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TRANSCRIPT SPONSOR

Wall Street Breakfast

ExxonMobil Corporation (XOM)

Q2 2007 Earnings Call

July 26, 2007 11:00 am ET

Executives

Henry Hubble - VP IR & Secretary

Analysts

Doug Terreson - Morgan Stanley

Robert Kessler - Simmons & Company

Nikki Decker - Bear Stearns & Company

Paul Sankey - Deutsche Bank

Doug Leggate - Citigroup

Mark Gilman - The Benchmark Company

Daniel Barcelo - Banc of America Securities

Paul Cheng - Lehman Brothers

Kate Lucas - JPMorgan Chase & Company

John Herrlin - Merrill Lynch

Neil McMahon - Sanford C. Bernstein

Operator

Good day, everyone, and welcome to this ExxonMobil Corporation Second Quarter 2007 Earnings Conference Call. Today's call is being recorded.

And at this time for opening remarks, I am pleased to turn the conference over to Vice President of Investor Relations and Secretary, Mr. Henry Hubble. Mr. Hubble, you may begin, sir.

Henry Hubble

Thank you. Good morning, and welcome to ExxonMobil's teleconference and webcast on our second quarter 2007 financial and operating results. As you are aware from this mornings press release, our integrated business model delivered another strong quarter including record second quarter earnings for our downstream and chemical businesses. The fundamentals of our business are strong and we saw continued good operational performance in the quarter. We also continued our disciplined approach to prudently invest and meet long term demand growth.

Before we go further, I'd like to draw your attention to our cautionary statement. Please note that estimates, plans, and projections are forward-looking statements. Actual results including resource recoveries, volume growth, and project outcomes could differ materially due to factors I discuss and factors noted in our SEC filings. Please see factors affecting future results on the Form 8K we furnished this morning which are available through the investor information section of our website.

Please also see the frequently used terms, the supplements to this mornings press release, and the 2006 financial and operating review on our website. This material defines key terms I will use today, shows ExxonMobil's net interest in specific projects, and includes our SEC Regulation G disclosure.

Now I'm pleased to turn your attention to the second quarter results. ExxonMobil's second quarter earnings were $10.3 billion, down slightly from the 2006 record second quarter. Earnings per share, however, were up markedly from last year at $1.83 reflecting the strong earnings and the continuing benefits of our ongoing share purchase program. Before I discuss the specific business results, I'd like to share some of our recently achieved milestones.

In the quarter, we saw first production from our interest in the deepwater Rosa project in Angola Block 17. Rosa's recoverable resources are estimated at 370 million barrels and production capacity is expected to be approximately 150,000 barrels per day. SOX exploration Angola has a 20% interest in the project. On July 19, ExxonMobil majority owned affiliate, Imperial Oil and ExxonMobil Canada announced success in acquiring exploration rights for a large block in the Canadian Beaufort Sea.

Imperial and ExxonMobil Canada were awarded the exploration license after bidding a work program of $585 million Canadian. The block is over 2,000 square kilometers and is located approximately 120 kilometers offshore in water depths ranging from 60 to 1,200 meters.

An ExxonMobil subsidiary has also recently awarded an offshore block in New Zealand's latest exploration acreage release. The block which comprises approximately 20,000 square kilometers is located in the great South Basin off the southeastern coast of New Zealand.

Water depths in the area range from 500 to 1,000 meters. The successful capture of acreage in the Beaufort Sea and offshore New Zealand demonstrates ExxonMobil's global approach to the identification and pursuit of quality hydrocarbon resources and exploration opportunities. We look forward to exploring these attractive and technically challenging areas with the full suite of ExxonMobil capabilities.

During the quarter several new exploration discoveries were reported in ExxonMobil interest Blocks 31 and 32 offshore Angola. These continued successes attest to the resource potential of these blocks and the development options continue to be progressed. In the downstream, we continued our feed diversification activities running 29 crudes which were new to individual refineries.

Additionally, we implemented projects during the quarter to further enhance feed flexibility. ExxonMobil's ability to rapidly assess and optimally process feedstocks utilizing our proprietary molecular management technology is a key competitive advantage which enables us to maximize the value of a broad range of feedstocks. We also completed the start up of new low sulfur gas facilities in Japan.

These facilities allow more efficient production of low sulfur gasoline while improving operational flexibility. These projects were completed in line with budget and on or ahead of schedule.

In June, we announced the worldwide introduction of Mobil Pegasus 1005, a high performance lubricant with advanced additive technology. This new lubricant provides exceptional levels of protection for today's high output, low emissions, natural gas engines. In our chemicals business, we announced the planned expansion of hydrocarbon fluids capacity at our Antwerp and Singapore facilities.

The hydrocarbon fluids business includes differentiated products used in a broad range of applications and industrial processes. Antwerp capacity will increase -- be increased by about 10% to 700,000 tons per year, with expected completion by the end of this year. In Singapore, the expansion will add 130,000 tons per year bringing production capacity to over 500,000 tons per year.

These investments reinforce our commitment to meet customer requirements for differentiated products. During the quarter ExxonMobil chemical also announced the development of technology to support the growing drive for improved automobile fuel efficiency. In Japan, an ExxonMobil affiliate is now producing innovative microporous films for hybrid and electric vehicle lithium ion batteries.

In the U.S. we announced the planned construction of a facility to manufacture new specialty elastomer compounds that can improve the durability and reduce the weight of tires resulting in improved fuel economy.

And finally, ExxonMobil Chemical also earned awards for energy efficiency from the American Chemistry Council and from the Industrial Energy Technology Conference hosted by the Energy Systems Laboratory of the Texas A&M university system. This is the 10th consecutive year that the ExxonMobil chemicals has received ACC energy efficiency awards.

Turning now to the business line results. Upstream earnings in the second quarter were $6 billion. This represents a decrease of $1.2 billion versus the second quarter of 2006, primarily due to reduced worldwide natural gas realizations, lower gains from asset sales, tax effects including the absence of positive tax impacts in 2006, and increased expenses primarily due to new project developments.

These negative effects were partially offset by positive sales mix impacts. Worldwide crude realizations were $65.11 per barrel, up $0.21 per barrel from second quarter 2006. Upstream after-tax unit earnings in the second quarter of 2007 remain strong at $15.88 per barrel. In total, oil equivalent volumes were down 1% from 2006. However, excluding the impact of entitlement, OPEC quota and divestment effects, second quarter production was actually up almost 4%. That increase was driven by increased volumes for major project ramp ups in Russia, West Africa, and Qatar, which more than offset natural field decline and lower European natural gas demand.

Turning to liquids production. Although increased volumes from the recent project start-ups in Russia, West Africa, and Qatar more than offset natural field decline, liquids production fell by 34,000 barrels per day, or 1% from the same quarter last year due to entitlement and OPEC quota effects in Africa. Gas volumes were essentially unchanged from last year, with lower demand in Europe due to warmer weather and natural field decline offsetting higher production in Qatar.

Now turning to the sequential comparison. Versus the first quarter of 2007, upstream earnings decreased about $90 million with seasonally lower natural gas volumes, reduced earnings from asset sales, and negative tax effects more than offsetting higher realizations. Liquids production decreased 3%, including the impact of entitlement and quota effects in Africa and plant field maintenance in the U.S. and Europe. Natural gas production was down 14%, primarily due to seasonally lower demand in Europe. Oil equivalent volumes were down 7% from the first quarter.

Finally, in the upstream, as you're aware ExxonMobil's affiliate in Venezuela was not able to reach the agreement on the formation of a mixed enterprise and on June 27, 2007, the government took over our interest in the Serene rural project. ExxonMobil's net investment and Serene rural producing assets is about $750 million. Discussions with the Venezuelan authorities over the compensation to be paid to ExxonMobil have not yet been completed.

At this time, the net impact of this matter on the corporations consolidated financial results cannot be reasonably estimated. However, we do not expect the resolution to have a material effect on the corporations, operations or financial condition. For further data on regional volumes, please refer to the press release and IR supplement.

Now let's turn to the downstream results. Downstream earnings were a quarterly record at $3.4 billion, up approximately $910 million from the second quarter last year as the quality of our integrated downstream portfolio allowed us to benefit from the robust industry conditions. Margins improved across the downstream business functions, increasing earnings by $430 million.

Volume mix effects were positive $190 million, reflecting feedstock flexibility and product optimization programs. These effects more than offset lower refinery throughput associated with the divestment of the Ingolstadt refinery in Germany and higher planned maintenance activity in the U.S. Despite lower U.S. refinery throughput during the quarter, our supply and operating flexibility allowed us to maintain U.S. gasoline production and in fact our year-to-date gasoline production in the U.S. is up 5% versus last year. Other factors increased earnings by $290 million, primarily due to asset sales, including the Ingolstadt refinery divestment.

Sequentially, second quarter earnings increased by $1.5 billion, reflecting improved global refining margins. Volume mix effects were positive $110 million, as refinery optimization and other volume effects more than offset the impact of planned maintenance activities. Other factors benefited earnings by $110 million, including the positive effects from asset divestments partially offset by higher maintenance costs and foreign exchange effects.

Chemical earnings were a record for the second quarter at $1 billion, up nearly $175 million versus the second quarter of 2006. Higher margins improved earnings by $215 million reflecting increased realizations partly offset by higher feedstock costs. Sequentially, second quarter chemical earnings were down by $225 million from a strong first quarter, driven by lower worldwide margins.

Turning now to our corporate and financing segment. The Corporation recorded second quarter expenses of $99 million in the corporate and financing segment, unchanged from the second quarter of 2006. The effective tax rate for the second quarter was 44%. The Corporation distributed a total of $9 billion to shareholders in the second quarter through dividends and share purchases to reduce shares outstanding, up 14% from the second quarter of 2006.

During the quarter, ExxonMobil purchased $7 billion of shares in excess of dilution, reducing the number of shares outstanding by 1.5%, and further demonstrating our ongoing commitment to return cash to our shareholders. CapEx in the second quarter was $5 billion. At the end of the second quarter, our cash balance was $33.6 billion and debt was $8.8 billion.

In summary, these results highlight the fundamental strength of our business, our ability to deliver superior operational performance, and continue to grow our integrated capabilities while continuing to position ourselves for future demand growth and create value for our shareholders.

That concludes my prepared remarks, and I'd now be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) We'll go first to Doug Terreson with Morgan Stanley.

Doug Terreson - Morgan Stanley

How are you?

Henry Hubble

Hi, Doug.

Doug Terreson - Morgan Stanley

In international refining and marketing, your refining production outside of Europe during the first half was higher by almost 5% in relation to the year ago period, which is obviously a good number, but marketing output seemed to be lower versus the same period. And so my question regards why these two figures might be diverging, which I believe represented a feature of the results during the past couple of quarters as well. And so divergence and refining and marketing first half outside of Europe is the question.

Henry Hubble

Outside of Europe?

Doug Terreson - Morgan Stanley

Outside of Europe, yes. Asia and other, basically.

Henry Hubble

Okay. Let me just look at what we've got here. There's no real big story here. Most of that, it's turnaround timing and it's going to fluctuate with timing, but I can't really point to a seasonal impact there that's going on either.

Doug Terreson - Morgan Stanley

Okay. Okay. Well, let me ask you another question. At the analyst meeting, Rex talked about the proficiency of the project management system as being one of the explanations why Exxon's actual and funded capital expenditures have been so close in recent years and at 2007 appears to be heading in the same direction.

Henry Hubble

Yes.

Doug Terreson - Morgan Stanley

Which is also good news too. And so on this point, I wanted to see if you could provide an update on some of the inflation trends that the Company is experiencing, because it appears as if you have taken them into consideration in an appropriate way in your operations, and Henry if you have an aggregate or by the major functions, that would be great.

Henry Hubble

Yes, I mean, if you just look at overall operating expenses for the Company, there's -- and you look at what we're able to do just -- of course we track this on a regular basis in terms of the various effects, and then how we're able to offset those. If you look at the inflationary effects, basically we've been able for a long period of time to offset inflationary effects with efficiency.

Doug Terreson - Morgan Stanley

Yes.

Henry Hubble

The general drive though that you see in rising costs, there are some associated with new projects and non -- noncash costs associated with new projects. You also have a 4X effect that's in here.

Doug Terreson - Morgan Stanley

Sure.

Henry Hubble

But obviously we're not immune to the impacts of higher costs and we work very hard to offset those. So when you look at the projects, especially in the CapEx area, there's an awful lot of work that goes on in the front end. In fact, that's a big piece of our focus, is to make sure that we have really got the concept of development right, that we've got the execution plans well thought through, the contracting is in place, and then we got to execute according to those plans. And we work very hard. It's not that things don't go wrong, but we have very -- because of the global functional approach that we have to be able to solve problems, we're able to get the right people there very quickly and get those resolved to help us keep on track.

Doug Terreson - Morgan Stanley

Sure.

Henry Hubble

And all of these things end up helping to manage those costs, but they're not silver bullets. It's a lot of hard work by a lot of people. The other thing I would say is technology plays a big factor here too, and many of the things that we have been able to deliver in even in the recent times, whether it's the technology we have around Fast Drill that has allowed us to improve the efficiency and effectiveness of our drilling efforts. That has taken anywhere from 15% to 30% out of the cost of wells, which is -- goes a big ways to offset the cost of inflation on drill rigs and other things. So all of that to say, there's just a lot of things that are going on, a lot of people working this very hard, but I'll tell you the other thing that's real key here, in any cost controlling effort, is that you don't start with the goal of reducing cost. You start with a goal to improve things like reliability or efficiency or productivity, and you put in systems that allow you to deliver those. You just don't go cut budgets or you won't get the results you're looking for. Generally, we find improved reliability and improved maintenance practices delivers lower costs and improved throughput.

Doug Terreson - Morgan Stanley

Well, the system is working. Thanks a lot.

Henry Hubble

Yes. Thanks.

Operator

Next we'll go to Robert Kessler at Simmons & Company.

Robert Kessler - Simmons & Company

Hi, Henry.

Henry Hubble

Hi.

Robert Kessler - Simmons & Company

Looking at your upstream variant sequentially, the other bucket, over $1 billion, can you just give a little bit more granularity as to the components there?

Henry Hubble

Yes. Just stepping back, in both of the comparative periods, we had a large other impact, and if you look into what's behind that, as we highlighted last year and it really is -- we also discussed in the first quarter, we saw a positive earnings impacts associated with asset sales in 2006, including the second quarter. It's really the absence of those sales or reduced number of sales that you see this negative variance and then we also had some positive tax impacts, largely in Canada, that we also got last year in the second quarter. So that -- those -- that combination of those two ends up being about 60% of that $1 billion variance in the other column.

Robert Kessler - Simmons & Company

Reading that different, Henry, do we just call the current quarter fairly clean then in that regard?

Henry Hubble

Yes, that's right. It's -- you had variations, but there's nothing in the current quarter that's a big negative to these results. I mean, we do see as I mentioned earlier, we do see some expense increases and those expense increases associated largely with new project startups. You also saw some in our exploration activity that reflected in the period, but I would tell you there's nothing there in the way of a significant other variance.

Robert Kessler - Simmons & Company

Sure. I appreciate with respect in Venezuela that the full financial impact is not yet estimable. Can you tell us though of the $750 million of PP&E exposure you had to Venezuela previously, how much is still on your books ?

Henry Hubble

Well, the $750 million is an all-in effect. So that's I think that's a way to look at that. That's basically all-in what we have on Venezuela from the Serenegro production.

Robert Kessler - Simmons & Company

And you have yet to really write-off any of that in the interim?

Henry Hubble

No, because we're still in the middle of discussions here , and you're predicting how that's going to turn out and what the net of this issue will be, or effect will be, is -- really can't be determined at this point. So I think it's premature to do anything in that

Robert Kessler - Simmons & Company

Okay. Last one for me. This is a quick one but looking at your cash flow from operations of $11.3 billion for the quarter, can you quantify any positive or negative working capital effects buried in there?

Henry Hubble

Yes, if you look at cash flow, normally in the comparisons that we have, especially in the first quarter or second quarter, you always have the impacts of -- you have more tax expense, or, excuse me, less tax expense than you have cash payments in the second quarter, because you end up -- we have that opposite effect we talk about in the first quarter when the taxes aren't due until April 15th. So you end up with essentially a double payment in the second quarter and that's the biggest piece of that. You'll see other variations that occur just with variations in pricing that goes on. I think there is a bit in here that may be associated with product receivables but the big impact was on the tax side.

Robert Kessler - Simmons & Company

But I'm sorry, in aggregate, last year, second quarter, you had about a $3 billion working capital use of cash. Is that about the same in this year's second quarter?

Henry Hubble

Let's see, if I look, the year comparison year on year, it's really almost nothing in there. It's -- they were almost identical.

Robert Kessler - Simmons & Company

Right.

Henry Hubble

Or had very similar effects.

Robert Kessler - Simmons & Company

Fair enough. Thanks, Henry.

Henry Hubble

Yes, okay.

Operator

Our next question will come from Nikki Decker at Bear Stearns.

Nikki Decker - Bear Stearns & Company

Hi, Henry.

Henry Hubble

Hi, Nikki.

Nikki Decker - Bear Stearns & Company

I wanted to ask you about U.S. liquids production. It's lower both sequentially and year-over-year.

Henry Hubble

Yes.

Nikki Decker - Bear Stearns & Company

Is something going on there?

Henry Hubble

Well, no, I would say we tend to look at the liquids in North America, or that's the way I'd generally look at this, and we're down about 4% on the year on year comparisons second quarter '07 to 06, and I would just say there's -- we feel very good about the work programs and overall, the things are on track there. There's -- I mean obviously there's actual field decline and mature areas, but we've been able to partially offset that with actually some pretty strong work programs during the period.

Nikki Decker - Bear Stearns & Company

Do the -- liquids production would reflect the natural declines?

Henry Hubble

Yes, Oh, yes.

Nikki Decker - Bear Stearns & Company

Okay. Secondly, Henry, I think last quarter, you provided a breakdown between refining and marketing on the margin contribution on your earnings comparison. I was wondering if you could do the same.

Henry Hubble

Yes. If you just -- if you look, it's about 75% marketing in the margin side, 75% marketing, 25% refining. And just back on your other question about the North America volumes, there are some asset management effects in there too. They aren't real big, but there are some of those that are in that same time frame.

Nikki Decker - Bear Stearns & Company

Okay, thanks. Just on your response on the margin question, is that sequentially or year-over-year?

Henry Hubble

That was year-over-year.

Nikki Decker - Bear Stearns & Company

Would you have it sequentially as well?

Henry Hubble

Sequentially, it's all refining. There's basically nothing in there on marketing.

Nikki Decker - Bear Stearns & Company

Thanks, Henry.

Henry Hubble

Yes.

Operator

We'll go to Paul Sankey at Deutsche.

Paul Sankey - Deutsche Bank

Hi, Henry.

Henry Hubble

Hi, Paul.

Paul Sankey - Deutsche Bank

How are you?

Henry Hubble

Good.

Paul Sankey - Deutsche Bank

Henry, I was given what you think about project start ups , it's notable that your African oil volumes are down quite heavily year on year. Could you speak specifically to that, and extend it to just break out the -- what were the components, divestments, and so on of the volume differential that you're talking about between the decline and what would have been a 4%

Henry Hubble

Right, yes. Well if you look at the number, when I was talking about the 4% increase I was really referring to the oil equivalent comparison in the year on year quarter comparison. Now, the bulk of that as I pointed out was for titlement effects, those were in Africa, associated with the projects that we have there, and it's components, as you know with the PSC's that we have there, we have impacts as we -- or cumulative price effects associated with those entitlement effects over those, and then we also have price impacts. But that was if you looked at it, that was if I just jump down to the total oil equivalent impact, we had -- we were 1% down year on year, and it was about 3% of that that impact associated with entitlements. There was a 1% impact that was associated with quota, and again the big piece of that quota effect was in Africa, and then there were divestment impacts, but they are obviously outside of Africa in the U.S. and non-U.S. And ended up being about another .5%, but that's where -- how you get to the 4%. And if you look at the Africa volumes themselves, and it's basically, again, it's the entitlement effects and the quota effects there, which were the big pieces of that. And that was offset by the new project volumes that we brought on that ended up partially offset by the new volumes we brought on.

Paul Sankey - Deutsche Bank

And is that situation in Africa particularly with the cutbacks on OPEC changing, Henry? Are you producing more now or is it still ratcheted back?

Henry Hubble

Well, I don't know. To current day, yes, but if you look at what the impact will be on the quarter, it's hard to say what's going to evolve from here on that front.

Paul Sankey - Deutsche Bank

But basically back at a similar level of cut back right now that we saw in the Q2?

Henry Hubble

It would be less currently today.

Paul Sankey - Deutsche Bank

That's interesting, thank you. The second question if I could, we were surprised by your realizations in European gas. We know about the seasonal volume effect obviously, but it's interesting that there was a really significant step down on the realization side. Could you talk about that?

Henry Hubble

Well, you see just with the warm weather in Europe, we did see downward pressures on realizations there, and if you look at the natural gas, if you look at like the -- you don't really have the equivalent of markers, but if you look at the UK net balancing point, it was down sharply across the time frame, and we saw some of that roll through into impacts in Europe in particular. So you kind of have an issue here where, in the U.S, natural gas actually increased during the period, about 11%, and over there we saw a 14% decline in our realizations, and really reflecting warmer weather and in fact there were even periods where there were arbitrage opens going across, so we did see weakness in the European gas pricing.

Paul Sankey - Deutsche Bank

Okay, so it was essentially just related to the headline -- the marker being down. It was nothing like no special items in there that would cause it to be unusually low?

Henry Hubble

No, other than we had, there was less demand associated with the warm weather.

Paul Sankey - Deutsche Bank

Sure.

Henry Hubble

And however that rolls back through into price, yes. That was there, but nothing else, no.

Paul Sankey - Deutsche Bank

Right, and finally for me, U.S. refining, it seems to me you got an 82% utilization rate in Q -- the first half. Is that going to improve do you think in the second half, and you mentioned it was related to plant turnarounds? It seems like an awfully low number or very high level of turnaround. Was there some additional issues there? Thank you.

Henry Hubble

Well, if you look at the turnaround impacts and the throughput impacts that we had in the quarterly comparison, we're down about 128 I think in North America or in the U.S, And that was essentially all turnaround, both Beaumont and Baytown. And they were pipe turnarounds, so you see that in throughput but we were actually because we didn't have as much conversion capacity down, we had more of our CAT units and other conversion units up and running, we were actually able to increase our gasoline production in this time frame. So what we've done is buy feedstocks to be able to keep those units full and we're able to maintain our production.

Paul Sankey - Deutsche Bank

Right, and your '06 number U.S. utilization was 90%. Is that what we can expect to see in the second half?

Henry Hubble

We'll have less turnaround activity scheduled in the second half.

Paul Sankey - Deutsche Bank

Thanks, Henry.

Henry Hubble

Yes.

Operator

We'll go next to Doug Leggate with Citigroup.

Doug Leggate - Citigroup

Thank you. Good morning, Henry.

Henry Hubble

Hi, Doug.

Doug Leggate - Citigroup

International downstream, notwithstanding the sequential and year-over-year comparisons that you've given us, if you look at the realized earnings in that segment and adjust for the gain, I guess, coming from the refinery disposal that the counter rates still look pretty impressive. Can you just talk around that and has there been anything specific going on? Have you changed to feedstock, or is there something unusual there that has pushed your earnings up?

Henry Hubble

Nothing that I can really point to. There's obviously in all of these periods a lot of emphasis on selecting the right raw materials and getting them into the refineries, and we do a lot as we talked about to get advantage feedstocks or advantage crudes into those refineries. And one of the things that we find is gives us an advantage in that is, we have with our molecule management technology, we're able to quickly assess the value of new raw materials and assess those values into our facilities. And that helps with our optimization, but there's nothing else I can really point to, other than kind of the normal good operations and good reliability that we've had in the period.

Doug Leggate - Citigroup

Can you break out the absolute contribution from the English stock disposal?

Henry Hubble

I don't have a specific number associated, but about 3 -- about 3 -- $300,000 -- $300 million.

Doug Leggate - Citigroup

Okay, and the only other one for me is if I could just jump back to Venezuela very quickly, obviously your -- one of your competitors took a fairly sizeable write-off in Venezuela yesterday. You folks have decided not to do that, but arguably, it's difficult to know how it's going to play out. But I'm just curious when you think about it from a prudent standpoint, why have you opted not yet to take that hit, given that it's relatively modest in any case?

Henry Hubble

Well, the -- I think both argue for not -- it's modest and overall sense, it's important, but we're in the middle of discussions and until you can estimate it, reasonably estimate what the impact is, if you follow, we follow GAAP rules and frankly, our view is you can't really estimate it until we're a little further down the road on these negotiations. And so we just don't think that it's appropriate timing to do that.

Doug Leggate - Citigroup

Okay, great. Thanks, Henry.

Henry Hubble

Yes.

Operator

(Operator Instructions) We'll move to Mark Gilman at Benchmark.

Mark Gilman - The Benchmark Company

Henry, good morning.

Henry Hubble

Hi, Mark, how are you?

Mark Gilman - The Benchmark Company

Good, thank you. Quick update on quality, if you can?

Henry Hubble

Update on --

Mark Gilman - The Benchmark Company

The following --

Henry Hubble

Oh, sorry. Yes. Basically, we had a fire at our -- you may have obviously heard about it, on the Cogent facility there, where we lost steam and some of the power production, basically ended upbringing the facility down. Right now, we're working on the plans and in fact the plans have been developed for restart and we're expecting that to happen over the next several days. So it's one of those -- you had a down time, but no long lasting damage as we've assessed it.

Mark Gilman - The Benchmark Company

Okay, do you have a hard number for your next Serenegro production in the second quarter?

Henry Hubble

I don't have a -- it's about 30%, because we had quota effects, we had some quota effects in there, so actually I think it's a little less than that, 20%, about 20%.

Mark Gilman - The Benchmark Company

About 20%?

Henry Hubble

Yes.

Mark Gilman - The Benchmark Company

Yes, I notice that in your variance analysis on the upstream. The volume is indicated to be a modest plus in the year-over-year comparison, whereas production was down. Does that mean that there were favorable lifting variances in this years second quarter?

Henry Hubble

Well, what you see there is really the effects of the positive -- we had a positive impact associated with new volumes that we're bringing on in the Middle East, as well as in Russia associated with the ramp up production there, and being able to export those volumes. So we had some positive mix effects associated with that.

Mark Gilman - The Benchmark Company

Okay, and final one for me, there's reference in the release to Canadian gas production and project that ramped that up a little bit. Wasn't aware of anything in that regard. Could you be a bit more specific?

Henry Hubble

Oh, that's associated with Sabel.

Mark Gilman - The Benchmark Company

Oh, okay.

Henry Hubble

Bringing that. Yes.

Mark Gilman - The Benchmark Company

Okay, thanks, Henry.

Henry Hubble

Yes, yes, no problem.

Operator

Next we'll take a question from Dan Barcelo with Banc of America.

Daniel Barcelo - Banc of America Securities

Hi, good morning, Henry.

Henry Hubble

Hi, Dan.

Daniel Barcelo - Banc of America Securities

Just a clarification regarding upstream.

Henry Hubble

Yes.

Daniel Barcelo - Banc of America Securities

Q2 versus Q1, and it related to two aspects. First U.S. realization seemed to be really light compared to Henry Hub benchmarks. Does that have to do with rocky differentials or things like that? And the second part is related to an earlier question, if you could give some color on the $620 million swing in other, related again from Q2 to Q1 in the upstream.

Henry Hubble

Yes. When you look at the other impacts, as I mentioned, you do have -- there's a whole bunch of items in there, but they are basically all going in the same direction again in this time frame. So we have a number of effects. Basically, again, it's the absence of some positive impacts from the first quarter including the asset sales and some positive tax impacts. And there were also some higher activity related to exploration, and we also had some -- a little additional in there in operating expenses and 4X impacts. But nothing else that I really can highlight. And then the other piece of the question was around --

Daniel Barcelo - Banc of America Securities

Henry Hub differential -- Henry Hub change 1Q to 2Q versus your realization, you were broadly flat. I think the benchmark went up to about $0.78. Is that related more to differentials and your position --

Henry Hubble

It's going to be related to the specific contracts. Typically we track pretty close. There isn't anything I can point to that was a specific issue there, so it's -- we've generally tracked that reasonably close. If you look at I think we had Henry Hub was our average would show $7.55 in the quarter and versus last or sequential quarter, $6.77 and we were at $6 versus, excuse me, U.S. we were $6.94 versus the $6.85. So I guess that's, it is a variance there, but I really can't point to anything specific.

Daniel Barcelo - Banc of America Securities

Okay, and then second one if I could was just maybe a broader comment on your deepwater U.S. Gulf strategy, both in the context of maybe lease expirations, upcoming lease sales. But it's also interesting because I understand you're bringing a rig down from Canada that was at Walker Ridge. And then last year you did something interesting with Statoil and AMI and Walker Ridge.

Henry Hubble

Right. Yes. We've got, if you look at the lower tertiary, we've got a number of -- we already drilled the Julia well as you're no doubt aware. We're bringing the rod down from -- or it's actually down I guess now, to drill the North Braun in fact it's drilling now, and then we'll be using it also to drill Hal later in the year, and then we also have Chuck that is being drilled in the time frame. So all has impacted is it's being drilled now as well so there's a fair bit of activity and those are prospects -- the best prospects that we see. There is some acreage that will be released in that area and we'll be evaluating what we want to do there.

Daniel Barcelo - Banc of America Securities

Okay, thank you.

Henry Hubble

Yes.

Operator

We'll go to Paul Cheng at Lehman -- Lehman Brothers, rather. Sorry.

Paul Cheng - Lehman Brothers

Hi, Henry. Good morning.

Henry Hubble

Hi, Paul.

Paul Cheng - Lehman Brothers

Two quick questions. I think based on what you just described earlier, that in this particular quarter we do not have any major impact one way or the other from inventory gain tax adjustment or foreign exchange?

Henry Hubble

Yes. We have foreign exchange is kind of minor impacts, but if I look at just the total, you end up in the second quarter, the year on year comparison, second quarter to second quarter, there's a positive $77 million of that in chemicals and then if you look at sequentially, it's a negative impact of about $50 million, but pretty small across the businesses. And that's from a 4X standpoint.

Paul Cheng - Lehman Brothers

Yes, how about in terms of inventory gain on laws or tax --

Henry Hubble

No, the only we really you don't see, we don't see any inventory effects other than at year-end associated with LIFO.

Paul Cheng - Lehman Brothers

Yes. Okay. And cats, what kind of impact are you guys -- and also can you talk about what is the asset sales gain for the German refinery?

Henry Hubble

I don't have a quick number off the top on the cats impact. I can -- we can get something for you on that, but it's relatively small.

Paul Cheng - Lehman Brothers

Relatively small?

Henry Hubble

Yes.

Paul Cheng - Lehman Brothers

And then how about in terms of the asset sales gain you record --

Henry Hubble

What was that again?

Paul Cheng - Lehman Brothers

The asset sales gain you record for the German refinery you sold?

Henry Hubble

Oh, yes, that was Ingolstadt of about $300 million.

Paul Cheng - Lehman Brothers

$300 million?

Henry Hubble

$300 million, yes, and the cats impact is about 40 million.

Paul Cheng - Lehman Brothers

40,000 or 40 million cubic feet?

Henry Hubble

40 million cubic feet.

Paul Cheng - Lehman Brothers

Wow, only?

Henry Hubble

Yes.

Paul Cheng - Lehman Brothers

You guys are in good shape.

Henry Hubble

Yes.

Paul Cheng - Lehman Brothers

Okay, thank you.

Henry Hubble

Yes.

Operator

And we'll take a question from Kate Lucas at JPMorgan.

Kate Lucas - JPMorgan Chase & Company

Hi, good morning.

Henry Hubble

Hi, Kate.

Kate Lucas - JPMorgan Chase & Company

Hi. Just a quick question on your chemical segment. We've seen pretty strong results over the last several quarters and you've had -- you've got some organic growth projects. But I just wanted to know if you might be giving any consideration to expanding the weighting of chemicals in your overall portfolio, maybe beyond the organic projects that you've approved for project start-up?

Henry Hubble

Well, as you -- well, we have a number of projects that are aimed at growing, basically aimed at the Asia Pacific market. So we have a project in Fujian that we're executing now. We're working on the Singapore parallel train and looking forward to bringing that one not too far down the road, and of course we also have the project in joint venture project in Wusavec and Saudi Arabia, and then we're working with Qatar, all of these will be world class facilities. So, yes, we're growing this business, and it's one where -- as we look at it, it grows about 2%, or better than 2% above GDP growth, and it's really driven because of the continuing substitution into automobile parts and textiles, and other things. So we see a strong demand growth there, and really, in that Asia Pacific area is the big piece. So, yes, we're working that and then also, of course our big focus in this in how we approach it is with a strong integration to our downstream businesses or to advantage feedstocks and with our upstream assets. So, yes, we're positioning ourselves to grow and meet the organic or the larger growth that's coming.

Kate Lucas - JPMorgan Chase & Company

Thank you.

Henry Hubble

Yes.

Operator

Next we'll go to John Herrlin with Merrill Lynch.

John Herrlin - Merrill Lynch

Yes, Henry, European gas sales were weak. You mentioned that the cast line would be out for a little bit volume wise in the prior question.

Henry Hubble

Yes.

John Herrlin - Merrill Lynch

What kind of sequential recovery are you seeing with respect to gas or should we expect more weakness in the third quarter in Europe?

Henry Hubble

Well, the big piece in sequential comparison is just the normal seasonal demand. So it typically, we see in the third quarter, it's not all that different than what we typically have in the second quarter, and then it starts picking up fourth quarter and first quarter. So I would -- it's going to be dominated by those seasonal impacts and I would expect it to be not all that different.

John Herrlin - Merrill Lynch

Okay. Next one for me is on chemicals, we've been getting a lot of weak economic data. Are your folks seeing any issues with respect to product demand on your chemical business?

Henry Hubble

Not really. We're running utilizations, we're running our plants full, so that's been strong. We've seen strong solid demand globally. The areas in our aeromatics have been strong in the period and we've seen good. So basically, strength through the business and don't really see that changing quickly here. It's in a good position, as long as we see good global demand growth --

John Herrlin - Merrill Lynch

Thank you.

Henry Hubble

All right

Operator

Next we'll take a follow-up from Mark Gilman.

Henry Hubble

All right

Mark Gilman - The Benchmark Company

Henry, I know there's rate of return thresholds in the PSC 's for Kizamba A and B. I was wondering whether Kiz B has hit that threshold which would result in a reduction in the profit split?

Henry Hubble

Well, there -- as you know, we don't get into the specifics of the contracts on those things. There are, as you know, there's a couple of components of PSC's, those that are affected with cumulative entitlement effects that are associated with cost recovery, and those associated with the profit-sharing, and their -- both of those effects are in those entitlement numbers you're seeing there.

Mark Gilman - The Benchmark Company

Let me try it differently. All things being equal, is there another step down further down in the life of either Kiz A or Kiz B that we should be aware of going forward?

Henry Hubble

Well, these projects they have a more traditional offshore profile for production and they have -- they do have effects associated with them as you basically go to different tranches in the cost recovery. So -- yes, that will mean -- there will be some future impacts.

Mark Gilman - The Benchmark Company

Okay, thanks, Henry.

Operator

Yes. And we'll go next to Neil McMahon at Sanford Bernstein.

Neil McMahon - Sanford C. Bernstein

Hi, I've got a few questions. The first, maybe Henry, just a quick, if you've got the number, idea of the earnings impact from all divestments, not just Ingolstadt, like you said a number of things like $300 million, just wondering what the overall number is. And then I've got a few questions on exploration.

Henry Hubble

Yes. And I'll -- let me look and see what I've got here. If you look at Ingolstadt, it really wasn't a whole lot outside that was significant. You ended up -- so I really don't have anything else to kind of point at there. That was the biggest single piece.

Neil McMahon - Sanford C. Bernstein

Okay. Maybe just the exploration questions. Your exploration expense on top of it from the first quarter and it sort of is running along the lines of fourth quarter numbers when it tends to be sort of back-end loaded. Geographically, was that Gulf of Mexico, North America or international where you were seeing that?

Henry Hubble

Well, I mean, a lot of it is what you see is it's a timing of big wells and specific timing of the recognition of some -- whatever dry holes were in the period. So I really couldn't point to -- I mean we have a broad slate of activity going on around the globe, as you know, and it was really not a specific area that was the big chunk of that. So you got some seismic activity in there, you've got drilling and dry hole expenses that were reflected in the period. But I guess just stepping back from it all, I mean, we do have a very active exploration program, and it's -- if you look around the globe, with Columbia, things we have going on in Brazil, Orphan, the -- now work on the Beaufort Sea, Gulf of Mexico, Tertiary, Piance, Ireland, Norway, UK North Sea high, activities in Africa, AP. So there's just a lot of activity going on around the world. And so a lot of these, there will be expenses associated with those.

Neil McMahon - Sanford C. Bernstein

Just on that actually, I think the big wells you've got coming up have more to do in the Orphan next year.

Henry Hubble

Yes.

Neil McMahon - Sanford C. Bernstein

But you've got Columbia. Has the Columbia well started drilling yet offshore?

Henry Hubble

No, not yet.

Neil McMahon - Sanford C. Bernstein

And then I think you've got Madagascar next year?

Henry Hubble

Yes. Columbia will be later this year.

Neil McMahon - Sanford C. Bernstein

My question is mainly, I saw you got into New Zealand.

Henry Hubble

Yes, yes.

Neil McMahon - Sanford C. Bernstein

Through the quarter. Where does that, since this is as you've probably the most remote wild cat you're going to drill ever, why does that rank up there with the big opportunities in Madagascar and the Beaufort Sea, and in terms of the way you're looking at new basins?

Henry Hubble

Well, we're going to be going through obviously to get the seismic first, so we've got basically planning under way to get the 2D and whatever 3D seismic data there. And then what it's going to take from there we'll make the decision after that. It's like a lot of these, they tend to be, they're plays that we think have high potential but they high risk or technically challenging in many of these areas. So I wouldn't want to put it in the characterization versus some of these others. It's obviously one that we think there's -- we have interest in and want to pursue.

Neil McMahon - Sanford C. Bernstein

So basically for our models running forward we might want to assume a bit higher exploration expense in the current rig rate environment, and the riskiness of some of these big high reward, high risk --

Henry Hubble

Yes, it's going to be variable, and we've -- we update that on kind of on a yearly basis, and we'll be reflecting what our best view of that is as we come up to the next round.

Neil McMahon - Sanford C. Bernstein

Great. Thanks a lot.

Henry Hubble

All right, very good.

Operator

And there are no further questions at this time. Mr. Hubble, I'll turn it back to you for any additional or closing remarks.

Henry Hubble

I just would like to thank everybody for joining us today and appreciate the questions. If you have any others or areas that you would like to pursue, please don't hesitate to give us a call. Thanks.

Operator

This does conclude today's teleconference. We thank you all for your participation. You may now disconnect your lines.

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Source: ExxonMobil Q2 2007 Earnings Call Transcript
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