Exxon Oil Supply Outlook 2015

Source: Exxon, rotated annotations added by Prienga

From the early 2000s until 2011, just like OPEC, non-OPEC producers could count on increasing oil prices to support investment activities. Production challenges could be addressed with 'more metal': larger production platforms, deeper wells, and more sophisticated drillships, for example. Capex more than tripled during this period. And yet, all this yielded little by way of production gains.

By 2011, oil prices were at carrying capacity, and by 2013, operators began to trim their capex budgets, as E&P costs continued outpace oil price gains. This mismatch between revenues and costs is set to persist, and therefore the industry will not able to rely on price increases to support increasing investment. Rather, production gains will have to come from technology improvements. Brains, rather than money, will have to carry the load--even if oil prices recover.

For conventional production, this is a big challenge, and maybe a very big challenge. It is far from clear that technology can advance as fast costs have been rising. Thus, any increase in conventional production will depend on the difference between OPEC production gains and non-OPEC conventional losses to the extent not sustained by technology improvements. At $85 / barrel, conventional losses will be outpacing OPEC gains, at least for a few years.

Deepwater

Within conventional production, Exxon sees deepwater as carrying much of the load. Growing deepwater supply is to offset conventional declines elsewhere. This seems far from certain, however. Offshore exploration results in the last two years have proved disturbingly weak. Of course, Brazil will add a few million barrels / day to 2025, but one has to wonder whether deepwater production is sustainable at high levels beyond 2030. Perhaps Angola will see Brazil-like finds and production gains. Notwithstanding, Exxon's deepwater forecast looks too optimistic, particularly after 2030. Deepwater may well peak before that time. Also, the deepwater outlook suggests a high oil price environment. If oil were $80 / barrel (and Brent's currently an astounding $65), deepwater would be lucky to hold current production levels to 2020.

Notwithstanding, if we consider the conventional outlook as a whole, Exxon has taken the view that the conventional system, as it existed in 2005, has done what it can.

Unconventionals

From here on out, Exxon sees all net supply growth coming from unconventional production. Shale oil, Canadian oil sands and natural gas liquids (associated in significant part with shale gas production) are viewed as meeting the needs of global demand growth. This reflects realities on the ground since 2005. For the last decade, these sources have provided more than 90% of global supply growth. Exxon sees more of the same.

Oil Sands

There is nothing particularly controversial about Exxon's outlook for oil sands, other than to note that, again, it suggests a high price environment. New oil sands projects are among the most expensive to develop, and continued growth in the segment suggests that Exxon is envisioning a Brent price, on average, north of $100 / barrel--in essence, consistent with the earlier company guidance of $109 / barrel for 2017.

Tight (Shale) Oil

The most interesting aspect of Exxon's outlook, in my opinion, revolves around its projection for shale oil production. There are perhaps two different paths of development for shales. The first of these would mirror the experience of shale gas and perhaps warrants labeling at the 'Citi School'. According to Citi, the marginal cost of shale oil ranges between $50-70 / barrel. By this line of thinking, shale would continue to expand at an increasing pace until price is brought to the marginal cost of shale.

On a corporate level, it might look like the story of EOG, the most successful US shale oil producer. As the graph below shows, EOG's production increases at an increasing pace, with cash flow turning from negative to positive as investments come to fruition.