Tuesday, December 9, 2008

Is this the seriously smart money?

It pains me to say anything nice about Exxon Mobile management.  They are the most notorious climate change sceptics for instance, something I rank along with believing that the world was created in six days about 6000 years ago.  

The belief might be politically convenient for Exxon, just as it might be politically convenient for some conservative politicians – but otherwise it dumb and possibly dangerous.

But – putting my politics aside I am going to say something really nice about Exxon.  They look a lot smarter than me – and a lot smarter than most of the rest of us.

Remember the super-spike in oil.  Remember how it was going to remain high forever.  It was only a few months ago.

You would think that Exxon believed it too – and ramped up their capital expenditure to take advantage of the super-cycle boom to come.

You would think…

But you would be wrong.  

Here are the capital expenditure numbers for the company by year in millions:

2002 11,437
2003 12,859
2004 11,986
2005 13,839
2006 15,462
2007 15,837

Now anyone who followed this industry knows that the cost of building new plants, pipes and drilling new holes skyrocketed during this period – so the physical amount of capex done by Exxon probably reduced during this period.  It reduced whilst the cash flow from operations went from 21 billion to 52 billion.  

Sure capex went up a little in the first nine months of this year but even that increase was disciplined.  

The conclusion you have to come to is that Exxon did not drink the kool-aid.  They were at the centre of one of the biggest booms out there – and they were not sucked in.

So – if you want to know who the smart money were – look no further.

John Hempton

PS.  There is another hypothesis consistent with the data – one which paints Exxon in a very poor light.  The alternative hypothesis is that they did little capex because they did not have worthwhile projects to do – that is that their reserves are stuffed.  I see little evidence for that hypothesis but hope to entertain it in the comments.

However I should note that I know so little that it is entirely possible that the PS bear case is correct.  Knowledgeable comments much appreciated.  



CrocodileChuck said...

Sorry, JH, I've worked for Esso (Exxon ex-USA). The reason they've stopped investing:

1) they and the other Big Oils (BP, Shell, etc) control <10% of the known reserves (the sovereign oils dominate the landscape)

2) new refineries are , for all intents and purposes, not allowed to be built anymore in the US

3) the so called 'attractive' reserves increasingly are in v dangerous or 'not very nice' parts of the world [think Kazahkistan where political opponents are boiled alive in vats of oil]; or, Nigeria - one of the most corrupt governments on Earth

So, what's to like in the above??

Look, the reason Lee Raymond did all those share buybacks was...

...he was due to retire at the end of '06!!! 'Shareholder value', and all that!

I'm afraid the truth is more prosaic than your inference in the post.


John Hempton said...

I left open the possibility that the reason they didn't do capex was that their reserves are stuffed. I put that in the PS - and said I would entertain it in the comments.

I guess the first person who claims some real knowledge agrees with the PS bear case.

Could you send me an email...

Thanks Croc...


Anonymous said...

I don't think the "did not have worthwhile projects" hypothesis holds water. To most people, including our friends in Washington, "worthwhile projects" would include wind, solar, and other alternative sources. The fact that XOM wouldn't invest in those areas simply tells me that they didn't believe the business case was strong enough. These guys have lived through volatile oil prices before; they know what can happen and how quickly things can change.

Anonymous said...

Please keep an open mind about global warming before we start rationing energy away from poor countries. CO2 is good for plant life and plant life is good for human life. There is no scientific consensus. If interested, please read the following academic piece which was endorsed by the former president of National Academy of Sciences. Also, if interested, google the story about the founder of the weather channel calling global warming incorrect.


Robertm73 said...

I would agree the reason for not doing cap-ex is that the new Oil is in tought area's or controlled by forigen governments. They would rather provided expertise to extract the oil and the middle man then get involded. Call it is lessons learned from the 80's

Unknown said...


As a political moderate, I find your left leaning comments regarding global warming to be offensive. Somehow, this liberal argument has captured the "intellectual high road" and anyone who questions the validity of the science is an idiot.

Since when did CO2 become a "toxic" gas? I always thought it was necessary to make plants green. Hmmm?

The world will soon see that Al Gore is preaching junk science and that solar activity is the main driver of global temperature. Until then, in order to control the levels of CO2 in the atmosphere, I suggest that all liberals like yourself should quit exhaling.

Scott Fagan

Anonymous said...

Denying global warming is a sucker's bet. Any of the steps we take towards remedying the perceived threat will be beneficial, regardless of its affects on global warming. Huge dividends will be reaped by the US if it isn't dependent on foreign oil and the geopolitical stability it demands. Pollution is still pollution and less is always better. We're going to run out of oil eventually, and it just so happens that alternatives like wind and solar are more environmentally friendly.

If I were to be cynical about XOM, I would say they just let a bunch of other companies lever up and do the exploration and drilling and then buy them for pennies on the dollar out of bankruptcy.

Anonymous said...

"anyone who questions the validity of the science is an idiot"

That is correct.

If you have some 'scientific' evidence to the contrary, please supply that. And no, if the scientist believes that the earth is 6000 years old they are not allowed to have an opinion. They are not a scientist. Science is built on consensus and data. If your beginning statement is that science is wrong, you belong in church, not in a scientific argument.

CO2 is a good thing? You should try breathing it. I am sure I can find several 'scientists' that can tell you it is good for you.

Al Gore is the biggest straw man out there. He is not a scientist, or a person with an opinion worth considering. Look at where his family made their money. There is an oil man on every ticket, and it was not Clinton.

You say that science is wrong, and then use it later on to back up your argument.

Science is a process, not a result.

Anonymous said...

CO2 is not toxic? Neither is water, or Air for that matter, why don't you try injecting yourself with some of either to test your hypothesis.

Toxicity is determined by the level of the toxin. I am probably confusing you already.

Junk science.....Prove it, follow the greats, put your beliefs to the test and make yourself a test subject.

Anonymous said...

Guess that global warming as a subject inspires heated debate. Some are almost religious in their belief, others just plain silly (eg injecting yourself with C02).

The debate is not whether some of the measures taken to reduce wasteful uses of precious hydrocarbons, or to clean up the atmosphere and to reduce pollution are worthwhile. It is a given that they are, and for the 'Global Warming' lobby to attempt to sequester these into their side of the debate is phony.

The only debate is whether industrially-induced C02 is the cause of global warming and, in consequence, whether any such warming will lead to the dire consequences predicted.

I am a professional scientist but I am not familiar with all of the models used. However, as with any model-based hypothesis, I would like to see some predictions from the model being rigorously tested experimentally before spending countless billions on carbon-trading schemes etc. We all saw how the dependence of the financial industry on their own models ended up.

Anonymous said...

Exxon has a larger problem on the agenda to deal with, mate.

youtube.... Maxine Waters oil.


Anonymous said...

The statement that the antropogenic global warming hypothesis is not to be questioned and that anybody who does so anyway is "an idiot" is religious in nature and not scientific. To place a certain hypothesis beyound questioning is deeply anti-scientific and dangerous.

The notion that science is built on concensus is ludicrous since science cannot progress on cosy consensus but only on perpetual doubt and further research.

Last but not least, expending massive resources to satisfy some ersatz religious requirements is far from harmless as the resources will not be available for other, possibly much worthier, activities.

Regardless of the outcome of the debate on antropogenic global warming I expect the current religious fanaticism of it's adherents to be regarded in future with the same bemusement we view the Spanish Inquisition with.

vnvbrtd said...

To 9:10PM Anon post: one of the most sensible climate debate comments I've seen on any blog.

Anonymous said...


There IS scientific consensus on one thing regarding climate (whatever else people might argue about): IF the temperatures rise as much as the models predict, it will be very, very bad. Some areas might benefit, and they are usually the ones where people do not live.

Now; nobody can tell with 100% certainty that continued CO2 emissions will produce the quoted 1-4 degrees increase in global mean temperatures of the IPCC, science can only give a probability it will happen given a certain model with certain initial conditions. And that is as good as anything will ever become, in any field of human endeavor. The sin committed by the "skeptic" side (I always hated that terminology being used as something negative, especially regarding scientific findings) is to discard all models that produce an outcome they don't like.

Now, what is so sad, not to mention counterproductive, is for liberals, and scientists to attempt to label anybody that goes against themselves as stupid or corrupt. If someone will point out to me that none of the models we see can say, with probability equal to one, what the climate will be like in 2100, I will agree. The point is, however, that it doesn't matter if you put the less-than-one probability of global mean temp increasing by at least 1 degree by 2100 given average carbon emissions of this years level and no radical sunshade program at 99%, 70%, 47%, 20% or even 5% - the downside, should it happen, is just too great. Also, although models usually stop at 2100, that doesn't mean we're home free as long as we make it there.

It all boils down to a simple Bayesian cost-benefit analysis. And that is what the (at least more intelligent of) environmentalists and liberals are aiming at with their vigorous and sometimes over-the-top condescending campaigns.

PS Keep in mind that of all the models and averages of models, the ones who agree best with observations when run on initial conditions from well before our time predict a global mean increase of around 1.8 degrees until 2100 on the constant emissions data - pretty catastrophic (and more than the average of ALL models).

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