ExxonMobil to leave the Gulf?

An Oct. 2 report by Reuters says ExxonMobil is weighing selling the company’s Gulf of Mexico holdings now that oil prices have rebounded. If true, the question is: What does this decision mean for the future of the Gulf of Mexico?

A decision by ExxonMobil to exit the U.S. offshore market would be a monumental move by the industry giant, but it doesn’t necessarily doom the Gulf of Mexico to a dismal future. Oil and gas producers strive to build portfolios of prospects and producing properties. Diversification has been established as a hallmark for a company’s successful sustained growth. Yes, companies have scored with concentrated bets that turn out successfully. But oil patch history reflects more one-hit wonders becoming terminal disasters.

Just as with any other investment portfolio, oil and gas properties need to be watched closely by company execs. It is imperative that the performance of each investment is tracked against its cost and profitability. The latter assessment is the greatest challenge. With respect to producing oil and gas fields, the operator has knowledge of their geology and physical properties. This knowledge helped decide to complete and produce the field initially. Over time, the field’s production rate can be measured against original projections, providing a verdict on that original fateful decision. Knowing how well the field has produced, and the remaining oil and gas resources in the field, its value can be estimated. This becomes the benchmark against which any possible offer to buy it can be assessed.

Much of 2018 has been dominated with news of large petroleum companies electing to sell fields in the more mature basins around the world. Companies have also been purchasing interests in undeveloped fields in order to reorient existing portfolios. Since the 2014 oil price collapse, oil and gas companies have been adjusting their portfolios as they readjust their business strategies. New offshore basin exploration successes, along with the dramatic revival of the Permian Basin, has large oil and gas companies rethinking where they want to allocate their capital to maximize returns.

Exiting the Gulf of Mexico would merely represent another period in which large oil and gas companies turned their backs on the U.S. in favor of other markets. In the late 1990s, the large domestic oil companies abandoned the U.S. as large international prospects offered better financial returns compared to the high-cost U.S., which was seen then as a region in terminal decline. A decade later some of the same companies who had walked away were aggressively buying their way into the successful U.S. shale basins.

The offshore has always been a high-cost area to operate in. As a result, the history of the Gulf of Mexico has been marked with periods of high and low activity — in concert with the ebb and flow of oil and gas prices, as well as the emergence of new technologies that helped to lower finding and development costs. ExxonMobil’s decision to view its Gulf holdings as the “glass is half empty” will provide an opportunity for others that see it as the “glass is half full.”

Optimism has always driven the oil and gas business, but sustainable business strategies often dictate changing courses at times. Neither is right or wrong. The players in the news in the future will just be different.

 

 

About the author

G. Allen Brooks

G. Allen Brooks is a 40-year veteran of the energy and investment industries, serving as an energy securities analyst, an oilfield service company manager, a consultant to energy company managements and a board member of several oilfield service companies. He is the author of the highly regarded energy newsletter “Musings From the Oil Patch” that interprets trends within all sectors of the energy business.

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