Oct 2006
In 1930 we found 10 billion new barrels of oil in the world and we used 1.5 billion. We reached a peak in 1964 when we found 48 billion barrels and used approximately 12 billion. In 1988, we found 23 billion barrels and used 23 billion barrels. That was the crossover when we started finding less than we were using. In 2005, we found about 5 billion to 6 billion and we used 30 billion. These numbers are just overwhelming.
– Charley Maxwell
Less than twenty years from now—not a long time in the big scheme of things—Exxon Mobil Corporation could be broke.
Imagine that. One of the biggest, most outrageously profitable corporations in the history of markets... an awe-inspiring behemoth that rakes in tens of billions per quarter in pure profit... broke. Busted. Kaput. Tapped out. Like a poker player down to the felt.
This isn't some wacked-out, nearly-impossible prediction. It's based on (or rather, extrapolated from) the analysis of Charley Maxwell, a veteran analyst with Weeden & Co. in Greenwich, Connecticut.
In addition to being one of the most respected energy analysts on the street, Maxwell has had nearly fifty years' experience in the oil & gas industry. He got his start with Mobil corporation (since merged with Exxon) way back in 1957. (To give some perspective, my father was nine years old at the time.)
After eleven years in the field, Maxwell headed for the canyons of Wall Street in 1968. He quickly established a reputation as the top oil analyst in the business, dominating the rankings for decades. Now he works with institutional traders, meets with top industry execs and OPEC officials twice a year, and routinely advises the top dogs in the energy and hedge fund world.
In other words, the guy's opinion is probably worth listening to.
In an interview with Barron's, Maxwell marveled at the utter folly of Exxon's decisions. To understand his line of thinking… and to see why Exxon could be in major trouble… we first need to consider the energy industry from a big picture perspective.
By conservative estimate, 75% of the world's oil supply is produced by National Oil Companies, or NOCs. This is not good news, as Maxwell explains:
Most of [the NOCs] were nationalized in the '70s and early '80s and they have real structural problems today. They bring in a lot of money but most of it goes to support the national Treasuries and the various political constituencies that are in favor in the various countries, whether it's the army or a host of other bureaucratic ministries. In the end, in the political battle for budgetary support the national oil companies tend to be a constituency with little or no political influence. All in all, the national oil companies have been shortchanged and held on a poverty diet for a long time.
Imagine the US Postal Service in charge of America's energy supply. The efficient, well-run oil majors are like FedEx and UPS—they do a good job, but handle a very small portion of the job overall. Now expand this analogy to a global energy scale.
The situation with NOCs is ugly for multiple reasons. One side of the coin you have leaders like Hugo Chavez, who turn their country's oil & gas operations into political fronts and largesse-distribution programs. On the other side of the coin you have leaders like Vladimir Putin, who see the strategic value of energy as a weapon.
Those NOCs who are asleep at the wheel are making the energy-supply problem worse as their operations fall into decay. Those NOCs who are wide awake see the increasing value of their reserves and are increasingly loath to share them. Witness Russia's recent belligerence regarding its Sakhalin and Shtokman fields. Russia rejected all Western partnership offers for development of its massive Shtokman gas field, on grounds that the spoils are simply too valuable to share.
Cynics have their own interpretation of the golden rule: he who holds the gold makes the rules. This is doubly true for energy reserves.
As Russia demonstrates, oil majors in future will have two choices: they will have to pay through the nose for access to new reserves, or be left out in the cold. The first option could eventually disappear altogether. And as Dan Amoss of Strategic Investment has pointed out, the inevitable corruption of paper currencies makes energy hoarding all the more likely. When the world clamors for a refuge from paper, even as the developing world bursts at the seams, NOCs will be all the more aggressive about keeping the goods to themselves.
(By the way, did you hear China will start filling its second oil reserve soon? By the end of this year we're told.)
Exxon puts on a confident face, but seems to have no plan... other than assuming things will just work out somehow. If Exxon's management is confident that cheap oil will be readily available any time soon, they are deluded. The NOCs are going in the other direction. They are moving towards hoarding, not sharing.
If not cheap oil, then, what about expensive oil?
For the most part, energy optimists don't dispute that the cheap oil is gone. They just assume that technology will save the day, by giving us access to the more expensive, harder-to-reach stuff.
Chevron's deepwater drilling is just such an example of technological triumph. So is Exxon confidently betting on technology, then? Will the great behemoth save itself with skillful application of technology?
Apparently not. Maxwell reports:
As we understand it, Exxon is not taking on any leases for deep-water drilling after 2008. They haven't leased anything. If you think deep-water leases are going to be very important, and the recent big discovery in the Gulf of Mexico suggests they will be, you would have contracted for the future use of rigs. But if you think the deep-water leases aren't going to be important because the oil found will be more expensive than the common garden-variety Texas oil from 6,000 foot down, and that you will have lots of oil coming from sources like that then you don't need these high-cost leases down the road. On the other hand, many major oil companies have taken these rigs to 2010 and 2012 and 2014 and are pre-empting Exxon's ability to get these rigs. Exxon is putting itself at a huge disadvantage if there should be a need for this type of deep oil. I find that remarkable.
Maxwell goes on to clarify his belief that Exxon is taking a huge gamble, on the assumption that oil will go back to $30 and none of this high-tech foofaraw will be necessary. He thinks Exxon is "dead wrong"... and I completely agree.
Optimism is good when logic and reason supports it. Optimism sans logic is foolhardy and dangerous. I agree with the energy optimists that technology will eventually pull us through... the key word being ‘eventually.' This idea that oil markets will have a goldilocks soft landing, though, and the gusher days of yesteryear will roll back around, is just plain silly.
This leads to a conundrum: Exxon is an excellent company, with a history of excellent management. How could they make such a bone-headed mistake?
Not to put too fine a point on it, how could they be so... so... dumb?
It makes sense if one considers that Exxon is steeped in a rigid, old-school culture that doesn't respond well to change. It fits in terms of seeing Exxon as a gigantic, tradition-steeped company with a history of dogmatic authority at the top of the pyramid.
It also makes sense that Exxon would have adopted this 'nothing is wrong' view early on, as a defense of their larger-than-life profits, and then got stuck in a rut of consistency bias.
For Exxon management to adopt the peak oil view, even as they rake in tens of billions per quarter, would be a public relations disaster. If the world's most profitable corporation were to sound the energy alarm, political heat would increase to unbearable levels. Nationalization would be on the table.
Furthermore, the required investment response to peak oil—ramping up capital expenditure like crazy, plunging into high-cost, high-risk deep water projects with both feet—would be anathema to Exxon's hard-bitten conservative management. So they reject the facts out of hand, and stubbornly dig their own hole.
In sum, Exxon has become entombed by its own success and its own culture. This in itself is not surprising. It has happened plenty of times before, to companies and empires alike.
One last eye-opening word from Mr. Maxwell:
I estimate Exxon will peak in 2011. BP will peak in 2012. Total (TOT) in 2012. ConocoPhillips (COP) in 2013. Marathon Oil (MRO) in 2009. Royal Dutch (RDS-B) in 2009 and Hess (HES) in 2010. But a company like Suncor Energy (SU), which operates in the Canadian tar sands, will peak around 2045. It is a completely different world. EnCana (ECA), the big Canadian gas and tar sands producer, will peak around 2020.
Now, can you imagine—just imagine—the valuation boost that companies like Suncor and Encana will get when it becomes clear to the world what is happening? When the street wakes up to the fact that Exxon and its ilk are set to peak within the next five years, and find themselves on a path to oblivion thereafter?
The Suncors and Encanas are indeed in a ‘different world' as Maxwell suggests... they are deep in the oil sands, investing in the future, doing it right.
