The Oil Drum and It's the Environment, Stupid are among those commenting on ExxonMobil's recent paid advertisement, which begins:
Will we soon reach a point when the world's oil supply begins to decline? Yes, according to so-called 'peak oil' proponents. They theorize that, since new discoveries have not kept up with the pace of production in recent years, we will soon reach a point when oil production starts going downhill. So goes the theory.
The theory does not match reality, however. Oil is a finite resource, but because it is so incredibly large, a peak will not occur this year, next year or for decades to come.
Exxon is also spreading the message to shareholders that it expects to be contributing directly to that production increase. In a presentation to Wall Street analysts last week, new CEO Rex Tillerson said the company's oil production could grow by 3% per year over the next five years.
One purpose of such announcements is to address the concerns of those who say companies like ExxonMobil have not been reinvesting enough of their profits in new oil production and refinery capacity. In his statement before the analysts, Tillerson noted that over the last 15 years, the company has consistently invested more than it earned.
Source: Oil Drum
As I noted here, comparing gross investment with net income is in some ways comparing apples and oranges. The reason is that oil companies must invest huge sums just to replace depleted oil fields and obsolete and worn-out equipment. These imputed depletion and depreciation costs are already subtracted from revenues before one arrives at profits. The question is not how big is gross investment relative to net income but rather how big is net investment-- investment over and above what is required for depletion and depreciation-- relative to net income. I would expect the long-run ratio of net investment to net income for a healthy industry with solid investment opportunities to be somewhere around 50%. My earlier post pointed out that in 2004, ExxonMobil's net income came to $26 billion, but, depending on how you do the accounting, you could actually arrive at a negative value for their net investment for 2004.
Another way to cut through the accounting is to count the teeth and look at how much oil ExxonMobil's actually been producing. The green line on the graph at the right gives ExxonMobil's crude oil and natural gas liquid production over the last decade, with the 2005 entry based on the second quarter; (more on the purple line shortly). If ExxonMobil has indeed been making big investments beyond those needed to replace depleted oil fields, they don't have a lot to show for it so far. Yes, in gross terms they invested a huge amount. But, as the graph reveals, you have to do that in this business just to stay in the same place.
Granted, the company is currently favorably situated in a number of big projects that should be producing a lot of new oil in the near future, and just finished negotiating a nice cut of Indonesia's Cepu field. The question is, how much of that new production will be needed just to replace declining production from existing fields?
Which reminds me, I said I'd explain the meaning of the purple line. That's the projection from Exxon's 2001 Annual Report, in which the company predicted that their oil and gas production capacity would grow by 3% per year between 2001 and 2007."