Exxon Mobil, the largest non-government-owned oil and gas company in the world has recently turned to natural gas, a traditionally less profitable resource than crude oil, to replace reserves and help slow the slide in its production output volumes. However, a global gas glut has resulted from the current economic crisis and significant increase in U.S. shale gas production, which presents an uncertain outlook for gas prices and places pressure on the company’s future earnings. In December 2009, Exxon Mobil (XOM) announced its largest acquisition in a decade: a $41 billion, all-stock deal to buy XTO Energy Inc., a U.S.-focused gas producer. This transaction places a sizable bet on the future of the domestic natural gas market and positions a super-major integrated energy company as one of the top five players in the field of unconventional natural gas development. Through this acquisition, ExxonMobil hedges their bets that natural gas, as opposed to coal or renewables, will be the most demanded fuel source needed to meet the world’s ever increasing energy needs.
Many questions remain on whether this business strategy will boost production, and force the rest of industry into a game of catch up, or simply run the risk of consuming capital and management focus without generating substantial profits.
The Oligopoly of Domestic Oil and Natural Gas Companies
John D. Rockefeller’s Standard Oil gradually gained almost complete control of oil refining and marketing in the United States through horizontal integration, which provided kerosene, gasoline and other petroleum to a vast number of markets. The organization was eventually broken up into thirty-four separate companies after US government passed antitrust legislation in 1911. Almost eighty-eight years later, Exxon (formerly Standard Oil Company of New Jersey) and Mobil (formerly Standard Oil Company of New York), were reunited in the largest merger in the industry’s history. By the end of 2006, several other mergers also took place between major players like British Petroleum’s (BP) purchase of Amoco and Atlantic Richfield (ARCO), the merger between Chevron and Texaco, Conoco’s purchase of Gulf Canada, Burlington and Phillips, and Anadarko’s acquiring of Union Pacific Resources (UPR) All of this M&A activity further consolidated the oil powerhouses of the United States, and exemplifies the oligopoly that has plagued the oil and gas industry since its inception.
Despite the government’s imposed break up in the early part of last century, the industry has experienced a maturation that was not necessarily due to product evolution, but rather to the instability and volatility of oil and gas prices, particularly over the past 40 years.
ExxonMobil
Big oil got even bigger in 1999, when Exxon and Mobil Oil signed an $81 billion agreement to merge and form ExxonMobil, thus creating the largest oil super-major, with capacity to produce 3.921 million BOE (barrels of oil equivalent) daily. In 2005, ExxonMobil’s stock price rose with rising crude oil prices, establishing a market capitalization of $312 billion. At the end of 2005, annual income was up 42% with reported record annual income profits of US $36 billion. XOM’s 2005 annual income, which included $11 billion in the 3rd quarter alone, was the greatest by any business in recorded history. By 2008, XOM held approximately 3% of world production, and when ranked by its oil and gas reserves, the company is 14th in terms of total reserves. This is less than 1% of the total world reserves held by E & P companies, and in some cases, far less than many of the biggest state-owned companies.
Nevertheless, ExxonMobil remains the strongest leader in the oil and gas market, with a stronghold in terms of international land position combined with dramatic earnings.
The ongoing development of breakthrough technologies, including some pioneered by ExxonMobil themselves, have helped the organization keep pace with rising global energy demand by making additional energy supplies available. Technology is becoming more critical in this industry as time moves on, since much of the world’s oil and gas reserves is located in challenging environments.
As reserve replacement has required the super-majors to explore in deep-water basins offshore, extract heavy oil bitumen and oil sands from strip-mining or shallow excavation operations, and remotely isolated Arctic regions of the north, innovative approaches to energy production have become essential to increasing the company’s dynamic capability. Superior engineering talent is available to provide industry-leading technologies that provide the business with opportunities to explore, discover, develop, produce, refine and market oil and gas resources that are not available to many of XOM’s competitors.
Get Help With Your Essay
If you need assistance with writing your essay, our professional essay writing service is here to help!
ExxonMobil claims that its competitive advantage in the market is realized through industry-leading project managers that ensure superior return on investment. Their high level of expertise and discipline contribute to a strong track record of timely project completion and their ability to deliver their product within a specified time-frame was a key performance attribute that was always appreciated by its investors on Wall Street. The reputation of ExxonMobil played a significant role in earning the support of suppliers and contractors, which was equally coveted by their competitors and in constant demand, particularly during periods of peak pricing.
While seemingly in the same business, Exxon and Mobil did not find many areas of similar technology within the two companies, but did find synergies and complements. When it comes to research and development strengths, for instance, Exxon was very strong in process technology while Mobil had expertise in lubricants as well as catalysts, an R&D area that the combined company immediately adopted to strengthen its patent position in converting gases to liquids.
ExxonMobil has a very unique recruitment process where they look for individuals that exercise core strengths as opposed to bringing vast amount of industry experience. They have excellent proprietary capabilities in teaching petroleum science and technology, and therefore do not require new geoscientists to have any prior petroleum course work or experience. There is, however, a requirement for demonstrated leadership, adaptability, teamwork, excellent communication skills in English, and a commitment to high safety and ethical standards. This flexibility in hiring enables ExxonMobil to customize their operations unlike any of their competitors. When an employee joins ExxonMobil, they are taught how to do things the ExxonMobil way. From systems to processes, jargon to policies, employees are essentially engineered and tailored to work effectively in this stand alone culture, so much so, it remains in Exxon’s best interest to hire straight out of college and mold their people the way they want to. Virtually no other energy firm maintains the reputation and capacity to offer such extensive training to new grads or discipline experts as ExxonMobil.
ExxonMobil is truly an international player with operations touching almost every aspect of the energy and petrochemical business, and operating facilities or market products in most of the world’s countries with oil and natural gas exploration on six continents. Their geographical reach and breadth of line are extensive and provide a competitive advantage from both a logistics standpoint and integrated producer, which encompasses every phase of petroleum life cycle from Greenfield exploration through to distribution of retail products. Through control of all the major processes, from exploration to retail, XOM has a good deal of control over its chosen partners in both independent operations and joint ventures. This is due to network externalities that exist in many of its midstream (pipelines) and downstream (refineries) businesses in which other companies are compelled to use these assets out of necessity.
Exxon Mobil is also well known for its superior operational practices, which capitalize on their ability to vertically integrate their activities. XOM has a capacity to distill over 6.3 million barrels a day due to its interest in over 40 refineries in 26 countries. Combined with their global logistics system with ownership interests in crude oil, tankers, pipelines and major terminals they are able to optimize millions of barrels of crude oil supply and associated petroleum products.
Exxon Mobil has long battled a negative reputation as an oil giant with little concern for the environment. Most memorable was the infamous Exxon Valdez spill off the coast of Prince
William Sound of Alaska in 1989, an event that carried a stigma that far outlived the environmental impacts of the oil itself. Since then, ExxonMobil has gone on the offensive, spending more than $3 billion in 2006 on expenses related to the environment and its stance on climate change. Exxon Mobil has been attacked as having denied that climate change is occurring as a result of fossil fuel extraction and consumption.
Regardless of the environmental reputation, Exxon has somehow persevered throughout the last century with a strong culture and management team, which is responsible for much of its success. As with any large company, there are pros and cons to working with a major corporation. Although they offer excellent salaries, the ability to work with very intelligent coworkers, opportunities for travel and multiple career paths, they are often criticized for their bureaucracy and low employee retention rates.
Figure 2. ExxonMobil Competitive Advantage
Several value and cost drivers have led to the continued success of ExxonMobil, creating one of the largest and most powerful energy companies in the world
A Changing Market
In June 2008, West Texas Intermediate crude oil (WTI) price passed the $145 mark and that same year the Henry Hub Natural Gas Spot Prices peaked at $13.30. These unprecedented prices sparked a frenzy of concern that the world had reached peak oil, which is defined as the point in time when global petroleum extraction is at its maximum rate, after which the rate of production enters terminal decline. Subsequently, the high price environment served as a catalyst for research in alternative energies and renewable resource projects.
These prices also, however, made more exotic fossil fuel extraction techniques viable. One such technique was the extraction of trapped hydrocarbon in highly impermeable source rocks. Resources found in source rock or parent-rock have traditionally been difficult to extract due to their extremely low permeability. Despite the well known geological knowledge that the rocks are hydrocarbon bearing, the low permeability prohibits oil from entering a well bore at any economic rate once it is tapped.
Many experts call Exxon’s long term strategy into question outside of the volatility of oil and gas prices. The company also faces confrontations from outside forces such as foreign governments. With oil reserves diminishing and becoming more and more rare, thus increasing the difficulty and smaller likelihood of discovery, ExxonMobil has more competition than just the other five other majors. These aforementioned resource laden governments and ruling parties have become much more interested in these type of investment vehicles as they see global demand rise.
Another challenge to ExxonMobil’s future is the rise of more aggressive environmental policies, targeting and limiting green house emissions, thought to be the key component of climate change. Supplemented by the intentions of the Obama administration, whose campaign platform was US energy policy reform, increasing alternative fuel source use, and less dependence on foreign oil, XOM will have to skillfully adjust their policies on environmental stewardship to reflect the demands of a new regulatory environment.
Unconventional Resource Plays – Technologic Advances Drive Attractive Shale Plays
Through XMO’s increased research and development, the very expensive well completion techniques including horizontal drilling and multi-staged hydro-fracturing were improved to increase efficiencies and lower costs to the point that the economics warranted broad application throughout the industry. Hydraulic fracturing is a technique in which fractures are created into rock formations from a borehole through a series of techniques. Specific chemically engineered fluids are then pumped into the fractured rock at a rate in which there is a sufficient increase in pressure in the formation to crack it further. Upon completion of the pumping of fluid into the formation, solid man-made or specially engineered proppant (commonly a sand variant) is then injected in as a step to prevent the closure of the fracturing. This proppant is used because it has a higher permeability that the surrounding rock, and will allow for flow of fluids and gas back into the well.
In conjunction with hydraulic fracturing, horizontal (or directional) drilling techniques also have emerged and been improved in the last decade. Horizontal drilling is when the well bore is “kicked off,” or sent from a vertical position and drilled into a horizontal trajectory. This can be used to expose the well-bore to more of the producing formation and is accomplished by using motors and instruments that can measure and direct the drill bit.
Exxon’s Challenge to Grow
Through 2008, Exxon’s reserve replacement was, on average, remaining flat, with many fields on rapid decline. Unfortunately, capital spending was increasing year on year, creating speculation in the markets that Exxon Mobil would have to do something drastic if it expected to continue to show persistent growth. One component of declining production was a result of state run oil companies taking a larger percentage of production in areas that have been disputed, such as in the Former Soviet Union countries or Northern Africa. With global politics at play, companies like ExxonMobil had to find was to secure less risky and proven reserves.
Like other western oil majors, aging fields suffer from ever-declining output and the lucrative new fields are primarily controlled by state-owned companies that offer less profit to production partners.
In order to maintain its competitive advantage, XOM began to look outside its typical business model and consider acquiring reserve bases with long term production potential in stable countries. This is a result of maturation of product life cycle. The opportunities for smaller companies with lower overhead to aggressively enter into aged conventional fields and following the spike in commodity prices in 2007, unconventional field development became economical and many smaller firms began to fill the wedge with new economically viable shale gas plays.
Find Out How UKEssays.com Can Help You!
Our academic experts are ready and waiting to assist with any writing project you may have. From simple essay plans, through to full dissertations, you can guarantee we have a service perfectly matched to your needs.
View our academic writing services
The XTO Story, A Leader in Unconventional Resource Plays
In 1986, the Cross Timbers Oil Company was formed as a partnership that would later become the publicly traded company known as XTO Energy Inc. in 2001. XTO quickly established itself in the domestic gas industry by obtaining both proven and unproven natural gas and oil properties and developing them effectively. Using increasingly efficient technological advances in exploration and production operations, the company proved that it was more than capable in its oil and gas exploitation strategy. By the end of the second quarter of 2009, XTO was America’s largest unconventional natural gas producer, with a resource base equivalent to 45 trillion cubic feet of gas that includes shale gas, tight gas, coal bed methane, shale oil and conventional oil and gas production. They had taken a smaller market niche, US domestic shale gas, and turned it into a full blown success while larger more experienced firms sat on the sidelines.
XTO achieved this vast collection of capabilities and resources through critical strategic decision. As of 1995, the company’s asset allocation was roughly fifty percent oil and percent natural gas. Yet upon the departure of the reigning chair, Jon Brumley, his replacement Bob Simpson decided to move to a two-thirds gas, one- third oil ratio. This was a major shift in the life of the company, and the decision’s rationale was based on cheaper handling costs of gas over oil. Additionally, the United States natural gas market’s vulnerability to the actions of OPEC nations was far less. Fortunately, the resulting purchases based on this philosophy were timely, as they were made just prior to the market gaining strength, thus increasing profitability for XTO. This lower buy-in proved to be a significant competitive advantage, as its cost base was far less than the companies that entered the market afterwards. Aside from lower costs for proven resources, XTO experienced growth by the way of its own numerous mergers and acquisitions. In 2007, it paid Dominion Resources US$2.5 billion for 1 trillion cubic feet (tcf) of gas reserves in the Rocky Mountains, Texas and southern Louisiana. In 2008 alone, the company acquired Hunt Petroleum Corp. and Headington Oil Co. for $4.2 billion, and $1.85 billion in cash and stock, respectively.
In order to build its competitive advantage, XTO’s successful strategy has been to buy properties that are otherwise simply cast aside by their prior owners. With the downturn of the real estate market towards the middle of the 2000s, the company has benefited from significant cost savings. This, coupled with the increase in the demand within the natural gas market has positioned XTO has a domestic leader in cost. XTO had built its organization by acquiring aged oil and gas fields and down-spacing well counts with in-field drilling, essentially optimizing production by aggressively extracting late in life reserves with new technology and lower costs.(mention scale economies here p.67 and niche markets p.144) Eventually XTO moved to capitalize on their and position and begin to target deeper shale zones through the application high-density fracturing technology which had begun to advance following industry fears of peak oil. (mention early mover advantage p.135 and sustaining technology p.149)
XTO’s hydraulic fracturing and horizontal drilling technologies became a dominant design.
Geography and total real estate position became XTO’s greatest value driver. At the time of the Exxon-Mobil merger, they were the leader in North American shale gas play acreage. This position was only realized in assuming large risks in the value of natural gas. While other companies were back peddling, XTOs investors were pleading with the company to reduce its debt and sell its properties. XTO not only took risk in more land acquisitions, but also bought stock in other companies in which it felt had greater value than their stock price reflected.
All the while during massive buying spree, the company became a leader in development of unconventional shale gas plays. Gaining a reputation as a solid partner in the development of gas exploitation techniques, XTO worked with the four major service companies, Schlumberger, Halliburton, Baker Hughes and BJ Services Company (which would later be bought by Baker Hughes) to learn and apply technologies in new ways. Working together though trial and error, horizontal drilling and hydraulic fracturing techniques were improved, XTO customized its activities
Growth in acreage position also became XTO’s greatest cost driver, as it achieved economies of scale in its own right by having the highest amount of development, surpassing Chesapeake Energy and became the largest shale producer. By leveraging its previous expertise in oil and pipeline operations, the company was also able to obtain economies of scope. Among the most pronounced of XTO’s accomplishments in its short history are the development of new techniques by their engineers and field hands to capture gas reserves from shale, XTO was clearly on the back end of a steep learning curve that provided them with profitable activities, allowing for nearly 70 rigs to work simultaneously. This coupled with the company’s aggressive approach to increased efficiency focus have paid large dividends for the company as a whole.
Many of the other major oil and gas companies outside of ExxonMobil have significant land acreage in both the United States and Canada, yet most of these holdings are considered to be overly depleted, not representing high growth potential in the minds of the companies that own them. It is in this part of industry in which niche markets have emerged for smaller, independent exploration and production companies that take the opportunity to develop these assets in areas that are considered mature or uneconomic in terms of feasible production potential.
A Better Bet for the Environment – Hedging Gas is the Preferred Fuel
The past 20 years has seen a growing concern of global warming with the increase release of greenhouse gases into the atmosphere, many of which are attributable to the production of fossil fuels. Natural gas has a significant advantage as a cleaner burning fuel in its ability to lower pollution and lead to a healthy environment. Consumer preference for gas as opposed to fuels generated from crude oil, such as diesels, heating oils, and LPG (liquid petroleum gases) is increasing more and more every year. GHG gas discussion-
A Marriage in Bliss of a Clash of Cultures?
According to XOM, and Mr. Tillerson, the combined company has proven capabilities to develop all resource types, and will seize the opportunity to “further enhance financial and operating performance with financial strength and proven project management skills.” Mr. Tillerson also reported in his July 8, 2010 presentation that the company also believes that its research and development resources will be able to capitalize on the advancements in technology used in “unconventional” plays. Finally, his last statement when discussing the “value added combination” was that the new company would be able to develop the most high-quality plays using an accelerated evaluation system. This remains to be seen as Exxon is known throughout the industry for its meticulous and industry insider dubbed “suffocating” hierarchy________
However, XTO prided itself on the fact its employees on the front lines were free to execute business strategy without concern for the administrative hurdles that come with being a large, public company. They drew real satisfaction from providing that support. and provide the reliable ‘back office’ that supports the activities that generate those results.
Inevitably, XTO was forced to sell as they began to feel the pinch of sinking gas prices. XTO is known for its meticulous assessment process, reviewing all of its wells at least twice a year. Its strengths and successes have stemmed from the company’s ability to exploit land and resources that other companies have forgotten or overlooked. It is with this pioneering culture that the company structured the deals that helped it grow to be the formidable target for any number of the major oil and gas companies of the world. There is a very high potential that a juggernaut like XOM will surely impair XTO’s ability to maintain an effective, fast moving, manufacturing model, and remain ahead of the rapid decline curves known to all tight gas plays. However, ExxonMobil believes that their technical expertise will unlock additional XTO resource potential, and XTO’s organization will complement Exxon’s existing unconventional natural gas and oil production worldwide.”
There is no question that the combined companies of ExxonMobil and XTO have the ability to accomplish the critical tasks that give him superior capabilities, as it has been proven over and over again in that the many arms of ExxonMobil, as a company was able t collectively coordinate its efforts even prior to the acquisition. On the contrary, the areas of concern in the new emerging company may be more of consistency and fit, in which both need to parallel the specific intricacies of the new domestic shale market in which they have entered. ExxonMobil’s role as a part company to the new subsidiary may make way for a convoluted process of gaining authorizations for new projects and expenditures unlike what XTO’s management team has experienced. Rest assured, XOM has many formal control systems that are in place with the intent of simplifying processes in all phases of development, yet until the standardized procedures, planning and joint task force teams have worked out a streamlined process, there is sure to be major growing pains and inefficiencies. As the speed of production is a prerequisite for shale production, the burden of a cumbersome and less than “lean” hierarchy of decision makers will no doubt frustrate operations in the early going. Culturally, XOM and XTO are light years apart, with XOM being an inbred creature of habit, training its people from the ground up. The question remains on how they intend on assimilating a work force that has not gone through the training regime that depicts “how things are done the ExxonMobil way.” All functional organizations will attempt to merge in a way that will not inhibit current operations, yet it will inevitably take longer than expected. Fortunately, despite the ambiguity of judging the ability for one company to incorporate another, the fundamental conclusion that Exxon came to was that target company can contribute to the core business of ExxonMobil and enhance their value and cost drivers as well as their overall position in the market. Of concern, and what XOM is gambling on, is that the new XTO subsidiary is a market opportunity with high future growth potential, and has a favorable market position, both of which are not guaranteed in the current economic and political climate.
Will ExxonMobil’s Strategy Pay off?
“We just thought they were the greatest unconventional gas organization from a technical standpoint.”
-William Colton, Exxon’s VP for corporate strategic planning talking about XTO
By the end of 2008, Exxon Mobil purchased over 13 trillion cubic feet equivalent (tcfe) of proven reserves, and had an estimated daily average production of 2.87 billion cubic feet equivalent (bcfe) per day the ensuing year. In keeping with its aggressive and robust domestic strategy, the company was planning intense drilling campaigns that would include development in all the United States’ major shale plays.
Exxon Mobil Corporation’s purchase of XTO was a major hedge on the US natural gas market and was arguably far too high a price to pay since gas prices have dropped substantially in the past two years and an additional 20% since the acquisition was announced in December.
The high level of success shale gas drillers are having from a technical standpoint is evident in their increasing ability to uncover growing quantities of gas from previously impermeable parent rock is having a major affect on supply, which has kept commodity prices depressed. The value drivers, such as innovation in technology, that led largely to XTO’s success have spread across the industry and somewhat softens the cost benefits that the subsidiary company continues to enjoy.
To his credit, CEO Rex Tillerson has openly admitted to the less than stellar economics of the US natural gas market and the XTO deal. “We don’t get a lot of upside, but on the flip-side you get a lot of downside protection,” he is quoted as saying in reference to the transaction. Instead he points out that the newly merged company would concentrate on having better returns than its competitors, and that even though this deal may not be as exorbitantly profitable as past ventures, it still is a positive move.
Figure 2. Monthly Change in Crude Oil vs. Natural Gas
Fluctuation in natural gas prices traditionally track the market price for crude oil, as seen through 2008. However, since 2009, there has been an unprecedented disparity between the pricing of these two commodities, which has led to a relatively strong oil price currently, while natural gas is at a 10 year low.
In the end, a carbon tax might further increase the value of the XTO purchase, as the carbon content of natural gas is considerably lower and thus less expense. However with the potential advancement the of a climate change bill, these benefits may be short-lived as Congress debates the legislative approach going forward. A forecast $30 per ton carbon tax over the next 10 years would demand a major shift to cleaner fuels such as natural gas and some speculate that leading electric utilities have already begun to make the move away from coal in anticipation of a change out of DC. Since December when Exxon closed on the XTO deal however, with unemployment so high, both political parties seem hesitant to push a bill that might be accused of destroying jobs. So it may be years before XTO contributes to Exxon’s return on equity.
Despite its previous stature as the US largest natural gas producer, XTO is still yet a rather a small part of the larger ExxonMobil business picture. Since the start of 2009, which was pre-acquisition, XOM has lost over $200 million in its downstream refining businesses. If a significant price were to be put on carbon, this advent would only add to the liabilities of this core business and thus put the increased profitability of the company in danger. In addition, it isn’t necessary that the XTO acquisition produce an immediate return either. Unlike deep-water exploration plays, shale gas wells tend to produce for decades at modest production rates. By retaining leases at as low a cost as possible and drilling in areas with the highest production potential, Exxon can keep shale businesses from being much of a liability while still contributing to the reserve base on the books.
Cite This Work
To export a reference to this article please select a referencing style below:
