Globally integrated energy supermajor ExxonMobil was severely mauled during 2020. The company reported a massive 2020 full-year loss of $22 billion, its worst performance in roughly 40 years, after being severely impacted by the fallout from the COVID-19 pandemic and March 2020 oil price collapse. By mid-2020 there were even analysts claiming that Exxon was a zombie company only generating sufficient cash flow to service its debt but unable to pay down its considerable financial obligations. It was Exxon’s mammoth fourth quarter 2020 $20 billion loss that set alarm bells ringing for investors. A key component of that loss was $19.2 billion of impairment charges caused by sharply weaker oil and natural gas prices. During 2020 Exxon lost over 40% of its market value and was dropped from the blue-chip Dow Jones Industrial Average, after nearly a century in the index, replaced by software company Salesforce. While 2020 was a tough year for oil companies, it was not as bad for Exxon as the numbers make it initially appear.
Even completing two unsuccessful exploration wells in offshore Guyana, the dry Hassa-1 well in the Stabroek Block and the uncommercial Kaieteur Block Tanager-1 discovery did not take the shine off Exxon’s success in the Guyana-Surname Basin. The oil supermajor reported several quality oil discoveries during 2020 in offshore Guyana and Suriname which are the focal point of South America’s next major oil boom. These included the Redtail and Uaru finds in offshore Guyana’s prolific Stabroek Block. Exxon, along with partner Petronas, reported its first oil discovery in offshore Suriname at the much-hyped Sloanea-1 exploration well in the 1.2-million-acre Block 52. The oil supermajor received approval from Guyana’s government to proceed with the Payara development which is Exxon’s third oil project in the Stabroek Block. That operation is expected to pump 220,000 barrels daily upon start-up in 2024, bolstering Exxon’s overall oil production from the Stabroek Block to 750,000 barrels daily by 2026. Those discoveries allowed Exxon to upgrade its recoverable crude oil resources in Guyana to more than eight million barrels of oil equivalent. That is a significant petroleum resource that is shaping up as a powerful driver of profitability for Exxon. Even more stunning were early 2020 pre-pandemic announcements that Exxon’s Liza oilfield is pumping crude oil at an industry-low breakeven price of $35 per barrel, which is expected to fall further. In fact, Exxon’s 30% partner in the Stabroek Block, Hess believes that upon deployment of the Liza Unity FPSO in 2022 breakeven prices could fall to as low as $25 per barrel. Those are impressive breakeven prices for offshore deepwater oil production, significantly lower than Brazil’s offshore pre-salt oilfields where the average breakeven price is pegged by the Natural Resource Governance Institute at $45.50 per barrel. Exxon’s breakeven price for offshore Guyana is also lower than the $46 to $52 per barrel estimated by the Federal Reserve Bank of Dallas for major U.S. shale oil basins. A combination of those favorable economics and the uncertainty surrounding the outlook for crude oil saw Exxon announce in November 2020 that it was focusing capital spending on high potential assets. In that news release, Exxon specifically identified offshore Guyana and the Permian Basin, which will see both locations become key production and profit centers for the oil company. An important number reported by Exxon is that during 2020 its focus on cost-cutting reduced cash operating expenses by $8 billion or 15% compared to a year earlier. That combined with the latest oil price rally, which sees Brent selling for around $60 per barrel, bodes for a significant increase in profitability during 2021, especially with Exxon’s focus on allocating capital more efficiently.
While the short-term outlook has improved dramatically, primarily because of crude oil’s latest sustained rally, the long term does not appear as positive. According to consultancy Rystad Energy, the pandemic will cause peak oil demand to arrive sooner than originally anticipated. The consultancy shaved four million barrels daily off its original peak demand target reducing it to 102 million barrels per day and announcing that it will arrive in 2028, not 2030. The rapid rise of electric vehicles and growing pressure to reduce emissions and head-off global warming are also placing considerable pressure on Exxon’s long-term outlook.
No matter which way you cut it, Exxon experienced an appalling 2020. The COVID-19 pandemic, a long-term global oil supply glut, and the threat of a price war between the world’s largest oil producers Saudi Arabia and Russia, which caused oil prices to collapse, had a severe impact on Exxon as well as its peers. Despite claims that the end is nigh for fossil fuels and ever-stricter carbon and other emissions targets clouding the outlook for big oil, there are signs that Exxon will not only survive but even thrive for at least the foreseeable future.
By Matthew Smith for Oilprice.com