Exxon looks to US shale fields to drive global growth

[TEXAS] In a world of US$55 a barrel oil, Exxon Mobil Corp is relying on shale fields in Texas, Oklahoma and North Dakota to help fund the next wave of big overseas projects it needs to thrive in the future.

Exxon unveiled plans Wednesday to double the amount of oil it pumps from US shale fields during the next three years, even as it moves more cautiously on investments in big projects elsewhere. Decades after quitting many US fields to pursue bigger reserves from the Middle East to the North Sea, Exxon now sees its US assets as its most reliable cash engines.

With its leading technology, expertise and market clout, the biggest US oil producer has been able to reduce costs and improve efficiency in domestic shale fields it began acquiring in 2010. That progress, coming even as the price of crude has dropped, has allowed Exxon to generate "attractive returns," said Chief Executive Officer Rex Tillerson.

"It might surprise some people how attractive some of these things are in this environment," Mr Tillerson told a gathering investors in New York Wednesday. North American shale "is more resilient than some people think it is." Exxon expects its worldwide production of crude and natural gas to climb 7.5 per cent to the equivalent of 4.3 million barrels a day by the end of 2017, the Irving, Texas-based company said. The last time Exxon performed at that level was 2011.

The US contribution to Exxon supplies has been nudging higher for the last few years amid Tillerson's renewed focus on domestic assets in shale and other so-called tight rock resources that require intensive drilling and fracturing techniques.

US wells accounted for 22 per cent of Exxon's crude output last year, up from 15 per cent in 2008. The supply bump from Exxon's domestic, onshore fields during the next three years will be driven by drilling in West Texas, North Dakota and southern Oklahoma, according to the company.

A "significant portion" of US shale fields are competitive with overseas oil projects at current prices, Mr Tillerson said, thanks to more efficient production techniques and cost cutting. His statement contradicts many analysts who had predicted most shale wells would become money losers as crude fell below US$75 a barrel.

The solid returns offered by US shale gives Exxon more flexibility to defer investment in bigger projects until market conditions improve, Mr Tillerson said. A nine-month rout in global crude prices is spurring oil companies to postpone or cancel exploration projects to conserve cash.

For Exxon, a fresh injection of shale oil couldn't come at a better time: the company's fourth-quarter output fell to the lowest for that period since it acquired Mobil Corp in 1999. And its exploration failure rate worsened to 39 percent in 2014 from 33 per cent a year earlier.

Exxon has about US$1 billion tied up in a Russian joint venture with Rosneft OAO that's been left in suspended animation after US and European Union sanctions forbade investment in that nation's Arctic, shale and deep-sea oil sectors. Russia surpassed the US to become Exxon's biggest exploratory prospect last year.

Exxon is sticking to production targets established when oil traded for more than US$100 a barrel, signaling confidence that demand for crude-based fuels will continue to expand.

The company plans to increase output by 2 per cent this year and 3 per cent annually in 2016 and 2017, according to a presentation that accompanied Mr Tillerson's remarks. The outlook assumes an average crude price of US$55 a barrel.

The forecast is little changed from Exxon's outlook a year ago. At the time, Brent crude, the benchmark for international oil sales, traded for about US$108 a barrel. The price has since fallen about 44 per cent as global supplies grew faster than consumption, an imbalance Mr Tillerson suggested may not change any time soon.

"There's a lot of supply out there and I don't see a particularly healthy economy," Mr Tillerson said. "My opinion is, people have to kind of settle in for a while, and I can't tell you how long that's going to be." Crude output from US shale fields probably won't decline much, if at all, in response to tumbling oil prices, said Tillerson, who entered his 10th year as CEO in January. Politically volatile regions such as Libya and Iraq will add to the global glut as conditions improve, putting additional pressure on prices, he said.

Production growth will be driven by oil and so-called gas liquids such as propane, which will increase by 7 per cent this year and 4 per cent annually in 2016 and 2017, according to the presentation. Natural gas output will drop 2 per cent annually this year and next before rising 4 per cent in 2017, according to the presentation.

Exxon fell 0.5 per cent to US$87.18 in New York Wednesday. The shares are down 9.7 per cent in the past year.

BLOOMBERG