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A customer holds a gas pump handle at an Exxon station in Vancouver, Wash. (Don Ryan/Don Ryan/AP)
A customer holds a gas pump handle at an Exxon station in Vancouver, Wash. (Don Ryan/Don Ryan/AP)

Breakingviews

Exxon's slow and steady pace could win the race Add to ...

Oil giant Exxon Mobil seldom rushes. The biggest U.S. oil firm bet big on gas with the $31-billion (U.S.) acquisition of XTO Energy. With oil now almost seven times more precious than U.S. gas in energy terms, the company has been slower than rivals to move back toward crude. But there may be method to Exxon’s avoidance of a dash to liquids.

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The financial incentive to pump oil over gas has seldom been greater. Brent crude trades at around $110 (U.S.) per barrel. Assuming the same price for the same energy content, gas should be worth around $18 per million British thermal units. Instead, oversupply in the United States means gas is fetching just $2.70 per million BTU. Oil hasn’t been so expensive relative to U.S. gas since the mid-1950s, according to data from consultancy Navigant.

Yet despite huge shale oil holdings, fourth-quarter data published on Tuesday show that Exxon’s U.S. oil output hasn’t budged from about 430,000 barrels a day since it completed its takeover of XTO in mid-2010. Indeed, gas has even increased slightly as a share of the company’s output, up from 59 per cent to 61 per cent in the United States, according to Argus Research.

That may partly explain why investors knocked more than 2 per cent off Exxon’s $400-billion-plus market value after its quarterly report. And some competitors have certainly moved much more quickly. Chesapeake Energy , Exxon’s largest rival as a U.S. gas producer, has almost doubled its production of liquid hydrocarbons since 2010 to almost 100,000 barrels a day. Oil will become an even bigger part of Chesapeake’s business after a decision last week to cut gas output in response to low prices.

Still, this doesn’t necessarily show lethargy on Exxon’s part. The firm has continued to accumulate oil-rich acreages in North Dakota, Oklahoma and the hottest new field in Ohio’s Utica shale. It may also be acting prudently in not starting new production in haste. While others need the money, Exxon has the flexibility to take its time to fully understand the geology. More effective drilling should mean better long term returns for shareholders. Exxon is not the fastest runner, but it may yet be a winner in the race to ramp up U.S. oil production.

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