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Exxon Mobil Corporation (NYSE:XOM)

2013 Energy Outlook Conference Call

December 11, 2012 10:00 am ET


Sarah Ladislaw - Co-Director and Senior Fellow, Energy and National Security Program at the Center for Strategic & International Studies

Kenneth Cohen - Vice President, Public and Government Affairs

William Colton - Vice President, Corporate Strategic Planning


Herman Franssen - Energy Intelligence Group

Guy Caruso - Center for Strategic and International Studies

Jim Landers - The Dallas Morning News

Lawrence McDonald - Private Investor

Michael Martin - Congressional Research Service

Ben Geman - The Hill

Barbara Shook - Energy Intelligence Group

Clifford Krauss - The New York Times

Gary Gentile - Platts Oilgram News


Good day and welcome to Exxon Mobil 2013 energy outlook conference call. Today's call is being recorded. Statements made today regarding future events or conditions are forward-looking statements. Actual future results could differ due to factors posted on the investor relations section of the Exxon Mobil website.

At this time, I will turn the call over to Ms. Sarah Ladislaw. Please go ahead.

Are you connecting? Hello. Well, the other lines have gone dead now.

And you are live. Go ahead.

Sarah Ladislaw - Co-Director and Senior Fellow, Energy and National Security Program at the Center for Strategic & International Studies

Okay, great. Well, this is a wonderful whole new experiment on how man Washington energy experts are getting bit on their own play for a whole minute. But thank you for putting up with that technical difficulty. That was great.

Hi, I am Sarah Ladislaw. I am the co-director and senior fellow here at the Energy and National Security Program at the CSIS. We are absolutely delighted to once again be the host for Exxon Mobil's outlook this year for 2013. Its' not only sort of a really important strategic document for Exxon Mobil for sure, but it is certainly one of those critical inputs that we have for the public class policy debate that all of you in the room are engaged in.

We have a limited amount of time this morning. So I am going to stop talking very shortly and just introduce both, Ken Cohen, who is Vice President for Public and Government Affairs at Exxon Mobil and Bill Colton who is the Vice President for Corporate Strategic Planning for Exxon Mobil, who are going to do the bulk of today's presentation.

As many of you can tell, we have a very large audience on the phone that we will also be facilitating a conversation with when we get to Q&A. So please, I will state the ground rules early and ask then to wait for a microphone, especially if you are on the outside of the room and wait for, and please turn your microphone if you are sitting at the table and state your name and affiliation when we get to the question-and-answer period.

But, first I am going to turn it over to Ken, who is going to go ahead and introduce the outlook for this year.

Kenneth Cohen

Thank you, Sarah and hello to everybody here and again, this goes to out everyone on the phone, Bill and I are very happy that you could join us today as we give you a high level summary of our 2013 energy outlook, but before we start, some housekeeping.

Please note that the outlook contains some forward-looking statements. Actual future conditions, including economic conditions, energy demand and energy supply could differ materially due to changes in technology, the development of new energy sources, political events, demographic changes and other factors that we will discuss today and under the heading "factors affecting future results", in the investors section of our website.

The information provided includes Exxon Mobil's internal estimates and forecasts based upon internal data and analysis as well as publicly available information from external sources including the international energy agency and our law department now gives us the good housekeeping stamp of approval to proceed. So, go.

William Colton

Okay, thanks, Ken, and good morning. I am pleased to be here to share Exxon Mobil's outlook for energy which we are releasing to the public just today. For more than 50 years, this outlook has provided a window for us to the future, a view that we used to help guide our investment decisions and also for meeting, for producing the energy the world needs to meet global energy demand.

This year's outlook reveals a number of key findings about how the world will use energy, how much we will need in the future and what types of fuels will make the most sense for consumers. These are questions pondered not only by us but also by consumers and policy makers around the world.

Now, the first and most important insight is that the world runs on energy. Energy is fundamental to our way of life and our future prosperity. Energy is essential for everything from heating our homes and hospitals to fueling our cars and powering all the technologies that we depend on everyday and now considered to be necessities.

The second critical insight is that the world continues to evolve and expanding population, economically improved living standards, government policies and new technologies are all transforming the energy landscape. We are becoming more efficient and moving to cleaner fuels. At the same time, modern technology is unlocking new resources and making energy more affordable all the while creating new jobs and expanding trade around the world.

At Exxon Mobil, every single one of the 80,000 men and women who come to work everyday are focused on the needs of meeting society and consumers and we are just a small part of the technologically advanced global energy industry with millions of people working together in this mission to meet the world's energy needs. I am pleased to note, and you all are going to have a lot of time for your questions.

Now, this first chart highlights really the good news story of continued economic growth worldwide. We show GDP here broken down into OECD, and non-OECD countries. Now OECD just refers to the Organization for Economic Co-operation and Development. So non-OECD refers to other mostly developing countries such as China and India. Despite the economic challenges that we face today, we along with essentially all other forecasters expected economic growth will return and particularly as we look out the year 2014.

You can see that we expect economic output to more that double over this period. Now, non-OECD countries in red contribute slightly more than half of this growth. China alone will contribute more than 20% global economic growth. India, whose economy is today above one third the size of China has becoming increasingly important as a growth engine in the decades ahead.

Now, for these developing countries, this economic growth is particularly a good news story as it enables improvements in living standards for billions of people. Economic growth in OECD countries will be lead by the United States which will contribute roughly 20% of the growth in the global economy. Relative to other developed countries, the U.S. will be aided by a growing working age population.

Hand-in-hand with economic growth comes the need for more energy. 2040 global energy demand will be approximately 700 quadrillion BTUs and that’s 35% more energy than we use today on our base year of 2010. Note that almost all of this growth, essentially all the growth is in the developing world, and we are going to talk more about that later.

But notice the difference when you compare these two charts on the left and right side and the difference in the slope of growth. Global energy demand rises but at a much slower pace and this is achieved by continuing improvements in energy intensity or the amount of energy used to produce a unit of GDP output.

Now, our ability to significantly expand prosperity with relatively modest growth in energy demand reflects a couple of key factors. First, the economic structure of economy changes over time. For example, like many maturing economies, China will move from an energy intensive manufacturing based economy to a more service based economy requiring less energy per unit of GDP.

Second, energy efficiency improves across all sectors. This includes everything in it for a more efficient energy used at buildings and manufacturing processes to fuel economy of vehicles on the road to better modern fuels that are biomass in developing countries and to growing use of high efficiency natural gas for power generation.

All of this combines to dramatically slow energy growth in comparison to gains in economic growth and living standards. Now, this line shows how much more energy we would need if we didn’t assume any improvements in efficiency. Energy demand would be 500 quadrillion BTUs higher or about three times of the expected growth to 2040.

So you can see how important energy efficiency is and why we often say that efficiency is actually the largest source of energy for the future as we simply learn how to use it more efficiently.

Okay, now, the world's total demand for energy is driven by energy use in these four sectors and we are going to talk about each of these today. This is electricity generation, industrial, transportation and residential/commercial. Electricity generation is the largest and we expect it to grow the most.

That’s remarkable considering that a little over a century ago, electricity use was a novelty. Today, it's considered a basic necessity in the lives of most people helping them to light their homes, cook their food, power their appliances and use their computers. It is also a sector with a lot of room to grow with approximately 1.3 billion people today still do not have access to electricity at all.

Industrial energy use covers a broad range of activities, from agriculture to the production of raw materials to chemicals and plastics and the manufacture of finished goods. Transportation demand supports the mobility of people and goods, whether moving overland, across oceans or in the air. Surprisingly, the smallest sector is for our homes and other buildings which is residential and commercial.

Now let's start with transportation. Transportation is one of most familiar and prominent sectors and it's the one that has the biggest influence on oil demand. That’s because right now nearly all of the world's transportation is powered by liquid fuels and mainly oil products. Liquid fuels are so prevalent because small volumes at affordable prices provide lots of energy making them easy to transport and widely available.

Just for this energy density factor and perspective because it is so important for transportation, if you took all the energy concentrated in just one tank of gasoline and try to reproduce that with the energy in D size batteries, something everybody can relate to, you would need 20,000 D size batteries.

Now, when we think about transportation, most of us think about cars, but there is a reason why this picture of the slide shows an 18 wheelers as you are about to see. Now here we show transportation fuel requirements broken down by the major subsectors. Total transportation demand increases by more than 40% but notice that the growth comes entirely from the commercial subsectors.

This includes heavy duty which is mostly trucks, but also airplanes, ships and trains. Growth in commercial demand is driven by increases in economic activity. As the world increases output and international trade flows, all this production needs to be transported both globally and locally. A shirt you buy today could be made from cotton grown in Africa, textile is produced in Southeast Asia, sewn in China and delivered to your door by the UPS. Heavy duty vehicle demand, the largest subsectors sees the largest growth, up 65% and it accounts for 40% of all transportation by 2040.

Now, in to the contrast to the growth in commercial transportation, demand from personal vehicles or light duty, as we show here, that’s cars, SUVs and small pickup trucks actually plateaus fairly soon and begins a gradual decline. Now this occurs as personal vehicles become much more fuel efficient, effectively flattening fuel demand even as the global fleet doubles. You have two major factors offsetting each other. Number of cards doubles but the efficiency performance also doubles. It tends to flatten the demand.

Now, next we can look at how transportation demand varies across different regions. The strongest growth is in Asia Pacific which remains the largest consumer of heavy-duty energy and sees a significant increase in personal vehicle ownership. By about 2015, transportation demand in Asia Pacific will exceed that of North America. However, on a country basis, the United States will remain the largest transportation demand center followed by China.

So what cars do we expect people will be driving in the future? As you can see, conventional gasoline and diesel engine vehicles in green makeup a smaller share of new car sales over time, down to about 35% by the year 2040. Full hybrid vehicles, and a full hybrid, by that we mean something like a Toyota Prius, will continue to make up about 50% by the year 2040. This is mainly because hybrids will be needed to meet the efficiency standards set by governments around the world.

Over the years, electric and plug-in hybrids will begin to play a more significant but still a small role. This is because of the high cost for electric cars as well as performance restrictions that limit their appeal to consumers. Now full hybrids on the other hand, take advantage of the efficiencies that come with electric motor but at the same time they enjoy the convenience of using conventional fuels and in this sense a hybrid combines the best of both systems.

Now on this graph, we show the source of vehicle efficiency gains from 2010 and 2040. We start with today's new cars, again this is on a global basis, which averages 27 miles per gallon and we expect with efficiency improvements, new cars will average 47 miles per gallon, as you see on the top right, by 2040.

Now these improvements will come in the four main areas that we show here. Initially manufacturers will continue to incorporate engine and transmission improvements and powertrain design. This increases efficiencies by about six miles per gallon. Body and accessory improvements such as the use of lighter parts will improve efficiency by another three miles per gallon.

Over time, manufacturers are likely to introduce smaller vehicles to meet tougher standards to gain another six. Then around 2025, we expect hybrid vehicles to continue to come down in cost and their share of sales will expand quickly adding yet more efficiency to the fleet. This increase when combined with the other advancements will enable new cars to reach 47 miles per gallon.

Now we come to the largest energy demand sector, electricity generation. Demand for electricity is growing all around the world and commands a larger share of global energy supplies over time. Over the next 30 years, we expect the world will need 85% more electricity. Now most of this growth is in the developing world where electricity use will grow by 150%, equal to about three times the amount of electricity used in North America today.

Now the world needing 85% more electricity, a key question, what are the fuels, the best fuels to use for generating all this power and to help us answer that question, we like to put ourselves in the shoes of a power generation company that is looking at the cost for each of the major options. Now this chart shows total cost for generating electricity for five of the most significant options available today, coal, gas, nuclear, wind and solar.

Total cost here includes capital cost, operating expenses and fuel. At the top, you can see our assumptions for the cost to carbon. We look at varying cost to carbons, mainly as a proxy for future energy policies, which would limit carbon emissions. We started our discussion today with the future year 2030, with a cost to carbon at $60 per ton.

On the far left, you see that coal is actually the second lowest cost option and so you factor in the cost of carbon and it becomes increasingly less competitive. Nuclear and wind energy look more attractive, of course, when CO2 costs are included. Despite ongoing improvements in solar photovoltaic power generation costs, solar power still remains much more expensive than the other options and this continues to limit its use. You can see that gas is an economical and competitive choice and natural gas also brings environmental benefits.

A recent report by the US EIA noted that US energy-related CO2 emissions were at their lowest level since 1992. This is mainly over a result of natural gas replacing coal for electric power generation.

Now when we look at when we also need to consider the true cost of wind and solar power because both of these are intermittent sources of supply, but obviously the sun does not shine 24 hours a day and the wind isn’t always blowing and this means that to ensure that you have reliable electricity supplies, you have to back them up and often with a gas-fired unit. This is to ensure that electricity is always there when you need it.

This is critical when you design an electric power generation system. Now when we factor in this additional backup generation, the costs go up, of course when you in the backup cost for intermittent power and this is true for both solar and wind.

So now when you step back from this picture and just think about this, the world needs 85% more electricity. Coal is very much pushed back by environmental considerations. Nuclear is limited by public acceptance limitations, so the pace of nuclear growth is also limited. Then wind and solar are limited both by cost and the practicalities of growing these.

So this provides a tremendous opening for natural gas as a source of generating electric power. Natural gas doesn’t require any new technology. We already have the technology to very efficiently convert natural gas to electricity. It has 60% of lower CO2 emissions than coal. The natural gas generation plants can be built at very reasonable cost which is good for consumers. Now all of this is underpinned by these huge natural gas resources that we have available worldwide. So this, more than any other chart, explains why we see so much natural gas growth in our outlook, and we will come back to the natural gas resources in a minute.

Now let's look at the entire picture of fuels for power generation. You can see that almost all the growth in fuel demand for electricity generation occurs in the non-OECD economies. OECD is able to meet growing electricity demand with little growth in the energy use because of efficiency improvements and particularly as generation units switch from coal to gas.

Now, those on the phone, if you have downloaded the charts you may want to flip the page. In the fuel mix, we see gas has 85% growth and it's expected to approach coal as the second largest fuel source by 2040. Nuclear power is also expected to double, increasing its share to about 20%. Renewables will also grow significantly, reflecting growth of wind and solar underpinned by government subsidies and mandates as they are otherwise not economic. Along with significant contributions from hydro and biomass, renewables make up about 15% of power generation by 2040.

On the right we see how the fuel mix changes by region. In non-OECD countries, there is growth across all fuel types with gas capturing a larger share, followed by coal. Over the next 15 years, coal is expected to lose significant share as a result of climate change policies and a shift that favors a cleaner and diverse mix including more gas, nuclear and renewables. You can see that we see significant nuclear developments, for example with China adding over 200 gigawatts of nuclear capacity by 2040. In the OECD countries, you see coal significantly losing share throughout the outlook with natural gas, renewables and nuclear all gaining significant share.

Now let's wrap up the demand side of the outlook, looking here at year 2040, each bar represents global energy demand for each type in quadrillion BTUs per year, along with our project average annual growth rate which is the percentages shown at the top. The dash lines on each partial where global demand is in our base year of 2010. So you can see how the growth is changing when you look at the difference between the top of the bar and the dotted line.

Just a few observations. Oil remains the single largest source of energy. Its use will grow about 25%. That’s really driven by its uniquely attractive properties for transportation which is mainly the energy density we talked about earlier. Oil, natural gas and coal provide about 80% of total supplies. The most significant shift occurs is natural gas displaces coal as the second largest fuel. Gas will grow faster than any other major fuels with the demand up 65%. Much of this is driven by gas being used to generate electricity, as we already talked about.

Coal is likely to end up in 2040 about where it was in 2010. This shift occurs as the world moves to less carbon intensive fuels. Nuclear grow significantly and remains an important part of the overall energy mix. Nuclear, of course is limited by public acceptance and related citing challenges. Then wind, solar and biofuels actually have the fastest growth rate, if you look at the percentage number, than any of the other fuels but still will only makeup 3% of total world supplies in 2040.

Now we finished the demand side and I am going to move in minute to the supply side but before we do that, I want you to consider this one chart to look at greenhouse gas emissions. Shown on the left we see another significant aspect of this year's outlook, which is that CO2 emissions are likely to plateau around the year 2030. Globally, the rate of increase of CO2 emissions will be about half that of the energy demand growth.

Let's just go back to the basics. You remember we said that the world economy is going to double or increase by 100%, energy is going to go up by only 35% and CO2 emissions go up by 20%. This improved performance comes from two factors. One is just the wise and efficient use of energy and a shift to less carbon intensive fuels. As shown, CO2 emissions patterns will vary greatly between OECD and the non-OECD countries with growth in the developing countries consistent with our outlook for the increased need for energy.

In fact OECD emissions are expected to drop 20% by 2040 and before we draw any conclusions on the growth in non-OECD emissions. Let's look at CO2 emissions in a different way on a per capita basis. In this view emissions in the OECD are relatively high today. This is simply because of the high living standards in the OECD countries. But by 2040, this gap shrinks significantly, both as we continue to improve efficiencies in the developed world and as living standards improve in the developing world.

So now let's shift from the demand side to supply side. Now 100 years ago, nearly all the world's energy came from wood and coal. Since that time our choices have become cleaner and more diverse and this trend will continue over the next 30 years.

Let's take a look in more detail, starting with liquid fuels. The bottom area in green shows a relatively flat outlook for conventional crude oil production but the real story here is the dramatic impact of new technologies that are being deployed today to produce growing volumes of liquids in new ways. Specifically deepwater drilling, tight oil production, oil sands extraction and natural gas liquids or NGLs as we show in the chart.

Biofuels in yellow are also shown, although they remain limited by their high cost. So you can see that the liquids outlook is really a technology story. We expect total liquids to rise to about 113 million barrels per day. That’s close to a 30% increase from our base year of 2010. The success of deepwater production is an example of how new technologies are key to delivering new sources of liquid fuels to meet rising demand. As you can see on the chart, deepwater production was barely on the radar screen 10 years ago and is expected to more than double by 2040.

The same is true for tight oil, which is growing as a result of recent advances in technology that have enabled our industry to unlock oil found in tight rock formations. The advances are very similar to the ones that have enabled the growth of unconventional natural gas which, as you can see on this chart, is also producing a rise in natural gas liquids. By 2040, only about 55% of the world's liquid fuels supply will come from conventional crude oil production. The recipe provided by deepwater, tight oil and NGLs as well as oil sands and biofuels, all enabled by the continuing application of new technology driven by human innovation.

Now while the composition of the world's liquid fuels is changing, one fact is not. The world continues to hold substantial oil resources. Even by 2040, Exxon Mobil estimates that less than half of the world's recoverable oil will have been produced. Note also that estimates of the size of that resource continue to grow as new technologies allow us to tap into every larger resources for the long-term.

Now let's shift to gas. In North America, we expect unconventional gas production to grow substantially and we expect it satisfy about 75% of demand by 2040. The growth in unconventional supplies is a result of recent improvements in technologies used to tap these resources. This will almost meet the need for imports in North America and make LNG available for Europe and Asia-Pacific.

Now let's put a little more perspective on North America's unconventional gas production. Here is the global gas supply split into conventional and unconventional resource between North America and the rest of the world. As you can see about 60% of the growth comes from unconventional sources approaching one third of the global gas supply by 2040. Shale gas comprises the largest component but it also includes coal bed methane and tight gas.

Over the next two decades, over half the growth in unconventional gas will be in North America, moving the U.S. energy mix towards a lower carbon resource. This competitive energy supply provides a strong foundation for increasing economic output in the U.S., opening up new and valuable opportunities in many regions and sectors of the U.S. economy. This includes not only the energy sector but also other sectors such as chemicals, steel and manufacturing.

We are already seeing a positive and significant impact from new investments that are helping to provide reliable, affordable energy supplies for consumers and businesses as well as an abundance of new job opportunities in many areas. We can see unconventional production in other parts of the world as expected later and is definitely more uncertain in terms of size and the timing of development.

Now, on this year's outlook, we have added a new regional perspective. These regional outlooks help us gain a better understanding of how demand trends combined with significant new resource developments might impact global trade. Now we will look first at the energy balances for North America where we see some dramatic shifts.

On the upper left, we expect North America oil demand to fall primarily as a result of improved efficiency in transportation. This trend coupled with significant increases in liquid supplies being developed in the U.S. and Canada is expected to lead to a significant decline in net import requirements which we show with a dark green hatched area. In fact, around the year 2030, we expect North America to go from a net importer to potentially a net exporter of oil and oil-based fuels, as shown in the light green shading at the top.

Now, on the bottom left we see the gas demand in solid red grows through most of the outlook and supply and demand remains fairly balanced until about 2020, when we see the initial build towards export potential in shaded red. This growth is enabled by the huge growth in U.S. resources now estimated to provide over 100 years of supply. Important to note that this resource estimate continues to grow.

Now on the bottom right, you can see what happens we integrate all of the energy sources. This is oil, gas, coal, nuclear and renewables and on balanced North America is likely to move from a net import position to a net export position by about 2025. Now, this view illustrates many important and good news elements in the North American and U.S. energy picture.

First, the growing domestic supply of oil and gas is being enabled by advanced technologies and significant investments that can help meet domestic energy needs for safe, reliable and affordable energy.

Second, these growing domestic supplies are providing new sources of economic opportunities for businesses operating in North America as well as the economic value created by international trade.

These bring important benefits such as new and better job opportunities and higher state and federal government tax revenues. Capturing emerging trade opportunities helps our economy and also provides a stronger and more reliable foundation for the U.S. to promote free trade with partners around the world. Expanding and capitalizing on the freedom to import and export goods and services, including those related to energy will continue to be a vital source of economic value and competitive investment opportunities in today's economy.

Now for something different. The energy balance here is very different picture for the Asia-Pacific region. Oil demand will demand is likely to grow about 60% over the outlook. At the same time, domestic supplies are expected to fall. By 2040, oil imports are projected to reach 35 million barrels per day for the Asia-Pacific region. The region's dependency on imports grows close to 80% by 2040. China continues as the largest single driver of the global oil trade.

At the same time, gas demand is likely to increase 150%. However domestic supplies are also expected to grow significantly to support demand. Although it will be supplemented by imports via pipeline and LNG or liquefied natural gas. Now when looking at Asia-Pacific overall, we see energy demand rising by about 60%. This demand is driven by significant economic growth with GDP per capita of Asia-Pacific is expected to grow by more than 150%. Much of the demand growth in oil is driven by transportation, with overall transportation demand doubling over the outlook period.

Electricity demand grows 150% in the region and an aggressive nuclear program helps to meet a portion of that demand. Now the economic growth in the region and energy required to fuel it open more opportunities for global trade. Fundamentally, free trade provides an opportunity for people and nations to serve one another while raising living standards together. The diversity and relative affordability of many of the products and services the we consume every day from food to clothing to vehicle to entertainment and energy, all are a result of free and open economic exchange. It's this freedom that leads to more choices, more value and more good jobs.

Now our world's energy supplies have changed over history. I would like to provide a really long-term perspective here by going back to the year 1800. You can see that the most dramatic changes that have occurred in the past 60 years as advances in productivity and a dramatic evolution of technology have increase living standards and created better lifestyles for people. Today's diverse supply next helps to ensure more and more people around the world have access to energy that that’s reliable, affordable, convenient and clean.

Looking back, this is a rather striking evolution over a relatively short period of time in history. It is especially remarkable considering the increasing scale of energy needs. Today the world consumes about 25 times the amount of energy used some 200 years ago. We have gone from wood and other forms of biomass in 1800 to coal to help the fuel the industrial revolution. The rapid rise in oil in the early 1900s fueled the growth of modern transportation. By mid-century, natural gas and hydroelectric power emerged to help meet the growing needs for electricity.

Then the 1970s saw the emergence of a new modern source of energy, nuclear power. Today natural gas is poised to surge as technology unlocks the huge resources of this useful energy and at the same time, modern renewables are gaining prominence in many countries though the scale of energy used today mask their growing contribution. With the advances we have seen in technology over just the past decade from computers to smart phones, it's easy to think that the fuel powering these advances might also change just as quickly but it is not really the case.

Developing new energy sources and scaling them up to make a sizable impact does take time and resources. Just as an example, it took over hundred years from the first oil well discovery until oil became the number one source of energy in the world. So we believe the evolution of energy, technology and human progress and enables will continue meeting the energy challenge through 2040 also requires an unprecedented level of investments, an estimated $1.5 trillion a year but with that also an opportunity to provide significant value around it.

On my last chart here, is just a picture of this year's report. The one key theme, there was one thing we would emphasize, would be the role of innovation and technology in our industry. For example, a decade ago there was little idea that the pooling of several technologies would lead so quickly today's unprecedented growth in unconventional oil and gas.

Who can imagine what breakthroughs might emerge in the future and how that might benefit us all? Human creativity and ingenuity will always be the most fundamental driver of progress. Our goal is to provide energy that helps to underpin growing economy and improve living standards around the world. Ultimately, how much, what type of fuel and how energy will be used will depend on the actions by companies, consumers and policymakers.

We hope that by sharing the outlook we can help to contribute to making informed decisions about our energy future. So that is my presentation. I would be happy now to take your questions.

Question-and-Answer Session

Sarah Ladislaw

Thank you.

Kenneth Cohen

Thanks, Bill. So what we will do is take some questions first from those of you here in the room and then we will open it to those on the phone.

Herman Franssen - Energy Intelligence Group

Herman Franssen, Energy Intelligence Group. Quickly just say something about your basic price assumption underlying the forecast? Secondly, do you see over time the natural gas prices converging or do you see the continuation of the current gap? Europe about twice as high as the U.S., Asia and both as high as the U.S.?

William Colton

Well, let me take your first question about oil and gas prices by saying that we won't answer the question but I will say and I hope you can understand that we are not really allowed to talk about prices in kind of a public forum here for legal reasons. But I will say that as we pulled together the outlook, we have to consider the impacts of energy price on economic growth and that we do have embedded in the outlook what we believe are reasonable outlooks for energy prices. I would direct your attention to those who predict oil and gas prices and there is many good sources out there.

And the question of gas prices converging around the world, as you know the gas markets have been very regional up to now and I think they will continue to be regional for quite a while. The fact that we can now export gas through liquefying it and LNG does provide opportunities to have some markets begin to approach parity in different parts of the world but that’s very much a long-term prospect.

Herman Franssen - Energy Intelligence Group

Next, with oil and gas journal, does the…


(Operator Instructions)

William Colton

The economics of converting and we find two sectors that look particularly attractive. The first is what I will call fleets. Think of a UPS or a FedEx fleet, where they come home to the same terminal every night and so only have to build the infrastructure one time. You also do not have as much issues in terms of range because you do cut the range of the vehicle a little bit because natural gas has lower energy density. So that makes sense. In fact some people are already starting to do that.

The second interesting opportunity is liquefied natural gas for long-haul trucking. Think of these large interstate corridors across the country because you don’t have to build out so many service stations to support those. It's relatively expensive to fit out the trucks for LNG but if you look at the cost savings over time, it looks like it can make sense.

We also see it making sense for international marine. So there do seem to be some significant opportunities and we think the market will naturally drive that. One of the great things about this market is that this is all about consumer choice and I think consumers will naturally migrate to whatever fuels make the most sense.

We have looked at compressed natural gas for cars and I would just say that the economics of that look marginal. We don’t see that as the first place where we will see gas for transportation really grow but it does work.

Guy Caruso - Center for Strategic and International Studies

Bill, hi, Guy Caruso of CSIS. This follows up for both, GTL, gas to liquids.

William Colton


Guy Caruso - Center for Strategic and International Studies

I know Exxon Mobil had planned the project and then did not go. Ultimately, this will sty with that, what's your view as to GTL given this environment that you just described?

William Colton

Right, and very natural also given the current economics to natural gas and oil to consider using GTL or gas to liquids technology to convert natural gas to oil and a lot of people are looking at that. I would even go on to say this is kind of existing technology because people have done this today.

Most prominently Sasol, out of South Africa, has technology that’s has proven to do this. But it tends to involve very high capital costs upfront. I am talking about $10 billion plus and it gets closer to $20 billion to build one of these plants. So you have to be very, very confident that this gap between oil and gas can be persistent for a very, very long time.

So in our outlook, frankly, there is only modest volumes of GTL liquids. We do have some because you are seeing some. You can also, for instance, convert coal to gas using the same technology because you can probably know you can gasify coal and then take that gas and convert it to liquid. China is doing, for example. But honestly, they are very modest volumes in the outlook. In fact, there in that story, there are other liquids there in that slide.

Jim Landers - The Dallas Morning News

You, in your forecast, looked at tight oil as what I thought was fairly modest compared to deepwater. Are you thinking the tight oil is going to be a regional phenomenon, just in North America? What is behind that?

William Colton

Well, Jim, I would say that basically the answer is yes. It is that, it's still very much early days for tight oil and we just looked at what happened in the Bakken as most people have heard about the production of unconventional oil out in the Bakken and over just six years the production of tight oil increased by a factor of 100. I think the production now is up to 600,000 barrels a day there. So clearly, for that region, we have seen tremendous growth. Now we are our seeing growth in other regions through the U.S. and internationally, there is opportunities also.

While the volumes in the outlook may seem modest, its just because, note that at the end of the day, we are only trying to forecast based on what we know today and what the evidence provides in terms of making a reasonable outlook. So is there outside? I would say, yes.

Lawrence McDonald - Private Investor

I am Lawrence McDonald and I am here today in a private capacity as a concerned citizen. Since there wasn't any discussion on the report, I would like to offer a brief comment before I pose my question, if I may. I think it is all important to be recognizing the importance of this report with the show up that image of an immensely powerful corporation whose wealth is directly tied to continued high consumption of oil and gas and you project out to 2040.

We have a report from the World Bank suggesting that if we continue with business as usual and this is very much a business as usual kind of report, that by 2040 we will cross the 2% threshold which we have runaway climate change. I think it's remarkable that in your disclaimer at the beginning, you suggested a number of things that might change these predictions and all though there were references to emission, there was no reference to the threat of runaway climate change.

Exxon, in particular, is under fire and now welcome to my question, but maybe these are best for Ken. I am wondering if you have any comment on the divestiture movements that’s pushing for universities, public pension funds to dump the stock of the company by Exxon but continue to explore for fossil fuels that we will never be able to burn? In particular 70%, more than 70% of the students at Harvard voted to divest firms like yours last month and I am also wondering if you have any comment on the commercial, the parody put out by the Oil Change International that says has Exxon hates your children? Thank you.

Kenneth Cohen

Well, thanks for the question. It's not easy being us. I will start with the answer. The challenge that we have is that, as being the world's largest nongovernmental energy company, is to continue to produce the energy that the world runs on, but do it in a way that the world shows, with a lower greenhouse gas emissions footprint.

That’s why you see the world is going to continue to run for the next several decades on conventional fuels. We have taken a very large position in natural gas. We are now the largest North American natural gas resource holder and producer. As Bill shows switching from power generation from coal to natural gas has a huge positive benefit in terms of emission reduction.

Going forward, and again as our outlook shows, it's all about technology. Its how do we come up, as an industry with new technologies to continue to do two things, produce the energy that runs the world but does so with a lower environmental footprint. That's what all of us here are engaged in doing.

I don’t have a comment on the other two items, the activities in the universities or parodies.

Sarah Ladislaw

Maybe we will go, I think there is still time for a question in the room. Why don’t we to Michael and Ben?

Michael Martin - Congressional Research Service

Hi, Michael Martin with Congressional Research Service. My question is kind of a follow on to this. In looking at your study, more gas is being used. Exxon is an integrated oil company. Do you see a change on a company level and for industry to be moving towards more becoming an integrated natural gas company first and an oil company second, by 2040 or somewhere out in the future?

William Colton

Well, Mike, you know, we get that question a lot about what our business focus is and our business focus remains that, as the outlook shows, remember the main reason we do the outlook is to guide our business planning. As the outlook shows that clearly the world needs both oil and gas for the future, that’s clearly amongst our core competencies. Frankly we have a full plate.

Exxon Mobil, just to put this in perspective, over the next five years expects to spend $185 billion pursuing the development of oil and gas that will meet part of the-needs of the world and that keeps us plenty busy. So we have a lot on our plate and so we are really not looking at changing our business model in anyway. We feel that we have plenty to do to meet these needs.

Ben Geman - The Hill

Ben Gamen with The Hill newspaper. I wanted to ask another climate change question. Yesterday, House Energy and Commerce Committee Chairman Fred Upton was asked about Exxon's support for carbon tax. He said he didn’t think it posed a very push. So my question is, is a carbon tax something that Exxon is encouraging lawmakers to adopt or conversely, if it is your view, that look, if there is eventually to a price on carbon, that’s a view that you support but that is not something that you are advocating for? Thank you.

Kenneth Cohen

Thanks for your question and its option B. There is two discussions going on and we need to be very clear as to what were talking about. In the context of putting a cost on the use of carbon as a way of discouraging the use of carbon-based fuels, there are range of policy options. If policymakers are going to adopt a measure, a regime to affect or put in place a cost on the use of carbon across the economy, then as we look at the range of options, our economists and most economists would support a revenue-neutral, economy-wide carbon tax as being the most transparent and efficient way of putting in place a cost on the use of carbon

If however the question is, we need ways to raise revenue, and you are looking at our industry as a source for revenue, that is not the preferred option. I in fact, it is not even on the first three pages. Put our industry to work, 85% of federal lands, for example, right now off-limits to our industry. The opportunity is there for us to do a number of things just as you watched over the last decade what the industry has done in terms of job creation and wealth creation and natural gas.

Put the industry to work. We will generate jobs. We will produce energy and we will produce tremendous amounts of revenue for local, state and federal governments. Far more than could be raised by a revenue neutral carbon tax.

Ben Geman - The Hill


Kenneth Cohen

Correct. Whence the question comes, what is the policy objective? If the policy objective is to raise revenue, not on the table. If the policy objective is to put a cost on the use of carbon to discourage its use then we believe that a revenue neutral carbon tax should be very much on the table.

Ben Geman - The Hill


Sarah Ladislaw

Okay, we still have a lot of questions in the room but I think we will try and move to the phone. Okay? Do we have some questions coming from the phones?


Yes, we have a question from Barbara Shook, Energy Intelligence Group.

Barbara Shook - Energy Intelligence Group

Good morning to you all. My question deals first with export of natural gas. First, do you see export to Mexico by pipeline growing and how many U.S. Gulf Coast LNG exports do you see besides your own golden tap?

William Colton

Barbara, thanks for joining us today and I would be happy talk about gas exports. This has been a hot topic recently and in fact I hope that many of you have had the opportunity to see the report that was just released last week by the Department of Energy that very comprehensively looks at the improvements in economic performance enabled by the export of liquefied natural gas from the U.S.

I would say, Barbara, that the volumes that they are talking about there in the report are reasonable volumes. I would direct people to that report and others. One of the points they make there and its consistent with a lot of other studies say that while the exports of LNG look attractive, they will also have to compete with other sources of liquefied natural gas being provided around the world. So these volumes very much have to compete with other sources. So the amount of volumes will really be set appropriately by the marketplace as people compete for these markets and we expect of that, it will be a significant market for the U.S. and that it will be good for the economy.

Barbara Shook - Energy Intelligence Group

How much is it significant?

William Colton

Well, I think the DOE was talking about 10 billion cubic feet per day over the long term. I am not going to say that’s a specific number that we are using but it’s a good example of a reasonable estimate.

Barbara Shook - Energy Intelligence Group

Okay, fine.

Sarah Ladislaw

(inaudible), I think there is time. I think we have got two more questions on the bell.


Our next question comes from Clifford Krauss with New York Times.

Clifford Krauss - The New York Times

Just wanted to follow up on the LNG question. It is in two parts. What are the hurdles that LNG providers face, the important ones? Then, what impacts do you see U.S. LNG exports having on the world gas market?

William Colton

Clifford, we had a hard time hearing you. You were asking about the impacts of LNG exports and what hurdles we see?

Clifford Krauss - The New York Times

Yes, the impacts to the world and hurdles that the industry faces here in the U.S., going forward.

William Colton

Well, I would say that the main hurdle right now is we just need to get regulatory approvals. It is interesting, most people understand that increased exports is a good thing for the economy which is fine and I think that is what the report said last week. It was that free trade is good. I always like to say this is not really a new idea. Adam Smith first explained this quite well 200 years ago.

It is probably the one thing that almost all economists will agree to, that more trade is good for any economy. But at the same time, we understand that policymakers need to get their minds around this and to make sure they are comfortable with it. So we are hopeful that economics will prevail.

In terms impact on the global markets, I would say it is really minimal. Again the LNG markets is a large market today. It is expected to be much larger in the future. You see LNG volumes in Asia-Pacific, for instance, growing by a factor of three in the future and so, the U.S. LNG exports will just be a part of that large market.

Sarah Ladislaw

Okay, one final question on the phone.


Our next question comes from Gary Gentile with Platts.

Gary Gentile - Platts Oilgram News

Speaking with exports for a moment, you mentioned you see North America becoming a net exporter of oil and oil products down the road. I was hoping you could break that down in terms of exports from Canada, the United States and Mexico and specifically do you envision that the policy will change in the United States down the road to allow the U.S. to actually become an exporter of oil?

William Colton

Well, yes, when we talk about and our balance is here just to remind everyone we looked at North America balances. So it did include Canada the U.S. and Mexico. It's a big and diverse market. Obviously you have net exports coming across the border from Canada. So that’s probably the preliminary driver of those balances. And yes, we would hope that again policymakers would see the wisdom of allowing exports which, just like exports of any other product would be good for the U.S. economy.

Kenneth Cohen

I would add to that, since we are in D.C., it seems in bipartisan term, speaking in terms of independence, you will note that we did not use that term its by the time we think in terms of energy security that is improved for North America as a result of increased supplies of energy the technology is enabling. The term independence implies isolationism, trade protectionism and of course it's self defeating. So I just wanted to make sure people understood in what we were saying.

Sarah Ladislaw

Perhaps, one final question, if I might just because I don’t want to get lots on the shuffle. Both in the headline issue for the world energy put up by the IEA and then also your outlook and since we are in Washington, something that actually seems to be actually come out the hill the other day, efficiency. You have a good deal of efficiency gain within your outlook. Are those along the lines of traditional psychological progress? Is that policy driven? Where does that growth come from and what are some of the sub elements to that theme?

William Colton

Sarah, the improvement that come from efficiency is actually not a new thing. The reality, as you look back in time, energy efficiencies continue to improve progressively over many, many years. So it's not a new trend. In some ways, it's actually accelerating in some industries like, when you think about automotive efficiencies, they are actually on a much faster pace going forward than they have been historically.

One of the things that is striking about efficiency, is that you to see it in every single sector. You see it in industrial processes. You see it in appliances that you buy for your home. You see it an industrial and residential designs. Some of that’s driven by government policies, things like efficiency standards for appliances is a good example.

So we are very supportive of what we call cost-effective efficiency standards because at the end of the day, we want to make sure it makes sense for consumers. One of the great things about efficiencies is again economics works pretty well here. People see the value of saving the cost of energy and then it naturally drives people to more efficient uses of energy over time.

Sarah Ladislaw

Well, one these days we get back, crowded rooms like this, we are trying to be efficient with your time. So we will try and let you all go, but I just wanted to thank both you and Bill and thanks for coming here to present this as you. As you can see, these outlooks are great batter for very current public policy discussions and commercial discussions. So we thank you for being here. Please help me in thanking them.


That does conclude today's conference. We do thank you for your participation.

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