ExxonMobil Corporation (NYSE: XOM) is ramping up capital spending, with a focus on finding new oil and natural gas to drill and sell. Some of its peers, meanwhile, have begun to look for ways to diversify away from these carbon-based fuels. That seems to make sense given the negative view of these energy sources today, so why is Exxon doubling down on oil and gas? Here's what you need to know to understand why the integrated oil giant's plan isn't nearly as crazy as it may appear.
Sticking with oil
Exxon plans to spend around $24 billion on capital projects in 2018. While that number includes investments in its downstream chemical and refining businesses, it is largely earmarked for oil and natural gas drilling. It has giant projects in the works in Guyana, Brazil, the onshore U.S. market, and Mozambique, among others.
The current $24 billion, however, is just the starting point for Exxon. It expects to increase that figure by around 15% in 2019. By 2023, Exxon's capital spending run rate of around $30 billion a year will be roughly 25% above the projected 2018 level. By 2025 all of those new projects are expected to account for around 50% of Exxon's oil and natural gas production, if everything goes according to plan. It is truly doubling down on oil and gas.
Some peers, meanwhile, have been looking to hedge their bets. France's Total SA (NYSE: TOT), for example, has been venturing into electricity generation. It started by purchasing a controlling stake in U.S.-based renewable power company SunPower in 2011 and augmented that venture with a recent deal to acquire French and Belgian power company Direct Energie. Total isn't alone: Royal Dutch Shell plc (NYSE: RDS-B) recently bought stakes in solar power company Silicon Ranch and NewMotion, one of Europe's largest electric car charging companies.
Exxon has traditionally been a conservative and slow-moving company, but is it missing the big picture here and allowing peers to get a head start on it? Maybe not...here's why Exxon is sticking with oil and natural gas.
Important in the past, important for the future
There's no question that oil and natural gas have been vital to the world's economic development. They remain just as important today. But the future is set to look very different. According to the International Energy Agency (IEA), an energy industry trade group, "The future is electrifying." That's not a commentary on how exciting things will be, but a statement to the increasing importance of electricity in satisfying the world's thirst for energy. Electricity is projected to make up 40% of the rise in final consumption by 2040, which, according to the IEA, is "the same share of growth that oil took for the last twenty-five years."
No wonder Total and Shell are starting to shift into the electricity space. But there's more to this story than meets the eye. Total energy demand is projected to expand by around 30% by 2040, driven largely by emerging markets. However, this means the total pie is getting bigger. Yes, electricity (driven by renewable sources like solar and wind) is going to help lead the way, but that doesn't mean that oil and natural gas will be ceding their roles as dominant and important fuel sources.
For example, despite the fact that oil's share of total energy demand will likely be in decline over the very long term, the EIA projects that "oil demand continues to grow to 2040, albeit at a steadily decreasing pace." That dynamic is possible because total energy demand is increasing. Natural gas use, meanwhile, is projected to increase by 45% as it continues to take share away from relatively dirty coal and becomes a potential bridge in the world's shift toward renewable energy.
So Exxon's decision to stick to what it knows best (oil and natural gas) isn't nearly as crazy as it sounds. There is no doomsday scenario unfolding for oil and natural gas. But that's not the whole story, either.
Running out of gas
Oil and natural gas are depleting resources. Once you pull these energy sources from the ground and use them, they are gone and you need to find more oil and gas to replace them. You can't just stop spending money on drilling or you will, effectively, run out of oil and natural gas. How's this for a shocking number: According the EIA, 80% of new oil supply between today and 2040 is needed just to offset the natural declines that are going to take place over that period.
That's huge, with Exxon suggesting that as much as $400 billion a year worth of capital spending will be needed through 2040 just to meet global oil demand. That puts a vastly different light on Exxon's $30 billion in capital spending, all of which isn't going to go directly toward oil. While 2040 is still more than two decades away, oil and natural gas will be just as important then as they are today.
Time to adjust
While Total and Shell are making early moves to adjust to a future in which electricity is the global fuel of choice, we remain a long way from a wholesale shift away from oil and natural gas. There's nothing wrong with the strategic moves they are making, but when you look at the big picture, there's also nothing particularly worrying about Exxon's decision to remain focused on oil and natural gas. Yes, Exxon is doubling down on the carbon-based fuels that it knows best -- and that's just fine.
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