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The Wall Street Journal: ExxonMobil CEO Says Oil Price Still Reflects Supply Concerns

Company Pegs Capital Spending at $20 Billion
March 7, 2007 6:36 p.m.

NEW YORK — A hefty speculative premium in the price of oil — driven by concerns over the reliability of global supply — still remains, Exxon Mobil Corp.’s chief executive said. The company, meanwhile, plans to spend $20 billion annually on capital investments.

“With the price today and over the last years, what the market is saying is they’re uncomfortable with the reliability of supply,” CEO Rex Tillerson said in an interview with Dow Jones Newswires and The Wall Street Journal. “That premium seems to be in the $15-20 dollar range.”
Mr. Tillerson also said that Exxon is prepared to walk away from its oil project in Venezuela’s Orinoco river basin if it fails to reach agreement with the government on the transfer of ownership. “It will be a function of, can we shift ownership to a value proposition that works for us?” he said, “If not, everything else is moot because we won’t be staying, we’ll be leaving.”

A big factor in sustaining both oil and natural gas prices in recent years has been the tight supply or the perception of it. Faced with a generation of “legacy” assets in decline, major international oil companies like Exxon and Royal Dutch Shell PLC have sharply increased capital budgets in recent years amid a multiyear commodity price surge.

Mr. Tillerson told analysts Wednesday at the New York Stock Exchange that the company expects to start up more than 20 new global projects in the next three years that, at peak, are expected to add one million oil equivalent barrels per day to Exxon’s base volumes. The company also plans to spend about $20 billion annually through the end of the decade as it pursues major crude oil and natural gas projects. ExxonMobil spent at about the same rate in 2006.

Oil-producing nations have also been taking advantage of their own swelling budget coffers. Oil powerhouse Saudi Arabia is leading the way in adding capacity, with plans to lift potential capacity to 12.5 million barrels a day by 2009 and, depending on market conditions, raising it to as much as 14 million barrels a day in 2016, compared with about 8.5 million to nine million barrels a day currently.

“They are taking all the steps to do that,” said Mr. Tillerson. “If you bring on a new source of supply, you would think that’s going to have an effect.”

Benchmark oil futures were trading Wednesday at $60.93 a barrel on the New York Mercantile Exchange, well off record highs of $78.40 a barrel seen last year but much higher than levels just below $50 a barrel in January.

The longer-term outlook for prices will depend on how announced expansion plans under way by oil producing nations will pan out, he said. What drives prices over the long term is the level of reliability of supply,” he said, adding that another way to describe it is “spare capacity.”

Throughout much of the oil boom of recent years, oil price gains have been driven by surging demand from the U.S., China and elsewhere. That left oil producers, both in the Organization of Petroleum Exporting Countries and outside it, pumping at almost full capacity to meet global energy needs. In the past few months, however, OPEC has been cutting supply as it seeks to eat into brimming global oil inventories ahead of a potential demand slowdown.

That has been another factor that has focused oil market attention ever more keenly on potential new supply or larger global spare crude capacity.

Mr. Tillerson said other supply factors that could affect the price of oil include a resumption of peace in Iraq, which would allow the development of its major oil industry, or lasting peace in the Niger Delta, where rebels have disrupted production of the African nation’s coveted light, sweet crude oil. “We’re prepared for a period of continued volatility,” he said. “People are worried about geopolitical uncertainty, global warming, hurricanes, the Middle East.”

Mr. Tillerson said access to oil resources — in countries like the U.S. and elsewhere around the world — will also be key to the direction of oil prices.

“The real question is not “Is there enough oil?” but “Is it going to be made available?'” he said.

Mr. Tillerson said there wasn’t an oil price necessarily at which acquisitions become more attractive for the energy giant. “The falling oil prices will have different impact on different companies because of decisions they’ve made in this environment,” he said. It won’t be the price of oil that would trigger an acquisition decision for ExxonMobil, he said. “It will be the company.”

Tumult in Venezuela

In Venezuela, a presidential decree issued last week requires state-owned Petroleos de Venezuela SA, or PdVSA, to take operational control of the four heavy oil projects in the Orinoco, the country’s richest oil deposit, by May 1. The decree also requires Venezuela to increase its stake in the projects to at least 60%.

The move stands to have major implications for the big oil companies. Majors like Exxon and ConocoPhillips of the U.S. and Total SA of France have invested billions of dollars to turn the basin’s characteristically tar-like oil into 600,000 barrels a day of lighter, synthetic crude.

Under the decree, Exxon will lose operational control of the Cerro Negro field, which produces 108,000 barrels of synthetic crude a day, as well as the deep-conversion upgrader, equipment that processes the extra-heavy Orinoco oil into lighter crudes. On Monday, PdVSA set up a special committee with Exxon to facilitate a smooth transition of operations by May 1.

Mr. Tillerson said the company already has pulled some staff out of Venezuela, though he stressed this was part of the normal business environment. “We’ve taken some staff out as their activities are not going to be needed in the near future,” he said.

Write to Grainne McCarthy at [email protected]

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