Exxon’s Oil and Gas Production Plans a Sign of Industry’s Future Reliance on Unconventional Sources

Posted by Josh Garrett on March 12, 2010 at 1:03 pm

For Exxon Mobil and the rest of the oil industry, much of their future production will come from unconventional sources like the oil sands of Alberta, Canada. (image: cdecard.com and The Co-operative campaigns via flickr.com)

In a presentation to the New York Stock Exchange, Exxon Mobil laid out plans for future oil and gas projects that show an increasing reliance on harder-to-reach oil and gas reserves, CNN Money reported on Friday. Exxon, the world’s largest publicly traded oil company, will begin new projects aimed at extracting crude oil and natural gas from deep ocean waters, from a remote area of the Arctic, and from tar sands in Canada. All of those sources, deemed “unconventional,” require substantially larger investments of money and resources to extract than do the “conventional” reserves of crude oil and gas relatively close to the earth’s surface. As reservoirs of easy-to-reach oil, such as those found in abundance in Saudi Arabia, deplete, oil companies big and small will increasingly turn to unconventional sources such as those identified by Exxon.

Exxon CEO Rex Tillerson, doing his job to keep up appearances of a rosy future for his company, noted that the definition of unconventional oil is subjective, and insisted that just 10 percent of its future projects will tap unconventional sources. Unconventional oil and gas that is difficult to access is more expensive to extract and process, meaning higher costs for oil companies that would likely lead to lower profit margins and/or higher consumer prices that could cut into future demand. Even Tillerson acknowledged that increased reliance on unconventional sources is the inescapable future of the industry, and offered his company a pat on the back for preparing for that future: “We anticipate it will grow in the future, and we hope it will grow with the positions we’ve taken,” he said.

There are some bright spots in the future of conventional oil, most notably expectations of prolific conventional oil production in Iraq as the nation becomes more stable. However, the quantity of conventional oil expected to come from these bright spots will not be abundant enough to offset the depletion of other conventional supplies.

Although oil executives like Tillerson would probably deny it, the industry’s shift toward unconventional sources will, sooner or later, bring higher prices for consumer goods like heating oil, gasoline, and natural gas. For economist Jeff Rubin, the shift toward unconventional energy sources is the most important factor in his extreme vision of $225-per-barrel crude oil in two years and a subsequent demise of the global economy.

While an economic downturn, booming economies in the developing world, and a host of other factors have sent oil prices on a wild rollercoaster ride over the last couple years, the future is clear: the prices of oil and natural gas will continue to increase—the only question is how much and how fast. One cannot escape the simple logic that a product that is more expensive to produce is more expensive to buy.