that lack of supply or just good business sense?
It's simply the price of the product they are selling minus their production costs. Recently one has increased faster than the other. The price has increased three-fold, real production costs are anybody's guess, I think they have probably increased a bunch for conventional LSC and come down a bit for certain uncon, but there is no way that the price to pull a barrel has tripled in the same time. There is still a lot of upside potential in the oil industry for a few years. I think the oil industry knows alot more than people give them credit for. And they are under no obligation to share that information. So to answer your question, it is just good business sense.
Whether it is good economic sense depends on their assumptions about the future. If they think prices are going to soar, it makes sense to hold back now so they have more to sell in the future. If they think prices are at a temporary high, then they should be working to increase production now to take advantage of current high prices. It's kind of hard to see a scenario where the right thing to do is to keep production constant, but you could argue that if there's so much uncertainty in future energy prices that they don't know what's going to happen, then steady production is a relatively conservative approach.

Note too that the only scenario where it makes sense for them to be trying their best to increase production, but failing due to supply constraints, is where they think prices will fall soon. That doesn't really work, because if it really were so impossible for them to increase production despite their best efforts, that would be a strong sign of an impending peak, meaning future shortages and increased prices. And as noted above in that case they should be holding back production in order to maximize profits.

It's pretty hard to square their behavior with a Peak Oil Now scenario and have it make business sense.

My guess would be that Exxon executives do not believe in peak oil now, that they were genuinely trying to increase production at 3% a year to maintain or increase their market share as the market grew, but they underestimated the decline rates in their existing production base and so only maintained production more-or-less flat. Their executives are on record here and there as saying they think oil is going to go back to $45, and I don't see an obvious reason to think them insincere in that respect (just because they don't have a vested interest in talking the price down - not that they aren't capable of mendacity if they think it is in their interests - their climate change actions have proven that).

Obviously Chevron has a different view...

Hmmm...  Stuart, when you say "My guess would be that Exxon executives do not believe in peak oil now..." are you saying that your guess is that, at this point in time, they don't believe in the concept of peak oil, or rather that they don't believe that oil is near peaking now?  I would have a very hard time believing the former, so I'm guessing you mean the latter.

You and the other bright lights on this topic have been building a thorough and convincing case that peak oil will happen fairly soon.  If the executives at Exxon honestly don't agree, that would be really interesting.  Everyone can't be right about how soon oil is peaking, can they?  While you've done some really excellent analysis, I can't imagine that the execs at Exxon don't know the truth.  So either your analyses are right, and the Exxon execs know it but aren't willing to say it, which seems perfectly plausible, or your analyses are wrong and they know there is nothing to worry about.

I'm laying most of my money on you being right and the Exxon braintrust knowing it but not letting on.  If you really think they understand otherwise, I might have to rethink things.  

You're correct in your interpretation that I meant I doubt they believe oil is peaking now (I'm sure they think it will peak eventually).

I suppose we don't have enough evidence to say really. Are they more like, say, Bernie Ebbers who clearly believed his own hype as his company crashed to the ground and took him with it, or more like the Exxon execs who were cynically selling stock hand over fist while boosting the stock price to analysts. Could be either way.

I think you are right. But I draw attention to your last statement - "It's pretty hard..."

That doesn't translate to impossible. I'm going to think about it and try to square it, just for the hell of it. After all, that's what we're here for, if we can't do it, nobody can.

I don't think it's so hard to explain. If they think prices are going to soar, it almost makes sense for them to cut back now so they have more to sell in the future. However, that behaviour would be known as "hoarding." What do you suppose the reaction would be in Congress if Exxon/Mobil, or any of the oil majors for that matter, were found to be hoarding available production of oil? We would have the biggest investigations of price manipulation since Standard Oil.

If I were running such an organization, I would only hold back now to the extent that it wouldn't trigger investigations. It seems perfectly reasonable to hold production at the current level in that case.

In fact, they would probably release a 'smoke-screen' annual report which said that they were going to increase production by 3% each year for the next X years, from projects Y, Z and W.

When in fact they knew that these projects would only cover their declines.

That way they could claim in any investigation that they under-estimated their rates of decline in their existing FIP.

Sound plausible? Sound familiar, in fact?

Your reasoning is plausible in some alternative world when all "externalities" like government, media, shareholders, executives that plan safe retirement etc. are non-existent.

First, Exxon-Mobil it too huge to start hoarding oil without the risk of investigation.

On the other hand it is too small for even a moderately-sized cut (say 200 kbd, which is 10%) to influence prices in a world-scale market. They will lose market share and their shareholders will ask them where are our profits?

Actually most likely both the government and shareholders will sue them. AFAIK in USA laws require that public companies to protect the interests of their shareholders by all means. In both cases willingfully cutting the production will be a very very bad idea.

Well that reminds me of a TOD article  by Dave from around the new year: The Extraction of Exhaustible Resources.

It discusses the work of Harold Hotelling regarding the Extraction of Exhaustible Resources, including the idea that there is an incentive to leave the oil in the ground for later when the price will be higher. But the price has to be expected to rise quite a bit to justify leaving the oil in  the ground:

If one "owns" an oil well, one has to decide whether to "produce" (i.e. extract) and sell the oil now or later. If one produces and sells the oil now, one can put the money in the bank, and it will grow because of the interest it will earn. If on the other hand one produces and sells the oil later, one has to discount the money one will get for the oil, because one is getting the money later, and not now. With either way of looking at this, there is only an incentive to produce and sell later (rather than now) if one has the certainty that the oil in the ground is appreciating as fast as the money in the bank (in annual percentage rate), or as fast as the annual discount rate used in the operation one runs. Many operations (companies, etc.) use an annual discount rate of 10% or even larger.

Consider an annual discount rate (or interest rate) of 10% and a 25 year-long generation. In 25 years, a compounded 10% annual interest rate will multiply an original investment by a factor of 10 (yes, ten), and an annual discount rate of 10% will decrease a later money receipt by a factor of 10. What does this mean? It means that an oil well owner using a discount rate of 10% has no incentive to leave any oil in the ground for our children 25 years from now unless there is a certainty of getting the children to pay 10 times as much for the oil as we are paying now, and our grandchildren 50 years from now would have to pay 100 times as much as we are paying now.

(from Dave's article, quoting Francis de Winter at hubbertpeak.com.)

Oil companies could believe near-term peak oil is likely, but still not be convinced that the increase in prices will justify pausing production now.

As for risking an investigation by congress, I really don't get that. It's a free market, and they don't have to pump at full blast if they choose not to. Is there some law against that??

In the seventies, congress passed windfall profit taxes on oil companies. I think it's a very real threat that it could happen again.
Very interesting post. Note that if oil companies COULD somehow restrict output, then their profits would increase hugely, because the demand for oil is highly price inelastic. Thus, if they somehow could form a secret cartel (Oh, this would make a great thriller movie . . .) or somehow communicate with winks and nods to divide up the market and hold down output, or maybe (here comes another political thriller plot . . .) bribe key legislators and prosecutors so that they can blatantly get away with illegal oligopilistic practices, oh me, oh my, they could jack up profits to double or triple current levels, if only they could figure out how to get production down.

Now, suppose Israel bombs Iran back to the stone age in a few weeks, and Iran stops exporting oil . . . now there is a third great premise for a thriller.

Writerman, get to work!

I have had a thought on what is happening with the oil price recently this morning and this is the closest post I can connect to (probably be an open thread soon after I post this).

For those that remember the Miner's Strike in the eighties, when Maggie Thatcher defeated Arthur Scargill. Scargill decided or was forced by circumstances to go on strike as spring was starting, the power stations had massive amounts of extra coal mined by his union members during the winter period. Using coal as a weapon of choice was negated for 6 to 9 months, until demand for electricity picked up again next winter. Thus Scargill and his union members had a very long wait on no pay before anything that could bother authorities occurred. Thatcher forced Scargill to declared a war that he could not win.

If you see the similarities with US (Maggie Thatcher), Iran (Arthur Scargill) and coal (oil). The US has had a few months of record levels of imports of crude, petrol and distillates. The storage tanks can't have much more storage left to fill up. If Iran decides to play silly buggers and stop its oil exports, its 2.5 million barrels a day being taken off the market could be a useless ploy. We are coming into slack (spring) period in the oil market, OPEC may need to cut back on oil production to stop the price of crude falling too much. If Iran stops its exports, the US thumbs its nose at Iran saying we have plenty of oil stocks for 6 months - go ahead and make our day, OPEC instead of forcing its members to have production cuts now tells them to carry on producing as normal, the oil price stays within acceptable boundaries to OPEC and the US, Iran looses out on oil money and gets a black mark on its copy book.

Does this scenario make sense to people (okay to UK TODers. US TODers may not know who Scargill was)?

US commercial stocks are about 30m above normal, although maybe half of this is owed to the US SPR. The loss of 2.5m/d would be felt immediately. The 685m left in the US SPR (the world's largest crude storage) could be drawn down, dropping to zero in 9 months, but if used for such a situation it would hardly be strategic. Most likely the shortfall would simply translate into higher prices, 100+, or whatever is required to reduce demand 3%.
I suspect USA and Europe will release some of their SPR but I don't see them draining it down significantly - they know they will need it in the future and it will have to be refilled eventually. Probably after the psychological spike they will try to moderate the price in the $80-90 range until the storm is over.
You are suggesting the cartelization of the Oil Market.

Exxon-Mobil has a share less than 3% of that Market, and there are 4 other companies with a market share above 2%. Thinking about a Cartel in this situation is quite impossible.

If they aren't producing more it's because they can't.

Even OPEC can't maintan production though vowing to do so:


I was reading (in "a thousand barrels [...]") that state owned oil companies controlled the bulk of the worlds reserves these days.  From the news and the web I think of Exxon as being "big" ... but I found a chart on-line:


Check out page 8.  Exxon is "top US" company in reserves, but that puts it in perspective.

The guys at XOM (Raymond, I think, in the earnings call a couple of quarters ago) have said that they think geopolitical/economic events have pushed oil prices artificially high and that they manage the company toward an expected long-term price of $35/bbl.

Like an airline who sees a short-term demand spike and flies at capacity but doesn't buy more planes vs. the airline who interprets the demand as a long term shift and takes a bunch of debt to buy more planes. In the short term, airline A looks like a genius. If/when the spike subsides, the latter guy is screwed. If not, of course, airline B is the only one with capacity to win the long term.

So perhaps the plateau you see is a function of that strategic plan. You can envision high-risk or $35+ site projects getting nixed at the executive level.

So here's a question for you. I'm a (gasp) XOM stockholder. Love those dividends baby! Been a fantastic investment over the last few years. And will be over the next few, I suspect.

But let's assume that their $35 projection is folly. Let's assume we're headed for $100+ sustained. That means someone else will capitalize while XOM falls behind. Who is that? (maybe that's the deepwater guys like Diamond, DO)

That is, help me pick the investments for 2008-2012 Who do we see optimizing the company around $100 oil rather than $35? (and for the sake of argument, let's exclude social consciousness from this decision. Let's simply answer who is the best positioned to grow market share and profits in the next X years, assuming $100 oil.)

Rather than guess who might do best at 100, I try to pick who will do best at 50 - which might be the same. I like ard (oil) and gmxr (ng), two young companies with very good and growing reserves/$ ev, and who are also growing revenues and earnings at a rapid rate (both doubled earnings 3q/2q 05, and gmxr increased reserves 149%, ard yet to announce.) All of their assets are in the US, and sufficiently far from gom. Because their reserves are undervalued by the market, both are takeover candidates - indeed, both companies have indicated this is the plan.