Exxon Mobil, the greatest non-government-owned oil and gas company in the world has recently looked to natural gas, a traditionally less profitable source than crude oil, to displace reserves and help slow the slip in its production output quantities. However, a global gas glut has resulted from the current economic turmoil and significant increase in U. S. shale gas creation, which presents an uncertain view for gas prices and places strain on the company's future income. In December 2009, Exxon Mobil (XOM) declared its greatest acquisition in a decade: a $41 billion, all-stock deal to buy XTO Energy Inc. , a U. S. -concentrated gas maker. This deal places a sizable bet on the future of the domestic gas market and positions a super-major built-in 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, would be the most demanded petrol source had a need to meet up with the world's ever increasing energy needs.
Many questions stick to whether this business strategy will enhance production, and drive the rest of industry into a game of capture up, or just run the chance of eating capital and management emphasis without generating considerable profits.
The Oligopoly of Local Oil and Natural Gas Companies
John D. Rockefeller's Standard Engine oil slowly but surely gained almost complete control of essential oil refining and marketing in america through horizontal integration, which provided kerosene, fuel and other petroleum to a vast number of markets. The organization was eventually split up into thirty-four distinct companies after US administration approved antitrust legislation in 1911. Almost eighty-eight years later, Exxon (formerly Standard Engine oil Company of New Jersey) and Mobil (formerly Standard Oil Company of New York), were reunited in the most significant merger in the industry's background. By the end of 2006, other mergers also took place between major players like English 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 this M&A activity further consolidated the engine oil powerhouses of america, and exemplifies the oligopoly that has plagued the coal and oil 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 had not been necessarily anticipated to product development, but rather to the instability and volatility of oil and gas prices, particularly within the last 40 years.
ExxonMobil
Big oil acquired a great deal larger in 1999, when Exxon and Mobil Olive oil authorized an $81 billion contract to merge and form ExxonMobil, thus creating the largest oil super-major, with capacity to create 3. 921 million BOE (barrels of essential oil equal) daily. In 2005, ExxonMobil's stock price increased with rising crude essential oil prices, establishing a market capitalization of $312 billion. At the end of 2005, annual income was up 42% with reported record twelve-monthly income profits of US $36 billion. XOM's 2005 gross annual income, including $11 billion in the 3rd quarter by themselves, was the best by any business in noted history. By 2008, XOM held roughly 3% of world development, and when rated by its coal and oil reserves, the company is 14th in conditions of total reserves. That is significantly less than 1% of the total world reserves performed by E & P companies, and perhaps, far less than many of the biggest state-owned companies.
Nevertheless, ExxonMobil remains the strongest head in the coal and oil market, with a stronghold in terms of international land position combined with dramatic earnings.
The ongoing development of discovery systems, including some pioneered by ExxonMobil themselves, have helped the organization keep tempo with growing global energy demand by making additional energy materials available. Technology is becoming more critical in this industry as time progresses, since much of the world's coal and oil reserves is found in challenging surroundings.
As reserve replacing has required the super-majors to explore in deep-water basins just offshore, extract heavy oil bitumen and oil sands from strip-mining or shallow excavation operations, and remotely isolated Arctic regions of the north, impressive approaches to energy production have grown to be necessary to increasing the business's dynamic capacity. Superior executive talent is available to provide industry-leading technologies that provide the business enterprise with opportunities to explore, discover, develop, produce, refine and market coal and oil resources that aren't available to a lot of XOM's rivals.
ExxonMobil says that its competitive advantages in the market is noticed through industry-leading job professionals that ensure superior profits on return. Their high level of know-how and discipline donate to a strong history of timely project completion and their potential to deliver their product within the specified time-frame was a key performance attribute that was always valued by its investors on Wall Neighborhood. The reputation of ExxonMobil played a significant role in getting the support of suppliers and contractors, that was evenly coveted by their rivals and in continuous demand, specifically during times of peak pricing.
While seemingly in the same business, Exxon and Mobil didn't find many areas of similar technology within both companies, but do find synergies and suits. With regards to research and development advantages, for case, Exxon was quite strong in process technology while Mobil had competence in lubricants as well as catalysts, an R&D area that the merged company immediately used to improve its patent position in switching gases to liquids.
ExxonMobil has a very unique recruitment process where they look for individuals that exercise central strengths instead of bringing huge amount of industry experience. They have excellent proprietary features in teaching petroleum knowledge and technology, and for that reason do not require new geoscientists to acquire any preceding petroleum course work or experience. There may be, however, a requirement for demonstrated management, adaptability, teamwork, excellent communication skills in British, and a commitment to high safeness and ethical criteria. This overall flexibility in hiring permits ExxonMobil to customize their functions unlike any of their rivals. When an employee joins ExxonMobil, they can be educated how to do things the ExxonMobil way. From systems to functions, jargon to procedures, employees are essentially built and tailored to work effectively in this stand alone culture, so much so, it remains in Exxon's best interest to hire upright out of college and mildew their people just how they want to. Without any other energy organization keeps the reputation and capacity to offer such comprehensive training to new grads or discipline experts as ExxonMobil.
ExxonMobil is actually an international player with businesses touching almost every aspect of the vitality and petrochemical business, and operating facilities or market products in almost all of the world's countries with engine oil and natural gas exploration on six continents. Their geographical reach and breadth of range are extensive and provide a competitive benefit from both a logistics standpoint and included producer, which encompasses every phase of petroleum life circuit from Greenfield exploration to syndication of retail products. Through control of all the major processes, from exploration to retail, XOM has a great deal of control over its chosen lovers in both impartial businesses and joint endeavors. This is anticipated to network externalities that exist in many of its midstream (pipelines) and downstream (refineries) businesses where others are compelled to use these property out necessarily.
Exxon Mobil is also popular for its superior operational tactics, which capitalize on their potential to vertically combine their activities. XOM has a capacity to distill over 6. 3 million barrels a day because of its desire for over 40 refineries in 26 countries. Combined with their global logistics system with ownership interests in crude petrol, tankers, pipelines and major terminals they could optimize an incredible number of barrels of crude olive oil supply and associated petroleum products.
Exxon Mobil has long battled a poor reputation as an essential oil large with little matter for the surroundings. Most memorable was the infamous Exxon Valdez spill from the coast of Prince
William Sound of Alaska in 1989, a meeting that transported a stigma that very good outlived the environmental influences of the petrol itself. Since that time, ExxonMobil has gone on the offensive, spending more than $3 billion in 2006 on expenditures related to the environment and its stance on weather change. Exxon Mobil has been attacked as having denied that environment change is happening therefore of fossil fuel extraction and intake.
Regardless of the environmental reputation, Exxon has somehow persevered throughout the previous century with a strong culture and management team, which is in charge of a lot of its success. As with any large company, there are pros and cons to working with a major company. Although they offer excellent salaries, the capability to work with very sensible coworkers, opportunities for travel and multiple career paths, they are generally criticized for their bureaucracy and low staff retention rates.
Figure 2. ExxonMobil Competitive Advantage
Several value and cost drivers have resulted in the continuing success of ExxonMobil, creating one of the largest & most powerful energy companies in the world
A Changing Market
In June 2008, West Texas Intermediate crude petrol (WTI) price exceeded the $145 symbol and that same yr 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 petrol, which is thought as the time when global petroleum extraction is at its maximum rate, and the speed of creation enters terminal decrease. Consequently, the high price environment served as a catalyst for research in option energies and renewable resource assignments.
These prices also, however, made more exotic fossil gas extraction techniques viable. One such strategy was the removal of stuck hydrocarbon in highly impermeable source stones. Resources found in source rock and roll or parent-rock have traditionally been difficult to remove because of the extremely low permeability. Despite the popular geological knowledge that the stones are hydrocarbon bearing, the low permeability prohibits essential oil from entering a proper bore at any monetary rate once it is tapped.
Many experts call Exxon's long-term strategy into question beyond the volatility of coal and oil prices. The company also encounters confrontations from outdoor makes such as foreign governments. With olive oil reserves diminishing and becoming a lot more uncommon, thus increasing the difficulty and smaller odds of finding, ExxonMobil has more competition than just the other five other majors. These above mentioned resource laden governments and ruling parties have become a lot more interested in these type of investment vehicles as they see global demand go up.
Another problem to ExxonMobil's future is the climb of more hostile environmental policies, focusing on and limiting green house emissions, thought to be the key component of climate change. Supplemented by the motives of the National government, whose campaign system was US energy coverage reform, increasing alternate gas source use, and less dependence on foreign petrol, XOM will have to skillfully modify their policies on environmental stewardship to mirror the requirements of a new regulatory environment.
Unconventional Resource Works - Technologic Improvements Drive Attractive Shale Plays
Through XMO's increased research and development, the expensive well conclusion techniques including horizontal drilling and multi-staged hydro-fracturing were advanced to increase efficiencies and lower costs to the point that the economics warranted broad software throughout the industry. Hydraulic fracturing is a method in which fractures are created into rock and roll formations from a borehole through some techniques. Specific chemically engineered essential fluids are then pumped into the fractured rock for a price in which there's a sufficient increase in pressure in the formation to split it further. Upon completion of the pumping of smooth into the development, solid man-made or specially built proppant (commonly a sand version) 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 can allow for movement of liquids and gas back into the well.
In conjunction with hydraulic fracturing, horizontal (or directional) drilling techniques also have surfaced and been improved upon in the last ten years. Horizontal drilling is when the well bore is "kicked off, " or dispatched from a vertical position and drilled into a horizontal trajectory. This can be used to expose the well-bore to more of the producing development and is accomplished by using motors and instruments that can evaluate and steer the drill little.
Exxon's Problem to Grow
Through 2008, Exxon's reserve substitute was, typically, remaining flat, numerous fields on immediate decline. Sadly, capital spending was increasing calendar year on season, creating speculation in the markets that Exxon Mobil would need to do something drastic if it likely to continue steadily to show persistent progress. One element of declining production was a result of state run engine oil companies going for a larger ratio of production in areas which have been disputed, such such as the Past Soviet Union countries or Northern Africa. With global politics at play, companies like ExxonMobil were required to find was to secure less high-risk and proven reserves.
Like other european oil majors, increasing age fields have problems with ever-declining result and the rewarding new domains are primarily manipulated by state-owned companies offering less profit to production associates.
In order to keep its competitive benefits, XOM commenced to look outside its typical business design and consider acquiring reserve bases with long term development 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 aged conventional domains and following the spike in item prices in 2007, unconventional field development became economical and many smaller companies began to complete the wedge with new economically practical shale gas takes on.
The XTO History, A Head in Unconventional Reference Plays
In 1986, the Cross Timbers Oil Company was created as a collaboration 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 gas and essential oil properties and producing them effectively. Using increasingly efficient technological improvements in exploration and development operations, the company demonstrated that it was more than in a position in its oil and gas exploitation strategy. By the finish of the second quarter of 2009, XTO was America's largest unconventional natural gas designer, with a tool base equal to 45 trillion cubic feet of gas which includes shale gas, restricted gas, coal foundation methane, shale oil and conventional coal and oil production. That they had taken a smaller market topic, US local shale gas, and switched it into a complete blown success while much larger more experienced firms sat on the sidelines.
XTO achieved this great collection of functions and resources through critical tactical decision. As of 1995, the business's advantage allocation was roughly fifty percent essential oil and percent gas. Yet upon the departure of the reigning couch, Jon Brumley, his replacement Bob Simpson decided to move to a two-thirds gas, one- third essential oil ratio. This was a major transfer in the life span of the business, and the decision's rationale was predicated on cheaper handling costs of gas over oil. Additionally, america gas market's vulnerability to the activities of OPEC countries was far less. Thankfully, the resulting acquisitions based on this beliefs were well-timed, as these were made just prior to the marketplace gaining durability, thus increasing profitability for XTO. This lower buy-in became a substantial competitive benefits, as its cost bottom was much less than the firms that entered the marketplace afterwards. Apart from lower charges for proven resources, XTO experienced expansion by the way of its 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 exclusively, the company attained Hunt Petroleum Corp. and Headington Olive 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 plan has gone to buy properties that are normally simply restarted by their preceding owners. Using the downturn of the true estate market towards the center of the 2000s, the company has benefited from significant cost benefits. This, coupled with the upsurge in the demand within the gas market has situated XTO has a local leader in expense. XTO experienced built its group by acquiring aged coal and oil domains and down-spacing well matters with in-field drilling, essentially optimizing creation by aggressively extracting late in life reserves with new technology and lower costs. (mention size economies here p. 67 and area of interest market segments p. 144) Eventually XTO shifted to capitalize on their and position and get started to focus on deeper shale areas through the application high-density fracturing technology which possessed begun to improve following industry worries of peak oil. (mention early mover edge p. 135 and sustaining technology p. 149)
XTO's hydraulic fracturing and horizontal drilling technology became a prominent design.
Geography and total real property position became XTO's very best value drivers. At the time of the Exxon-Mobil merger, they were the leader in UNITED STATES shale gas play acreage. This position was only recognized in assuming large hazards in the worthiness of natural gas. While other companies were back again peddling, XTOs investors were pleading with the business to reduce its debt and sell its properties. XTO not only needed risk in more land acquisitions, but also bought stock in others in which it felt experienced better value than their stock price reflected.
All the while during significant buying spree, the business became a innovator in development of unconventional shale gas has. Gaining a reputation as a good partner in the introduction 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 upon, XTO custom-made its activities
Growth in acreage position also became XTO's biggest cost drivers, as it achieved economies of size in its right by having the highest amount of development, surpassing Chesapeake Energy and became the greatest shale company. By leveraging its past expertise in olive oil and pipeline operations, the business was also in a position to obtain economies of opportunity. Being among the most pronounced of XTO's accomplishments in its brief history will be the development of new techniques by their engineers and field hands to capture gas reserves from shale, XTO was plainly on the back end of any steep learning curve that provided them with profitable activities, allowing for practically 70 rigs to work together. This coupled with the company's competitive approach to increased efficiency concentration have paid large dividends for the company as a complete.
Many of the other major oil and gas companies outside of ExxonMobil have significant land acreage in both the USA and Canada, yet most of these holdings are considered to be excessively depleted, not representing high growth probable in the minds of the companies that own them. It really is in this part of industry where niche marketplaces have surfaced for smaller, 3rd party exploration and production companies that take the chance to develop these belongings in areas that are considered older or uneconomic in conditions of feasible development potential.
A Better Wager for the surroundings - Hedging Gas is the Preferred Fuel
The past twenty years has seen a growing concern of global warming with the increase release of greenhouse gases into the atmosphere, a lot of which are attributable to the development of fossil fuels. Natural gas has a substantial edge as a cleaner burning up gas in its potential to lessen pollution and lead to a wholesome environment. Consumer inclination for gas instead of fuels generated from crude olive oil, such as diesels, heating up natural oils, and LPG (water petroleum gases) is increasing more and more each year. GHG gas discussion-
A Matrimony in Bliss of any Clash of Cultures?
According to XOM, and Mr. Tillerson, the combined company has proven features to develop all reference 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 display that the business also believes that its research and development resources can capitalize on the breakthroughs in technology found in "unconventional" plays. Finally, his last statement when speaking about the "value added mix" was that the new company would be able to develop the most high-quality takes on 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 actual fact its employees on the front lines were absolve to perform business strategy without concern for the administrative hurdles that include being truly a large, general public company. They drew real satisfaction from providing that support. and provide the reliable 'rear office' that supports the actions that make those results.
Inevitably, XTO was required to market as they began to feel the pinch of sinking gas prices. XTO is well known for its careful assessment process, looking at most of its wells at least twice a year. Its talents and successes have stemmed from the business's ability to exploit land and resources that others have forgotten or overlooked. It really is with this pioneering culture that the company structured the deals that helped it grow to be the formidable aim for for any volume of the major coal and oil companies of the world. There is a very high potential that a juggernaut like XOM will surely impair XTO's capacity to maintain a powerful, fast moving, making model, and remain ahead of the rapid decline curves recognized to all limited gas works. However, ExxonMobil believes that their technical expertise will uncover additional XTO learning resource potential, and XTO's corporation will match Exxon's existing unconventional natural gas and oil production worldwide. "
There is no question that the merged companies of ExxonMobil and XTO be capable of complete the critical jobs that provide him superior features, as it has been proven over and over again in that the many hands of ExxonMobil, as a firm was able t collectively organize its work even before the acquisition. On the contrary, the regions of matter in the new growing company may become more of uniformity and fit, in which both need to parallel the precise intricacies of the new home shale market in which they have came into. ExxonMobil's role as a part company to the new subsidiary may make method for a convoluted procedure for attaining authorizations for new projects and expenses unlike what XTO's management team has experienced. Be confident, XOM has many formal control systems that are set up with the purpose of simplifying techniques in all stages of development, yet before standardized techniques, planning and joint process force teams been employed by out a streamlined process, there will be major growing pains and inefficiencies. As the quickness of creation is a prerequisite for shale creation, the burden of any cumbersome and less than "trim" hierarchy of decision makers will without doubt frustrate operations in the early heading. Culturally, XOM and XTO are light years aside, with XOM being an inbred creature of behavior, training its people from the bottom up. The question remains how they intend on assimilating a work force that hasn't gone through the training plan that depicts "how things are done the ExxonMobil way. " All useful organizations will try to merge in a way that will not inhibit current businesses, yet it will inevitably take longer than expected. Luckily for us, despite the ambiguity of judging the power for just one company to include another, the fundamental final result that Exxon came to was that goal company can donate to the center business of ExxonMobil and improve their value and cost drivers as well as their overall position on the market. Of matter, and what XOM is gambling on, is usually that the new XTO subsidiary is market opportunity with high future expansion potential, and has a good market position, both of which are not guaranteed in today's economic and politics climate.
Will ExxonMobil's Strategy Pay off?
"We just thought these were the greatest unconventional gas group from a technical standpoint. "
-William Colton, Exxon's VP for corporate and business strategic planning talking about XTO
By the finish of 2008, Exxon Mobil purchased over 13 trillion cubic feet equal (tcfe) of proven reserves, and possessed around daily average development of 2. 87 billion cubic feet equivalent (bcfe) each day the ensuing time. Commensurate with its hostile and robust home strategy, the company was planning powerful drilling campaigns that would include development in all the United Areas' major shale has.
Exxon Mobil Corporation's purchase of XTO was a significant hedge on the united states gas market and was arguably much too high a price to pay since gas prices have fell substantially in the past 2 yrs and yet another 20% since the acquisition was announced in December.
The high level of success shale gas drillers are experiencing from a technical standpoint is visible in their increasing potential to discover growing levels of gas from recently impermeable parent rock and roll is having a major affect on supply, which has kept commodity prices depressed. The value drivers, such as creativity in technology, that led largely to XTO's success have distributed over the industry and slightly softens the cost benefits that the subsidiary company carries on to enjoy.
To his credit, CEO Rex Tillerson has openly admitted to the significantly less than stellar economics of the US gas market and the XTO deal. "We don't get a great deal of upside, but on the flip-side you get a great deal of downside safety, " he is quoted as declaring in mention of the transfer. Instead he points out that the newly merged company would concentrate on having better dividends than its rivals, and this even though this deal might not be as exorbitantly profitable as previous ventures, it still is a good move.
Figure 2. Each month Change in Crude Petrol vs. Natural Gas
Fluctuation in gas prices traditionally trail the market price for crude engine oil, as seen through 2008. However, since 2009, there has been an unprecedented disparity between your pricing of the two commodities, which includes led to a comparatively strong engine oil price currently, while gas is at a 10 season low.
In the finish, a carbon duty might further improve the value of the XTO purchase, as the carbon content of gas is significantly lower and so less price. However with the actual advancement the of an climate change charge, these benefits may be short-lived as Congress debates the legislative procedure in the years ahead. A forecast $30 per lot carbon taxes over another a decade would demand a major transfer to cleaner fuels such as natural gas plus some speculate that leading electric resources have already started to make the move away from coal in anticipation of a big change out of DC. Since December when Exxon shut down on the XTO deal however, with unemployment so high, both politics parties appear hesitant to thrust a bill that might be accused of destroying jobs. So it could be years before XTO plays a part in Exxon's go back on collateral.
Despite its prior stature as the US largest natural gas producer, XTO is still yet a fairly a small part of the larger ExxonMobil business picture. Because the start of 2009, that was pre-acquisition, XOM has lost over $200 million in its downstream refining businesses. If a significant price were to be placed on carbon, this arrival would only enhance the liabilities of the core business and so position the increased success of the business in danger. In addition, it is not necessary that the XTO acquisition produce an immediate go back either. Unlike deep-water exploration works, shale gas wells have a tendency to produce for many years at modest creation rates. By keeping leases at as low an expense as is feasible and drilling in areas with the best production probable, Exxon will keep shale businesses from being much of a responsibility while still contributing to the reserve bottom on the catalogs.
