Exxon vs. the Feds: How the Oil Giant's Own Conservatism Hobbled It
Exxon is battling U.S. regulators in court to retain leases for an oil-rich field in the Gulf of Mexico. One of the biggest oil finds in more than a decade as well as billions of dollars in royalty taxes for the Treasury hangs in the balance.
The fight is emblematic of the growing divide between regulators and the industry, specifically when it comes to offshore deepwater exploration. But it also illustrates how Exxon's typically celebrated conservative business model doesn't always serve it well in this new era of oil exploration.
The fight over the leases began long before the Deepwater Horizon disaster last year. Several 10-year leases for the Julia field off the Gulf Coast were set to expire in late 2008 -- i.e., in the waning days of the Bush administration. Exxon (XOM) filed for a 5-year extension about one month before the deadline, but was denied in February 2009 because the government said the oil company didn't present a specific production plan as required, the WSJ reported. Exxon lost its final appeal in May. The company filed a lawsuit against the Interior Department last week in federal court.
Starring Exxon as... the patsy
According to Exxon, extensions were regularly approved. When it was denied, the company was caught by surprise. U.S. regulators didn't change the rules. However, regulators did decide to interpret and enforce the rules in the strictest possible way. The feds delivered their we're-serious-about-the-unused-leases message by making Exxon an example.
Unfortunately, Exxon's conservative approach to business, including how it explores and produces oil, set the company up for this sort of treatment. It's possible that Exxon had underestimated the previously laissez-faire regulators. But considering how Exxon has historically approached exploration and its general aversion to financial risk, the company was probably being overly cautious about how it planned to develop the field.
This isn't just about filing for an extension sooner. Exxon lacked a specific plan, one it had several years to come up with. In other words, Exxon was still figuring out how to approach the site while weighing the financial risk against other projects.
Case study: How Exxon has lost out before
But the regulatory climate (and not just in the U.S.) as well as the global availability of oil-producing fields requires companies to be far more nimble and willing to take financial risks to search for oil. Take Tullow Oil, Kosmos Energy and Anadarko Petroleum, for example.
These companies were willing to explore for oil offshore Ghana when the traditional big guys were avoiding risky ventures and had abandoned the area. In June 2007, the group discovered one of the largest oil finds in the past decade in West Africa. The group accelerated appraisal and development of the Jubilee field, and began producing oil by December 2010.
Exxon tried to get in on the action in late 2009 -- once the oil was discovered and the risk was minimal -- and made an unsuccessful multi-billion-dollar bid on Kosmos Energy's stake in the Jubilee project.
Meanwhile, the Gulf of Mexico is one of the few areas left that is both rich in oil and gas and located in a friendly environment. Critics of President Obama might protest, but governments elsewhere are either more restrictive, have higher taxes or are unpredictable and unstable. The financial risks are minimal compared to offshore Africa.
On a side note: Regulators will have to decide whether making this point on unused leases is really worth it. If Exxon loses the lease, the Treasury will lose out on an estimated $10 billion in royalties. If it relents, the government sends mixed messages to the industry about what it intends to enforce.
Photo of Thunder Horse platform from BP (site of the last largest find in the Gulf of Mexico)
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