As the oil and gas industry has continued to struggle through the economic fallout of the coronavirus pandemic, Exxon Mobil is starting to face additional challenges in the South America. Prior to the historic oil price collapse in April 2020, Exxon Mobil was already struggling. Falling rates of oil production, a stock price that has been among the most abysmal performers in the energy industry, and a loss of stakeholder confidence has been putting pressure on Exxon Mobil for the past few years. In an effort to recoup some of the financial losses that have been experienced, the Houston-based energy giant has started to take on billions of dollars in monetary write-downs. While Exxon Mobil was once the most profitable corporation in history, the downfall of Exxon Mobil has been painfully visible for anyone with an eye on the fossil fuel industry.
As recently as 2012, Exxon Mobil announced that it had achieved its second-highest profit in the oil-giant’s history, with $45 billion in total annual profit. This was exceeded only by 2008’s record profit. To put the 2012 earnings report into perspective, Exxon Mobil’s annual profit exceeded the combined profits of both Wal-Mart and Royal Dutch Shell, which were the world’s first and second biggest companies during that year (Juhasz, 2013). With profits of this magnitude, Exxon Mobil was able to provide its shareholders with hefty dividends. Between 2010 and 2018, Exxon Mobil returned nearly $275 billion of its massive $318 billion net income to investors through dividends and sizeable stock repurchases (Johnston, 2018). However, falling oil prices, the growing cost of oil and gas extraction, and rising capital expenditures have taken a significant toll on this once unstoppable energy giant.
A Loss of Investor Confidence
In an attempt to win back the confidence of investors and stakeholders within the fossil fuel industry, Exxon Mobil set its sights on the South American country of Guyana. As the fossil fuel industry has been reeling from the impact of low oil prices in recent years, Exxon Mobil did something bold and unexpected. As other fossil fuel giants started to tighten up their budgets amid the economic downturn, Exxon Mobil kept spending. With CEO Darren Woods guiding the way, Exxon Mobil has kept moving forward with a $35 billion-a-year investment strategy to pump money and infrastructure into the development of the oil and gas industry in Guyana. Exxon Mobil’s massive bet on Guyana is representative of Darren Woods’ counter-cyclical investment strategy. The principles of this strategy are simple. Exxon Mobil will make investments in oil and gas exploration and accompanying infrastructure when the economy is struggling. This presents the opportunity to make investments in a favorable price environment, rather than making costlier investments when the global economy is booming.
While Exxon Mobil’s counter-cyclical investment strategy may sound like a reasonable bet, this approach hasn’t convinced many investors to buy into Exxon Mobil’s stock. With a stock price of slightly above $40 per share as of mid-July 2020, Exxon Mobil’s shares have not been this cheap since 2004. As Exxon Mobil has continued to move forward with its spending plan, its stock price has continued to lag behind rivals like Royal Dutch Shell and Chevron. Despite the fact that this fossil fuel giant is still struggling, a brief glimpse of hope was revealed in earlier in the year, when executives revealed a goal of producing 750,000 barrels of oil per day in Guyana by 2025, which encompasses about 20 percent of Exxon Mobil’s current production of oil (Blum, 2020). However, this lofty goal has been fading amid mounting political and economic instability in Guyana.
The Political Standoff in Guyana
A political standoff has been unfolding in Guyana. The future of the country’s oil and gas industry now looks more precarious than ever. On March 2nd, Guyanese President David Granger was defeated in the country’s national election. However, President Granger has yet to step aside. In a bitter dispute over the election results, President Granger insists that he was the clear winner of the election. However, amid allegations of widespread election fraud, a recount was conducted. The results of the recount indicate that the opposition leader had defeated President Granger. Even with an official recount showing that President Granger did not receive enough legitimate votes to claim victory, the retired military general refused to accept defeat by continuing to maintain control over the country’s government. As a means of trying to resolve the dispute, the Caribbean Court of Justice located in the Port of Spain in Trinidad and Tobago is expected to serve as a neutral party to settle the debate.
The Caribbean Court of Justice was established in 2005. Its main role has been to serve as a neutral jurisdiction that interprets and applies Caribbean laws to member nations. The Caribbean Court of Justice also examines judicial appeals as a court of last resort in both civil and criminal cases within the greater Caribbean region. While this court has been utilized to resolve judicial disputes in numerous Caribbean member nations, President Granger has indicated that he will not abide by the ruling of the court, which has further complicated matters in Guyana. The British high commissioner of Guyana, Greg Quinn, has called for a constitutional reform that reevaluates Guyana’s political system. The current system functions as a winner takes all scheme, which has proven to be problematic in recent years.
The political shake up in Guyana has complicated Exxon Mobil’s plan to expand the country’s oil and gas industry. In an effort to encourage a swift power shift, U.S. Secretary of State Mike Pompeo has called on President Granger to step down as president. Secretary Pompeo also announced that members of President Granger’s Partnership for National Unity would have U.S. visa restrictions put in place until the political dilemma comes to an end in Guyana. It is evident that American government officials believe that the opposition party, which is known as the People’s Progressive Party Civic, was the true winner in the Guyanese elections. As this conflict continues to escalate, Exxon Mobil may turn out to the biggest loser in the political stalemate.
In an interview conducted by the Trinidad Saturday Express, Guyanese Energy Minister Kevin Ramnarine issued a stark warning that the country’s economy and its oil and gas industry may be on the verge of collapse. Ramnarine signaled that there could be grave socioeconomic problems if the U.S. continues to put pressure on Guyana with sanctions. Ramnarine says, “As we have seen with Venezuela, the United States’ application of sanctions usually follows a gradual and incremental pattern. This might therefore be the first wave of sanctions. Should the US see no improvement in the situation in Guyana, the sanctions might be ramped up to include economic sanctions such as sanctions on shipping, on senior Guyanese government officials doing business with American companies, and on the payments of goods and services for the oil industry” (Blackmon, 2020).
New Challenges for Exxon Mobil
Irrespective of the election outcome, Exxon Mobil will be faced with new challenges amid this political turmoil. With so much riding on Guyana, the oil giant cannot afford to abandon the tremendous investment that has already been made within the tiny South American country. While Exxon Mobil originally negotiated the terms of its oil and gas deal with President Granger and his accompanying administration, a change of political administrations may put Exxon Mobil’s deal in jeopardy. Moreover, the current oil and gas lease deal that Exxon Mobil made with the Granger administration has received a tremendous amount of international scrutiny. Some energy analysts say that Exxon Mobil crafted a deal that would essentially deprive Guyana of its own oil and gas revenues. In fact, a recent economic analysis of Exxon Mobil’s deal found that the oil giant could strip Guyana of nearly $55 billion over the entirety of its oil and gas lease (Crowley, 2020). As a result of the outlandishly poor deal made between Exxon Mobil and Guyana, some international policy makers have questioned whether corruption allegations should be pursued.
Massive reserves of oil and gas were first discovered off the coast of Guyana back in 2015. Since then, international efforts have been underway to prevent corruption and move towards a sustainable model of natural resource extraction. The Leveraging Transparency to Reduce Corruption project has been working to evaluate connections between natural resource wealth and political corruption. It’s clear that oil, gas, and mining industries are particularly prone to the risks of corruption. Despite efforts to move the country towards an equitable and sustainable model for fossil fuel extraction, the current situation in Guyana shows that the country may already be falling victim to the natural resource curse. The country’s weak governmental institutions are already becoming riddled with conflict. With an estimated eight billion barrels of crude oil within a 6.6 million-acre offshore reserve, Guyana’s new oil fields are among the largest oil discoveries in recent years (Baddour, 2020). Fossil fuel reserves of this magnitude would be challenging to effectivity handle even with an advanced governmental bureaucracy.
A Disconcerting Outlook
With a lack of economic stability and a troubled history characterized by ethnic tribal politics, drug trafficking, and allegations of widespread money-laundering, the outlook does not look promising for Guyana. Moreover, with such a massive investment made by Exxon Mobil to explore for and extract oil and gas reserves, investors are extremely concerned with the way that the situation is unfolding. Despite these immense challenges and the disconcerting outlook, Exxon Mobil continues to move forward with its offshore oil and gas operations. After collaborating with Guyana’s Environmental Protection Agency, the oil company has been able to start extracting around 80,000 to 90,000 barrels of oil per day (Choy, 2020). This level of oil production is well behind Exxon Mobil’s original goal to be pumping at least 120,000 barrel of oil per day in June.
The rise of the coronavirus pandemic, issues with drilling equipment, and the political turmoil have kept Exxon Mobil from reaching its preliminary oil production goals. Exxon spokesman Todd Spitler recently held a press conference in an attempt to ease investor concerns. He said, “Operations remain steady as we work to safely commission the remainder of our gas compression system” (Choy, 2020). The current political standoff has delayed the oil company’s six billion dollar planned expansion of the Payara project, which was originally expected to be operational in 2023. The interruption of the Payara project puts the entire 220,000 barrel-a-day expansion project at risk. If political predictability and stability continue to slide, Exxon Mobil is sure to face more pressure from investors.
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