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Douglas Grandt answerthecall@me.com

Decommission your assets equitably
December 21, 2016 at 6:56 AM
Malcolm Farrant Malcolm.A.Farrant@ExxonMobil.com, Darren W. Woods Darren.W.Woods@ExxonMobil.com
Rex Tillerson Rex.W.Tillerson@ExxonMobil.com, Suzanne M. McCarron Suzanne.M.McCarron@ExxonMobil.com, Max Schulz
max.schulz@exxonmobil.com

..

Dear ExxonMobil Irving employees,

..

As a former Exxon and Humble Oil employee, I want the best for my former colleagues as the industry
winds down. Some say attrition is the only solution to the pain of a dying business, but I believe the
talent at ExxonMobil is the salvation for all of humanity. You just need to apply the engineering and
economic models to a new set of multi-dimensional constraints: price, demand, glut, greed behavior,
cost effective competitive technological advances, etc.
..

The attached article summarizes the interdependencies akin to a differential equation. It could be mind
numbing, unless one has a team of top-notch scientists and engineers on the team. That is EMRE's
strengthwhen I was a young Humble reservoir engineer it was EPRCo. Your skills and negotiations
must be applied to the new objective, which is to decommission your assets equitably.

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We Need to Accept That Oil Is a Dying Industry

by Nafeez Ahmed | December 15, 2016 | 10:51am (ET) | Bit.ly/MoBo15Dec16
The future is not good for oil, no matter which way you look at it.
A new OPEC deal designed to return the global oil industry to profitability will fail to prevent its
ongoing march toward trillion dollar debt defaults, according to a new report published by a
Washington group of senior global banking executives.
But the report also warns that the rise of renewable energy and climate policy agreements will
rapidly make oil obsolete, whatever OPEC does in efforts to prolong its market share.
The six-month supply deal brokered with non-OPEC members, including Russia, couldslash
global oil stockpiles by 139 million barrels. The move is a transparent effort to kick prices back up
in a weakening oil market where low prices have led industry profits to haemorrhage.
The Organization of Petroleum Exporting Countries (OPEC), whose members include major
producers from Saudi Arabia to Venezuela, have been hit particularly badly by the weak oil
market. In 2014, OPEC had a collective surplus of $238 billion. By 2015, as prices continued to
plummet, so did profits, and OPEC faced a deficit of $100 billion.
The immediate impact of the deal was a 4 percent price rally that saw Brent crude (the
benchmark price for worldwide oil prices) rise to $56.64, its highest since mid-July. But according
to Michael Bradshaw, Professor of Global Energy at Warwick Business School, a price hike
would not solve OPECs deeper problems. In fact, it could speed up the transition away from oil.

As oil gets more expensive again, there is more incentive to

use alternative, cheaper forms of energy.
The current agreement is only for 6 months and decisions about investment in oil and gas are
based on a 20 to 30 year view of future demand, Bradshaw told me. On that time scale, none of
the uncertainties are addressed by the current agreement and oil exporting states need a
strategy beyond achieving a short-term agreement on productionthey need to start preparing
for a world after fossil fuels.
As oil gets more expensive again, there is more incentive to use alternative, cheaper forms of
energylike solar photovoltaics, which can now generate more energy than oil for every unit of
energy invested.
They will also incentivise more unconventional oil production that will challenge OPEC
production. Clearly there is a balance to be struck and it is not a return to $100 a barrel,
Bradshaw said.
He warns that higher prices might kick-start US tight oil production, which would increase
competition with OPEC, making the production cut agreement moot. They also might add
inflationary pressures in the economy that could prolong sluggish economic growth. Both
factors could end up keeping prices lower than OPEC wants.

We are not in a business as usual world, Bradshaw said. Higher prices for oil and gas will drive
investment in efficiency and demand reduction and also substitution, so they may actually
promote structural demand destruction.
Its not just OPEC that needs to be prepared. A report published in October by the Group of 30
(G30), a Washington DC-based financial advisory group run by executives of the worlds biggest
banks, warns investors that the entire global oil industry has expanded on the basis of an
unsustainable debt bubble.

The oil industrys long-term debts now total over $2 trillion.

G30s leadership includes heads and former chiefs of the European Central Bank, JP Morgan
Chase International, and the Bank for International Settlements.
The industrys long-term debts now total over $2 trillion, the report concludes, half of which will
never be repaid because the issuing firms comprehend neither how dramatically their industry
has changed nor how these changes threaten to soon engulf them.
The report is authored by Philip Verleger, a former economic advisor to President Ford who went
on to head up the US Treasurys Office of Energy Policy under President Carter, and Abdalatif alHamad, Director General of the Arab Fund for Economic and Social Development.
Its main finding is that permanent shifts in global energy markets will inevitably overwhelm oil
companies, along with all economies which depend primarily on fossil fuel production. The
attempt to rally prices, the report confirms, is a somewhat futile effort to avoid a major debt crisis
by lifting revenues.
But it wont work because the global oil industry is in denial about the bigger trends disrupting
energy markets as we know them. Oil majors, the report says, are holding on to a number of fatal
delusions.
They believe that the oil price decline is transitory; that oil consumption will grow despite
ongoing economic stagnation; that the industry will be magically immune to public and policy
demands to reduce greenhouse gas emissions; that technological progress will never be able to
displace fossil fuels such as oil; and, finally, that fracking will not produce enough supply to
undermine OPECs market monopoly.

Oil majors, the report says, are holding on to a number of

fatal delusions.
But if these assumptions are wrong: They represent an ossified industry that will gradually fade
away [and] hundreds of billions if not trillions in debt issued by these firms and countries may
never be repaid.
So whats the alternative? Instead of tinkering with production quotas, Bradshaw said: They [oil
producing countries] should also be promoting greater energy efficiency and renewable energy in
their domestic economies to preserve their exportable surplus as some will struggle otherwise
due to rapidly increasing domestic demand.

To its credit Saudi Arabias Vision 2030 plan is a step toward this. But a HSBC research note in
May found that the plan would not do enough to avoid the kingdom entering a protracted period
of marked economic decline.
In the meantime, a trillion dollar collapse in the oil market is coming because oil simply cannot
compete with new energy technologies. If Bradshaw is right, then OPECs efforts to 'shock' the
markets into boosting prices are only going to prolong the fossil fuel pain.
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