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Executives

David S. Rosenthal - Vice President of Investor Relations and Secretary

Analysts

Evan Calio - Morgan Stanley, Research Division

Paul Y. Cheng - Barclays Capital, Research Division

Edward Westlake - Crédit Suisse AG, Research Division

Mark Gilman - The Benchmark Company, LLC, Research Division

Iain Reid - Jefferies & Company, Inc., Research Division

Pavel Molchanov - Raymond James & Associates, Inc., Research Division

John C. Nelson - Macquarie Research

Doug Terreson - ISI Group Inc., Research Division

Allen Good - Morningstar Inc., Research Division

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

Exxon Mobil (XOM) Q3 2011 Earnings Call October 27, 2011 11:00 AM ET

Operator

Good day, and welcome to this Exxon Mobil Corporation Third Quarter 2011 Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks, I'd like to turn the call over to the Vice President of Investor Relations and Secretary, Mr. David Rosenthal. Please go ahead, sir.

David S. Rosenthal

Good morning, and welcome to Exxon Mobil's Third Quarter Earnings Call and Webcast. The focus of this call is Exxon Mobil's financial and operating results for the third quarter of 2011. I will refer to the slides that are available through the Investors section of our website. Before we go further, I would like to draw your attention to our customary cautionary statement shown on Slide 2.

Moving to Slide 3, we provide an overview of some of the external factors impacting our results. The global economy and energy markets continued to face a challenging macroeconomic environment. Global economic growth was mixed in the third quarter. The United States GDP in the third quarter is expected to show some modest improvement from the second quarter, while economic growth in the European Union continued to slow amid persistent sovereign debt concerns. In general, Non-OECD growth remains robust even with some signs of demand softening in China. Energy markets overall continued to weaken in the third quarter versus the second quarter, with both crude oil and natural gas prices declining. Commodity chemical margins also weakened across the quarter.

Turning now to the third quarter financial results, as shown on Slide 4. Exxon Mobil's third quarter 2011 earnings, excluding special items, were $10.3 billion, an increase of $3 billion from the third quarter of 2010. Our effective tax rate for the quarter was 47%. Earnings per share for the quarter, excluding special items, were $2.13, up $0.69 from a year ago. The corporation distributed more than $7 billion to shareholders in the third quarter through dividends and share purchases to reduce shares outstanding. Of that total, $5 billion was distributed to purchase shares. Share purchases to reduce shares outstanding are expected to be $5 billion in the fourth quarter of 2011.

CapEx in the third quarter was $8.6 billion, consistent with the third quarter of 2010. Across our diverse portfolio, we continued to invest in robust projects through the business cycle to help meet global demand for crude oil, natural gas and finished products, while supporting economic growth including job creation. Our cash generation remains strong with $16.3 billion in cash flow from operations and asset sales. At the end of the third quarter 2011, cash and marketable securities totaled $11.3 billion, and debt was $16.8 billion.

The next slide provides additional detail on third quarter sources and uses of funds. Over the quarter, cash and marketable securities increased from $10.3 billion to $11.3 billion. The combined impact of strong earnings, depreciation expense, lower working capital and the benefit of our ongoing asset management program yielded $16.3 billion of cash flow from operations and asset sales. Uses included additions to plant, property and equipment or PP&E of $7.5 billion and shareholder distributions of $7.3 billion. Additional financing and investing activities decreased our cash and marketable securities by $0.5 billion.

Moving on to Slide 6 and a review of our segmented results. ExxonMobil's third quarter 2011 earnings of $10.3 billion increased almost $3 billion or 41% from the third quarter of 2010. Upstream earnings increased $2.9 billion, while downstream earnings improved $419 million. Chemical earnings were down $226 million. Higher financing expenses decreased earnings $140 million versus the third quarter of 2010, mainly due to tax items. Corporate and financing expenses remained within our continued guidance of $500 million to $700 million per quarter.

As shown on Slide 7, Exxon Mobil's third quarter 2011 earnings of $10.3 billion declined by $350 million compared with the second quarter of 2011, mainly due to weaker crude oil realizations and chemical margins, partially offset by higher downstream margins.

Moving next to third quarter business highlights and beginning on Slide 8. During the quarter, we continued to make good progress at Kearl, with construction now 75% complete. The Kearl initial phase development is progressing as planned towards a late 2012 start up. The PNG LNG project is also progressing as planned towards a 2014 start up.

Recent milestones include the first weld on the 430-mile gas pipeline, mobilization of the first drilling rig and construction of the LNG plant pipe racks, storage tanks, foundations and jetty.

We continue to wrap up activity in Iraq, with 6 drilling rigs operating. Current gross production is approximately 370,000 barrels per day. We are also working with the Ministry of Oil, the South Oil Company and other integrated oil companies involved in the development of the southern Iraq oilfields to advance the commercial and technical basis for the common sea water supply project.

At Banyu Urip in Indonesia, key contracts were awarded, including the central processing facility, EPC contract and the drilling rig contract. Additionally, the early production system continues to deliver approximately 20,000 barrels per day of crude oil production. Exxon Mobil also signed a principles of agreement with the government of Indonesia on key terms and conditions for a new production sharing contract for the development of the Natuna gas resource. The completion of the POA is a key milestone towards the development of Natuna.

Turning now to Slide 9. Rosneft and Exxon Mobil signed a strategic cooperation agreement on August 30 to jointly participate in exploration and development activities in Russia, the United States and other parts of the world. This includes 30 million acres in the Kara Sea, which is one of the world's most prospective hydrocarbon provinces with high potential for liquids. As you can see from the map, the 30 million acres in the Kara Sea is a very large area and is similar in size to the entire central Gulf of Mexico. Seismic surveys are planned in the Kara Sea in 2012.

In the 2.8 million acre Black Sea block, seismic surveys have begun with the potential for exploration drilling to follow in 2014. We are working closely with Rosneft to finalize the definitive agreement.

Turning now to an update on our unconventional activities on Slide 10. ExxonMobil's global portfolio of unconventional assets contains a growing number of highly-prospective liquids-rich plays. We have approximately 410,000 net acres

of leasehold and 7 operated rigs in the tight oil reservoirs of the Bakken Shale. In the Permian, where we hold approximately 800,000 net acres of leasehold, we are also evaluating unconventional potential that occurs across roughly half of this acreage. In the Bakken, liquids production in the third quarter rebounded strongly from the severe weather impacting operations in the first half of 2011, increasing by 19% from the second quarter and 25% year-over-year.

We are also involved in multiple emerging liquids-rich shale plays, the most active of which is the Woodford shale in the southern Oklahoma Ardmore Basin area. To date, we have amassed more than 150,000 net acres in this play through an aggressive leasing and acquisitions program. This leadership position has been built at an attractive cost. As we acquired resources for approximately $0.30 per 1,000 cubic feet equivalent and added the leasehold for under $600 per acre.Our activity in the Woodford Ardmore play has ramped up significantly in 2011, with our operated rig count increasing from 3 to 7 rigs and gross operated production more than tripling since year-end 2010.

In our core development area, peak 7-day gross production rates have averaged 325 barrels per day of crude oil and 3.7 million cubic feet per day of natural gas, with a rich 1,275 BTU gas also yielding significant natural gas liquids, providing an average liquids rate per well of over 750 barrels per day and 2.9 million cubic feet per day of sales gas. We are continuing to ramp up drilling activity and are progressing both marketing and infrastructure plans for the play.

Exxon Mobil is also actively exploring several other early stage liquids-rich play in the United States, including the Utica Shale play in eastern Ohio and western Pennsylvania. Our position in the Utica stems from our recently completed acquisition of the Phillips companies and represents incremental upside to the Phillips acquisition, which was focused on the Marcellus. The Phillips acquisition included 45,000 net acres prospective for the Utica in Ohio, and we have increased our position now to over 75,000 net acres. We anticipate drilling our first Utica well in early 2012.

Additionally, Exxon Mobil has a diverse portfolio of emerging unconventional resource opportunities outside of the U.S., including several new plays with liquids potential. For example, in Germany and Argentina, we are in the early stages of evaluating several new tight oil opportunities. These opportunities represent a large and growing global portfolio of unconventional assets, with the potential for significant value creation through the application of Exxon Mobil's advanced technologies, supplemented with strong operational and technical expertise from XTO.

Turning now to Slide 11, with an update on our new synthetic lubricant basestock project. During the quarter, Exxon Mobil Chemical announced plans to build a world scale facility to manufacture metallocene polyalphaolefin or MPAO, a synthetic lubricant basestock at our integrated refining and chemical complex in Baytown, Texas. This new facility will have the capacity to produce 50,000 tons per year of MPAO. This new high viscosity MPAO manufacturing capacity demonstrates Exxon Mobil's technology leadership and our commitment to providing customers with a reliable supply of synthetic basestocks.

Exxon Mobil Chemical is the world's largest PAO producer and offers the broadest range of advanced synthetic basestock fluids. MPAO is primarily used in high performance synthetic lubricants and offers enhanced characteristics versus conventional PAO, such as improved sheer and low temperature properties. Demand for high performance lubricants is increasing due to the greater emphasis placed on energy efficiency, improved equipment reliability and extended drain intervals.

This investment leverages ExxonMobil's proprietary metallocene catalyst process and enables development of innovative synthetic lubricants that can help address lubrication challenges across a wide range of market sectors. This new plant at the Baytown complex will be an important addition to our synthetic basestock manufacturing portfolio, which includes production facilities in Texas, New Jersey and France, as well as various custom manufacturing arrangements around the world. Engineering, procurement and construction activities have begun, and completion is expected in 2013.

Turning now to the upstream financial and operating results, starting on Slide 12. Upstream earnings in the third quarter were $8.4 billion, up $2.9 billion from the third quarter of 2010. Stronger crude oil and natural gas realizations increased earnings by $3 billion, as crude oil realizations increased $32 per barrel and gas realizations increased $1.34 per kcf.

Production mix and volume effects decreased earnings by $660 million, due mainly to the impact of lower entitlement volumes in west Africa and base decline, partly offset by the ramp-up of Qatar, Scotland [ph] and Iraq projects. Earnings were also positively impacted by the timing of liftings. All other items, primarily gains from asset divestments partly offset by higher exploration and operating expense, increased earnings by approximately $600 million. Upstream after-tax earnings per barrel for the third quarter of 2011 were $21.31.

Moving now to Slide 13. Oil equivalent volumes decreased 4% from the third quarter of last year mainly due to the impact of lower entitlement volumes in West Africa, decline and divestments. Volumes were positively impacted by the ramp-up of projects in Qatar, Scotland [ph] and Iraq and continued strong performance in our U.S. unconventional resources business.

Turning now to the sequential comparison, starting on Slide 14. Versus the second quarter of 2011, upstream earnings decreased by $147 million. Lower realizations decreased earnings by $450 million, as crude oil realizations declined by over $5 per barrel. Production mix and volume effects decreased earnings by $90 million due mainly to lower entitlement volumes in West Africa and Iraq, lower seasonal demand in Europe and decline.

Earnings were positively impacted, however, by fewer maintenance activities and the timing of liftings. Other items, primarily gains from asset divestment and favorable foreign exchange impacts, partly offset by higher exploration and operating expenses, increased earnings by $390 million.

Moving to Slide 15. Oil equivalent volumes decreased 3% from the second quarter of 2011 due mainly to lower entitlement volumes in West Africa and Iraq, lower seasonal demand in Europe and decline, partly offset by fewer maintenance activities. Lastly, I'll note that year-to-date oil equivalent volumes increased 5% or 226,000 oil equivalent barrels per day compared to the first 9 months of 2010.

Excluding the impacts of lower entitlement volumes, quotas and divestments, production was up over 8% and remains consistent with the 2011 volume guidance we communicated at the March analyst meeting of 3% to 4% growth versus 2010. For further data on regional volumes, please refer to the press release and the IR supplement.

Moving now to the downstream financial and operating results and starting on Slide 16. Downstream earnings in the third quarter were $1.6 billion, up $419 million from the third quarter of 2010. Improved refining margins increased earnings by over $1 billion. Continued benefits from our refining optimization activities contributed $110 million in volume and mix effects. Other factors, including unfavorable foreign exchange effects and lower gains on asset sales, decreased earnings by $710 million.

Moving to Slide 17. Sequentially, third quarter downstream earnings increased $223 million. Positive margin effects increased earnings by $360 million, while volume and mix effects increased earnings by $270 million, driven by refining optimization and lower maintenance activity. Other factors decreased earnings by $410 million, largely due to unfavorable foreign exchange effects.

Turning now to the chemical, financial and operating results, starting on Slide 18. Third quarter chemical earnings were $1 billion, a decrease of $226 million versus the third quarter of 2010. Margins improved earnings by $50 million, while higher plant maintenance contributed to a negative $110 million volume and mix effect. Other factors decreased earnings by $170 million primarily due to unfavorable tax effects and higher plant maintenance cost.

Moving now to Slide 19. Sequentially, third quarter chemical earnings decreased by $318 million. Lower commodity chemical margins decreased earnings by $130 million, reflecting lower global demand consistent with the softening global economy. Volume mix effects decreased earnings by $50 million. Other effects decreased earnings by $140 million, primarily due to unfavorable foreign exchange effects and higher plant maintenance costs. While the chemical business is cyclical in nature, we continued to leverage feed advantage, integration and premium product offerings to outperform throughout the cycle and maintain a positive long-term outlook on the business.

Moving to Slide 20. While we manage our downstream and chemical businesses separately, we continue to capture benefits from the unique integration and optimization of these businesses. Third quarter earnings were $2.6 billion for our combined downstream and chemical businesses.

Moving to Slide 21. ExxonMobil's third quarter financial and operating performance was strong and reflects the ability of our business model and competitive advantages to deliver strong results. As we continue to focus on operational excellence, deploy high-impact technologies and leverage our unparalleled global integration, Exxon Mobil remains well positioned to maximize long-term shareholder value.

That concludes my prepared remarks. I would now be happy to take your question

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Doug Terreson with ISI.

Doug Terreson - ISI Group Inc., Research Division

Global E&P profitability seems to be rising, especially overseas, which appears to be offsetting some of the weakness in the U.S. So my question is whether you could provide a little bit more insight into the upstream profitability trends, and that is in relation to the level of realizations or margins that there -- that may be called. Meaning, are there other international mix effects besides the ramp-ups in the 3 countries you mentioned? And in the States, are the trends assemble at lower oil but higher gas, production-related? Or are there other factors at work?

David S. Rosenthal

Let me actually answer those questions in reverse order. The impact you do see in the U.S. is a mix effect with some lower liquids production being offset on a volume basis by higher gas production overall as we've trended in the last year or so. And you've see that impact on our volume mix effects. Overseas, I would say most of the changes that you see there is really the benefit we're seeing in the project ramp-ups, in particular, the Qatar trends, and you see that both in our non-U.S. profitability, as well as the strength of our non-U.S. gas realizations. So those will be the primary factors.

Doug Terreson - ISI Group Inc., Research Division

Okay, good. And then also you mentioned Natuna was progressing slowly but surely. And on Natuna, I wanted to see if we could a little bit more of a status update on that project and specifically, whether you guys feel the partnership structure is settled and also whether you believe current technology is present to effectively develop that project. Just a little bit of an update on that one.

David S. Rosenthal

Sure. Even though this project has been around a while and we've been looking at it, working on it, we're still in early days in terms of the definition of the project, the partnership, et cetera. I was pleased to report this morning that ExxonMobil, Pertamina, Total and PETRONAS have signed this principles of agreement, which will relate to the plan for exploration and development of the area. So while the POA is a good first step, I have to say we're still kind of in the early days of bringing that project along, and those negotiations for the final PSE are ongoing.

Operator

And we'll take our next question from Iain Reid with Jefferies.

Iain Reid - Jefferies & Company, Inc., Research Division

I wonder if you could give us an update on the Rosneft deal. In particular, where are you on negotiation, the tax terms? Is there any kind of special tax breaks that you're looking for in order to make this project work? And also, I think you are going to swap some assets with Rosneft in the U.S. Is there any kind of decisions being made in which particular assets you are going to do that deal on? And I've got a question on chemicals after that, if I can.

David S. Rosenthal

Sure. Let me hit both of those questions on that strategic cooperation agreement. In terms of tax terms and other issues around the definitive agreements, I can tell you, work on those agreements is progressing on schedule. We're working very closely with Rosneft on that deal, and that's progressing. I can say in terms of, in particular, on fiscal terms, the Russian government does recognize the need for fiscal improvements in the offshore, and we are working with them to define how that might end up at the end of the day. But I can't give a specific time frame for the finalization of those agreements other than to say work is progressing. In terms of the second question, I wouldn't refer to it as asset swaps necessarily. I think a better way to portray it is Rosneft will be given the opportunity to participate in various properties in the U.S., for example, in the Gulf of Mexico, in the Deepwater they'll have an opportunity to farm in to some of our 100%-owned blocks, and they are evaluating those opportunities to make a decision. They may also take an interest in some of our unconventional resources in the U.S., and they're looking at that as well and what those opportunities might be. There was also potential for cooperation and joint partnership and other pieces of the business overseas. But again, those have yet to be finalized. I will say that we're looking forward to the multiple joint ventures and personnel exchanges that we're going to see in this agreement. And I think this will help really strengthen the relationship between the 2 companies, as well as provide valuable development opportunities for our staff. So it's kind of as the title suggested, it is a strategic cooperation agreement, and that includes technology development that we've also talked about, including the Arctic research center. So a number of things going on. And I would say, again, early days, but things are progressing on schedule

Iain Reid - Jefferies & Company, Inc., Research Division

Okay. And my chemical question was, you talked about margin weakness during the second and the third quarter. Is this the kind of a global GDP slowdown, thing you're seeing in Asia or the OECD? Or where is that kind of bit of weakness coming from do you think? And do you think this is something which will extend into the fourth quarter and into next year now?

David S. Rosenthal

Well, let me hit the first part of that. As we've look at margin trends sequentially across the last couple of quarters, we are seeing demand weakness overall and that has backed up into some downward pressure on margins. Asia is probably at bottom of cycle, if you kind of look at historic trends. But we've also seen some weakening demand and margin pressure in Europe as well. Back, again on the Asia side, there's a little bit of oversupply across some of the commodity products, and that's pressuring margins. So once again, we're reminded this is a cyclical business and the profits that we're earning now are certainly very strong given where we are in an otherwise pretty weak economic environment and in particular, on commodities. Although I will say on the specialty side of the business, that business is holding up pretty well, both from a volume and a margin standpoint. And we look at earnings decline across the last few quarters, most of that has been in the commodities section, as the specialties business has held up well. So as we look forward in the fourth quarter and next year, it's hard really to judge what's going to happen, although I will say as you would expect, there'll be a close tie between economic activity levels and certainly, the profitability of the commodity side of the business.

Operator

And we'll take our next question from Evan Calio.

Evan Calio - Morgan Stanley, Research Division

First question on the U.S. unconventional portfolio. I know last call you mentioned you were earning 65 to 70 rigs. Can you update us on the rig count this quarter? And secondly, as the commodity strip has come down very different than oil on the natural gas side, how do you consider any activity response to the environment or can you quantify -- I know you highlighted Woodford, Ardmore and Utica, I mean, can you quantify your shift within that portfolio towards liquids? And I have a follow-up on the Black Sea.

David S. Rosenthal

Sure. As you mentioned, the environment has weakened a little bit on gas prices here in the U.S. I can tell you across the quarter, we're averaging right around 64, 65 rigs in the unconventional space about what we've been doing over the last year or so. I don't have a quantification of actual rig movement. But I can tell you, as you would expect, we have optimized that rig count towards the liquids-rich plays and ramped up there. And certainly, in terms of keeping the overall total flat, backed off on some of the dry gas areas. So in particular, as I mentioned, some of these new plays that we're in, we're anxious to ramp up drilling activity there and are doing so. So yes, I think, just as you would've expected, we are certainly optimizing that rig count towards the liquids-rich plays, and in particular, some of that newer things that we're working on.

Evan Calio - Morgan Stanley, Research Division

Great. That makes a lot of sense. Just a follow-up on the Black Sea questions. In terms of the onshore or offshore assets that Rosneft, while the option to farm into, is this primarily an acreage opportunity? Or is there associated production potential as well? And you didn't mention any time on Kara. Kara, you mentioned seismic this year. Is that also a 2014 timetable at the Black Sea?

David S. Rosenthal

Yes. Let me just kind of clarify. In the Black Sea, we've got seismic underway now, and we look to potentially drill a well in 2014. When you go up to the Kara Sea, we would expect to begin the seismic operations next year, and then potentially, if things work out, drill a well in the 2015 time frame.

Evan Calio - Morgan Stanley, Research Division

Got it. And any update on the Kastamonu well? I believe -- Is that still drilling in Turkish Black Sea?

David S. Rosenthal

When you look at the Kastamonu well was our first well. We have finished drilling that well. I can tell you that we did not encounter commercial quantities of hydrocarbons. We plugged and abandoned that well. And we did take that dry hole expense in our earnings this quarter. I can also tell you we continue to evaluate the results of that well and the well we drilled last year, as we look at kind of the overall play there. I think as you look out across the next several months. Our plans in the Black Sea are -- once TPAO is finished, they've got the rig now drilling one of their blocks. We'll then take the rig up to Romania and drill our first well. Whether we'll get that spudded at the end of the year or it rolls in to the first year -- the first of the year, we'll see. It depends on timing of the return of the rig. But that'll be the order. We'll drill Romania next, and then we'll evaluate based on the results and what we're seeing from our evaluation of the earlier wells, what the go forward plan is there.

Evan Calio - Morgan Stanley, Research Division

If I could just slip in just one other. I know that on that Hadrian discovery, large discovery. I know you were testing a deeper objective. Any update there?

David S. Rosenthal

I'm glad you asked that because I do have an update on that for everyone this morning. We have finished the well. We drilled to TD. And I can update for you now the pay that we have logged is now 1,000 feet. So I think if you look at kind of how we've gone, we initially talked about 500 feet, then we updated it last quarter to 750 feet. And I can now confirm that well has encountered more than 1,000 feet of net oil and gas pay. And we are progressing plans for additional drilling, as we continue to evaluate what has turned out to be a very high quality prospective block.

Evan Calio - Morgan Stanley, Research Division

That's great news. The development plans, we'll hear those soon?

David S. Rosenthal

We're working on it. And as soon as those things are better progressed, we'll talk about those. But at least for now, the news is good. And again, we are very pleased with the quality of this discovery in the Gulf of Mexico.

Operator

And we'll take our next question from Jason Gammel with Macquarie.

John C. Nelson - Macquarie Research

This is John Nelson for Jason Gammel. I was wondering if I can get any color on the 76,000 barrels per day of entitlement volumes that you lost in the quarter. Just curious if there was any particular region that stood out or if you could try and maybe quantify that.

David S. Rosenthal

Sure. The primary area there is West Africa. As it was, frankly, when you look quarter-on-quarter, but if you're looking specifically sequentially, you have the bulk of that is in West Africa.

John C. Nelson - Macquarie Research

Okay. And then just wondering real quickly. Did you have any -- could you quantify the out -- any out-of-period tax charge taken in 3Q for the change in the U.K. tax law?

David S. Rosenthal

Yes, I can give you an update on that. That number was less than $100 million impact on our earnings this quarter.

John C. Nelson - Macquarie Research

Less than $100 million including 3Q? Or is it simply for out of...

David S. Rosenthal

No, that would be the 3Q impact on earnings, just under $100 million.

Operator

We'll take our next question from Doug Leggate with Bank of America Merrill Lynch.

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

Just a couple of quick ones, if I may. I guess, going back to an earlier question on the strength of the international realizations, it's kind of my favorite topic right now. But can you just talk about the impact of Qatar this quarter? It looks like international gas realizations were flat despite a lower brand price. And I'm wondering if that was some kind of movement in the direction of the sales volumes after the downtime in Q2. And I've got a quick follow-up, please.

David S. Rosenthal

You hit it spot on, Doug. That is exactly what we saw, the impact of the higher volumes into the LNG market and then the impact on our overall realization that we saw internationally. So you got that right.

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

You think it's fair to describe that as a big factor in what's improving your international realizations?

David S. Rosenthal

Yes, I'd say that was the primary factor.

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

Okay, great. The follow-up I have is, really -- I don't know if you're going to be able to answer this one. But I know you and I have had discussions about Kearl in the past, and. Given we're getting pretty close, I guess, to seeing a startup next year, albeit at the end of the year that the economics have really come under a bit of scrutiny. And I wondered if you could just clear things up in terms of how Exxon sees the economics of Kearl and how it stacks up relative to some of your other projects, and I'll leave it at that.

David S. Rosenthal

Sure. No, Doug, that is a good question, and it stems from the discussion we initiated at the analyst meeting in March. I can tell you that as we've looked at this, that Kearl returns are within the range of all the projects that ExxonMobil participates in the deepwater Gulf of Mexico. When we look at the projects that we're involved in, in those economics and compare those to Kearl, I can confirm that the returns are going to be consistent within that portfolio.

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

Any perhaps update on the timing of the future expansions beyond Phase 1?

David S. Rosenthal

No, I can't give you the timing on the future expansion. As soon as we've got that thing locked down, we'll let you know. But we haven't made the final determination on that just yet.

Operator

We'll take our next question from Mark Gilman with The Benchmark Company.

Mark Gilman - The Benchmark Company, LLC, Research Division

Can I stick with the Kearl project for just a second? I wonder if you could -- given that you're 75% complete, give us an update on what the Phase I development costs look like, whether it's still along the lines of about 100,000 of daily flowing barrel.

David S. Rosenthal

Yes. If you look at, as I mentioned, that we are 75% complete and that's going along very well, in terms of the cost, they've not changed from what we told you in March at the analyst meeting, on the chart we showed. Those things are still the same as we mentioned at the time.

Mark Gilman - The Benchmark Company, LLC, Research Division

Okay. If I could follow up with just some PSE related stuff. Looks to me as if there was a tranche affect encountered in West Africa. Is that accurate? Was it Nigeria or Angola? Also you mentioned a lower entitlement in Iraq, which strikes me given the spending profile there to be -- just a bit curious. Hopefully, you could flesh that out for me.

David S. Rosenthal

Sure. We did have a tranche change in Nigeria and did impact a part of those volumes. And then I'm sorry, what was the second part of your question?

Mark Gilman - The Benchmark Company, LLC, Research Division

You had indicated lower entitlements in Iraq, which struck me strange in light of the spending profile going forward, as well as the price environment. Can you clarify what was going on there. Maybe even provide an entitlement production number for Iraq in the period.

David S. Rosenthal

Yes, sure. Basically, the situation in Iraq is quite simple. We became cost current last quarter, and so we were -- during the second quarter, we were catching up. And the production barrels that we had reflected that. And this quarter, those volumes have come down because we are cost current.

Operator

We'll take our next question from Paul Cheng with Barclays Capital.

Paul Y. Cheng - Barclays Capital, Research Division

Dave, a couple of questions. First, in the -- can you tell us what is the asset sales gain, the actual amount in the third quarter -- in the second quarter of this year and whether that they are primarily in the E&P segment?

David S. Rosenthal

You're talking about the divestment gains?

Paul Y. Cheng - Barclays Capital, Research Division

Yes.

David S. Rosenthal

If you look at our divestments, most of the gains that we've seen in the second quarter -- or in the third quarter rather were in the upstream. And also, as you look at the second quarter overall, we did have a series of divestments in the upstream and also some in the downstream. I think the place you really see the impact of the divestments this quarter, without giving a specific number, but it's the biggest driver in the -- if you look quarter-over-quarter and then even sequentially in the other factor on our earnings waterfall chart there, the primary driver of those positive results are the divestments that we had over the quarter.

Paul Y. Cheng - Barclays Capital, Research Division

So it's roughly about $400 million sequentially higher asset sales gain?

David S. Rosenthal

No, that's the total in there. There were some asset sales gains in there, but there were a number of other factors. We had some favorable ForEx and then we also had the increase in exploration expense. So again, without quoting a specific number on the asset divestments, I can tell you, when you look at both of those waterfall charts, that is the primary driver of the positive impact.

Paul Y. Cheng - Barclays Capital, Research Division

Because the second quarter does have a reasonable, sizable asset sales gain also, right?

David S. Rosenthal

Yes, we did have some asset gains in the second quarter as well.

Paul Y. Cheng - Barclays Capital, Research Division

Okay. And then when you're talking about foreign exchange, the unfavorable impact, are those related to the translation of the balance sheet? Or is it actually on the cash earning due to the impact on your costs, as well as the translation back to the U.S. dollar when you are in on the revenue side?

David S. Rosenthal

Yes, the primary impact that you see in the downstream on the unfavorable ForEx I mentioned is really the impact on the U.S. dollar accrued payables that we have in the downstream.

Paul Y. Cheng - Barclays Capital, Research Division

Okay. So you saw on the balance sheet item?

David S. Rosenthal

Yes.

Paul Y. Cheng - Barclays Capital, Research Division

Okay. Can I sneak in maybe just one final one?

David S. Rosenthal

Sure.

Paul Y. Cheng - Barclays Capital, Research Division

You're talking about the production and driving into the shale oil. Is there any number that you can share? What is your current well cost that you guys running in Bakken, Woodford and Permian Basin?

And what is the GUR [ph] you're expecting and also the 30-day IP on those?

David S. Rosenthal

No, I really don't have any additional details to share this morning other than the ones I've mentioned in my prepared remarks. As you look at some of those plays, obviously, with the early wells that we're drilling and some of the optimizations that we're doing, it really wouldn't be representative to start talking about, I don't think, well costs and that sort of thing because our expectation is as time goes on, those costs are going to go way down. I think what's encouraging, though, is the significant addition we're making to our overall unconventional portfolio with the bulk of that here, as I mentioned this morning giving you an update on how we're doing on the liquids-rich plays as you might remember.

Paul Y. Cheng - Barclays Capital, Research Division

What is your total production in the third quarter for the shale oil?

David S. Rosenthal

I don't have a specific breakout number for that in the quarter. I can tell you it's certainly going up. I mentioned a couple of examples. So while it's a little premature to start talking about absolute volumes, I think the important thing for everyone to know is the activity is ramping up, the rigs are ramping up, the drill wells are ramping up, and we're progressing. I will give you a couple of examples. Just for example, we've added 38 wells year-to-date in the Bakken, with 18 of those in the third quarter. So I think that gives you a good feel of kind of how the activity is going, and once we get a little farther down the curve, we'll talk more about specific volumes.

Operator

We'll take our next question from Allen Good with MorningStar.

Allen Good - Morningstar Inc., Research Division

I just had a quick question on LNG and Golden Pass. It looks like this week there was some movement as far as the viability of exports from the U.S. I just wanted to get your thoughts and how Exxon views essentially LNG out of the U.S. and use there at Golden Pass and whether you're actually importing any LNG into the U.S. currently.

David S. Rosenthal

Yes, if you step back and look at the viability, first of all, just LNG exports out of the U.S., that is a topical discussion today, and a lot of folks are looking at it and talking about it. I don't think it would come to any surprise to you now that any marketing opportunity or development opportunity out there, certainly one that we're looking across the board whether it's in the U.S. or Canada. I can tell you, though, that Golden Pass is an LNG-receiving terminal, and there are no current plans to change that either -- into any form of an export terminal. So that's kind of the status there. We've not brought any cargoes in, and recently, that I'm aware of, into the terminal. But it does remain, obviously, a very valuable asset for us. Other than that, I really don't have any other comments to make. It will be interesting to see, as time goes on, if the viability of LNG exports materializes. But that's just one of a number of options that are out there.

Allen Good - Morningstar Inc., Research Division

Okay. And then just a question. I think last quarter, you mentioned that drilling in Argentina would start in Q4. I just wondered if that's still on track and then if there's any sort of changes as far as outlook there, given some of the recent tax announcements and changes with the government in Argentina.

David S. Rosenthal

I'll kind of start at the and back up. We don't have any changes contemplated in our plans at this point. We do have 2 wells that we're working on here in the fourth quarter, consistent with what I mentioned last, last quarter. And those wells are progressing. I don't have any results for you on that yet, but we are working on those. The one thing I think that I alluded to in my prepared remarks, and I've talked about the Neuquen Basin before and our large acreage position there. We are looking at the potential there for not only shale gas, but also tight oil and shale oil. And so that's encouraging, and we'll be progressing that, as I mentioned, several other tight oil plays that are emerging that we are actively working on. So back to your basic question, no change in our plans in Argentina, and the 2 wells are progressing.

Allen Good - Morningstar Inc., Research Division

All right. I appreciate it. And I'd like get one more quick one. It looks like you added one rig from the last quarter in Iraq, do you have a goal as far as exit rate on rigs there for the end of the year or sort of eventual plateau rate on rigs going into next year?

David S. Rosenthal

No, I don't have anything specific on either of those. There are a lot of factors that will drive that. I think the really important milestone that we've reached is we've gotten up to 370,000 barrels a day. The 6 rigs are running, a lot of workover activity. And again, that progress is going very well. But I wouldn't want to speculate on what something might look like down the road either next quarter or after that.

Operator

And we'll take our next question from Pavel Molchanov with Raymond James.

Pavel Molchanov - Raymond James & Associates, Inc., Research Division

Dave, if I may, one on downstream first. I believe Exxon is the only company in your peer group that has not been actively looking to sell refining assets in the past, let's say, 1 to 2 years. I'm just curious what you see in the refining market that seems to be different from what many of your peers are perceiving?

David S. Rosenthal

That's a good question. Let me clarify that because, in fact, we have had some recent announcements about asset divestitures, which include refining assets. You might recall over the course of the last several months, we've announced divestitures in Argentina, various areas in Central America and then most recently, the Malaysia downstream asset sales. So we have had quite a number of asset sales over the last year or so. And again, they do include some refining assets. Now if you look at refining in general across the board, as we've talked about, in many occasions, one of the tremendous competitive advantages we have in our refining circuit versus others is the full integration with most of our refineries, with the chemicals and the lubes business. So as we continue to optimize those facilities and get the kind of profitability and returns on those that we're generating, I wouldn't expect us to see a lot of change. So we're comfortable with what we're doing. We don't proactively tout major divestment objectives or programs. But as you look back across the years, we have been very active and have divested a number of assets as those assets turned out to be worth more to others than they were to us. And we'll see what happens going forward. But right now, I think we're in pretty good shape.

Pavel Molchanov - Raymond James & Associates, Inc., Research Division

I appreciate that, and just to be clear, I was mainly thinking North America and Europe, but your color on that is definitely useful. And then secondly, just on Poland, some press articles in the past week mentioning about your first frac jobs in the Polish shale acreage. Just an update on that would be great.

David S. Rosenthal

Yes, we are -- we've got a couple of wells there that we're in the process of frac-ing and flowing and cleaning up those wells. So it'd really be a little early for me to give you any initial results because we're just now literally, as we sit here, working on those and flowing them and testing them and seeing what we've got. So as we get through the evaluation stage and clean those wells up and see how they perform, we'll be in a better position to perhaps give some color on that. But today, it's just working on the operations.

Operator

We'll take our next question from Ed Westlake with Credit Suisse.

Edward Westlake - Crédit Suisse AG, Research Division

David, a lot of question already answered. But can I just come back to the entitlement issue? So basically, Q3 should -- I mean, obviously, it doesn't affect cash flow, but Q3 should be a sort of a better base if we're trying to get a volumes right going forward? If, say, you kept the oil prices flat?

David S. Rosenthal

Well, there are a number of things that affect the entitlement volumes. One, of course, and not only the price, but the spend as well. In fact, when you look sequentially at that impact that we had the 76 kbd, a fair amount of that was actually due to spending being down and thus, the recoup in volumes going down as well as the tranche change that I mentioned. So in a constant price environment, you wouldn't see as big of an effect, obviously. You'd be more down to spending rates, and of course, tranche changes. But we did see some pretty big movement, particularly quarter-on-quarter, with that $30 increase in oil prices, and then again, sequentially, a more spend-driven -- rate of spend driven, as well as Iraq being cost-current.

Edward Westlake - Crédit Suisse AG, Research Division

Okay. And then 2 small questions. But just the asset gains, do you actually have a number for the asset gain in E&P in the quarter? I mean, you mentioned $600 million that are a combination of a couple of things in there.

David S. Rosenthal

Yes. I'd tell you, Ed, I don't have a specific number associated just with the asset divestments to talk about this morning. Again, I'll confirm, though, when you look at both the quarter-over-quarter, as well as the sequential -- the primary factor, again, driving that other earnings impact are the impacts of the divestments. And then there were a number of other things up and down.

Edward Westlake - Crédit Suisse AG, Research Division

Right. And then in R&M, the actual FX impact?

David S. Rosenthal

Sure. The actual impact in the downstream, if you're looking third quarter '11 versus third quarter '10 was right at $300 million negative. And then if you're looking -- in fact, I'll just tell you, if you're looking sequentially, it was also close to $300 million negative. So fairly sizable ForEx effects in the downstream this quarter.

Edward Westlake - Crédit Suisse AG, Research Division

Great. And then obviously, there was a mix effect in terms of volumes with the liquids change, you flagged $170 million of extra tax in chemicals. But the 47% rate was still a little high. I mean, is anything else changing apart from the U.K.?

David S. Rosenthal

There are a couple of other factors I'd mentioned. One, of course, is the mix of profitability in terms of upstream, downstream and U.S., non-U.S. And then you have the kind of that effect where we had the absence, that I mentioned, of a few tax effects in chemicals and in corp and fin from last year and then a few negative impacts this year, and the difference between those 2 also contributes to that 2 percentage point increase.

Operator

And we have a question. It's a follow-up from Mark Gilman with The Benchmark Company.

Mark Gilman - The Benchmark Company, LLC, Research Division

There's been a lot said, I guess, in some of the freight press regarding extensive maintenance activities on Qatar gas trains. Can you help us out a little bit and quantify to the best you can what that looks like for you in terms of both Qatar gas and Russ [ph] Gas both in the third quarter and for the balance of the year?

David S. Rosenthal

If you look at the downtime that we've seen in the Qatar trains particularly over the last couple of quarters, I'll tell you that the work is done and those trains are up. And we actually saw -- as we came from the second quarter to end of the third quarter, we actually had less maintenance and some improved volume performance out of that in the third quarter. And so now, it's just kind of normal operations. But we did see improvement from the second quarter into the third quarter.

Mark Gilman - The Benchmark Company, LLC, Research Division

Is there anything remaining that needs to be taken down for maintenance purposes in the fourth quarter?

David S. Rosenthal

I'm not aware of anything major in the fourth quarter, so I would expect you can see basically normal operations.

Operator

And our final question today comes from Paul Cheng with Barclays Capital.

Paul Y. Cheng - Barclays Capital, Research Division

Dave, just 2 quick one. You talked about the open lift in the third quarter. Can you give us a number that -- how much is open lift? And also at the end of the September, from the inventory standpoint, are you still overlift, underlift or neutral?

David S. Rosenthal

That's a good follow-up from the last quarter where I'd mentioned how underlifted we were. If we look sequentially, which is probably the best way to look at our net overlift position, we were slightly overlifted this quarter and underlifted last quarter. And that gave a net overlift for -- of about 80,000 barrels a day quarter-to-quarter on a net basis.

Paul Y. Cheng - Barclays Capital, Research Division

Okay. So 80,000 barrels a day net overlift.

David S. Rosenthal

Yes. And on the...

Paul Y. Cheng - Barclays Capital, Research Division

Is that at the end of September or that is sequentially?

David S. Rosenthal

No, that's sequentially. So if you look, we were underlifted. I think, I mentioned in the second quarter, about 69,000 barrels a day. We were overlifted in the third quarter by about 14,000 barrels a day. And so the delta between those 2 is about 83,000 barrels.

Paul Y. Cheng - Barclays Capital, Research Division

And at the end of September, are you -- from an inventory standpoint, are you now pretty much balanced?

David S. Rosenthal

Yes, I think where we are year to date, we're probably pretty close. It maybe a little under or over, either way. But I think we're pretty close on a year-to-date basis.

Paul Y. Cheng - Barclays Capital, Research Division

Great. And David, would you be able to share with us how much is the production you actually booked from Iraq in the third quarter?

David S. Rosenthal

No. As we typically do, I don't typically give a country-specific number. But I can tell you, as I mentioned earlier in the call, some of that change we saw in the net interest or -- rather in the entitlements column, was Iraq getting cost current. But the most important thing in Iraq is that gross number, which we have now gotten up to 370,000 barrels a day. And that's a real milestone for us.

Operator

And Mr. Rosenthal, there are no further questions left in the queue. I'll turn it back to you for any closing remarks.

David S. Rosenthal

I just like to say thank you to everybody for participating on the call, and have a good day.

Operator

And this does conclude today's conference. We appreciate your participation. You may disconnect at this time.

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