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THE WALL STREET JOURNAL: Exxon to Boost Spending, Broaden Exploration

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THE WALL STREET JOURNAL: Exxon to Boost Spending, Broaden Exploration

March 6, 2008; Page B1

Exxon Mobil Corp. plans to increase its spending by more than $1 billion a year to find and tap new oil and natural-gas resources, aggressively increasing exploration in politically stable countries not usually thought to be energy-rich, including Germany, New Zealand and Greenland.

Exxon, the world’s largest publicly traded oil company, announced yesterday a 25% increase in annual capital spending for the next few years, to between $25 billion and $30 billion, to adjust for higher costs and to pay for wider exploration. Just a year ago, it projected it would spend $20 billion a year.
In recent years, the oil industry has developed the ability to drill wells in two-mile-deep water. That technological feat has encouraged Exxon, among others, to look for new opportunities in deep waters around the globe, including nations that haven’t been big oil producers in the past.

Not all of the new interest is in offshore locations. Exxon also plans to drill wells in Saxony, a German state on the border with the Czech Republic. It hopes to find natural gas trapped in dense rock there, replicating success it is having in Colorado using proprietary technology to unlock a huge gas reservoir.

The company, which is based in Irving, Texas, certainly has the financial muscle to expand. Last month, it reported earning $40.16 billion in 2007, the largest annual profit ever for a U.S. company. But Exxon officials said they would maintain their reputation for discipline. “If I didn’t think we had the ability to execute, we wouldn’t take it on,” said Chairman and Chief Executive Rex Tillerson.

Only a few years ago, major oil companies were betting most heavily on promising new fields in Russia, the Middle East and Africa. And Exxon won’t abandon its traditional oil and gas hunting grounds. It plans wells in coming years off the coast of Libya, Qatar, Nigeria and Angola — all members of the Organization of Petroleum Exporting Countries and all major energy producers. Indeed, Exxon expects half of its oil and gas production to come from West Africa, the Caspian Sea region, the Middle East and Russia by 2012, up from 38% today.

But the rise in oil prices has made it harder for big Western oil companies to operate in foreign countries. Many of those nations want a bigger share of the wealth, and they have grabbed back assets, ripped up contracts and raised tax rates. Venezuela expropriated Exxon’s assets last year, leading to a continuing legal showdown between the two over how Exxon should be compensated for its loss.

Exxon and other large Western oil companies have also been struggling to increase production and replace their reserves in recent years. Access to some of the world’s best remaining oilfields in the Middle East, Russia and elsewhere has been limited. Last month, Exxon reported that it replaced 76% of the fossil fuels it produced in 2007, using the Securities and Exchange Commission’s required reserves counting method. Using a different accounting method that Exxon and many other companies prefer, it replaced 101% of its production, but that was still its worst showing in 14 years.

To make up for the dwindling opportunities in some of the world’s richest oil regions, Exxon and other oil companies are using new technologies to reassess old oil reservoirs abandoned after the easiest-to-get oil was harvested, revisiting regions that were previously deemed too difficult and looking in new areas.

Oil companies like Exxon are adapting to changing industry conditions. “As the accessible basins mature and prolific basins they would like to explore in are not accessible, companies have a choice,” says Chris Ross, a vice president of consultants CRA International Inc. “They can either go to more challenging resources such as shale oil, coal to liquids or they can go to challenging places.”

Rising costs account for some of Exxon’s higher spending plans, but the extra funding will also pay for some of the giant floating drilling rigs the company expects to deploy across the world in search of undiscovered undersea pools of oil and gas. At its annual analyst meeting in New York yesterday, Exxon said it expects to drill speculative, high-risk wells in the Celtic Sea south of Cork, Ireland, off the western coast of Greenland, south of New Zealand and north of Madagascar. None of these is among the 50 largest crude-oil producing nations, according to the federal Energy Information Administration, the statistical arm of the U.S. Energy Department.

Europe is enjoying a bit of an energy renaissance. Royal Dutch Shell PLC, the second-largest nonstate-controlled oil company by market capitalization, is looking close to home, taking advantage of Europe’s political stability. In December, Shell decided to reopen the Dutch oilfield Schoonebeek, first discovered in 1943 and closed down in 1996 after existing technology pumped all it could. But higher crude prices coupled with enhanced oil recovery techniques such as horizontal wells and low-pressure steam injection have made the project attractive again.

“There are still hundreds of millions of barrels left,” Shell chief executive Jeroen van der Veer said in an interview. “We took out the easy oil, the difficult oil is left, but now that oil is not seen as so difficult.”

Oil prices have been hitting records for several years, culminating yesterday when the price of a barrel of crude oil on the New York Mercantile Exchange closed at $104.52. These prices are enriching Persian Gulf nations such as the United Arab Emirates. And while many established oil regions are toughening their contract terms and tax rates, other countries that want to get into the oil game are enticing investment from companies like Exxon in hopes of finding reserves off their coast that would enrich government coffers.

That is one reason Exxon is able to drill in places like Madagascar and Colombia, where offshore wells are in the works. Excitement about deepwater offshore exploration was stoked in November, when the Brazilian government said the partly state-owned Petroleo Brasileiro SA had discovered a field called Tupi. Tests of Tupi, located about 180 miles off the coast of Rio de Janeiro, indicated it may be the biggest oil strike in a decade. Exxon plans a wildcat well later this year near the Tupi discovery.

This isn’t the first time growing resource nationalism has encouraged oil companies to look for new sources of oil and gas either in politically stable Western nations or outside the usual places. During the 1970s, oil companies were booted out of Libya and faced tougher terms throughout the Middle East. In response, they focused their efforts on the North Sea and Alaska, starting production from the giant Forties Field in 1975 and Prudhoe Bay in 1977.

–Guy Chazan contributed to this article.

Write to Russell Gold at [email protected] and its also non-profit sister websites,,,,, and are all owned by John Donovan. There is also a Wikipedia article.

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