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ExxonMobil Swivels to North American Liquids

What does the largest North American natural gas producer do when prices aren't going its way? Move rigs to liquids plays, ExxonMobil investor relations chief David Rosenthal said Tuesday.

At this point no plans are in place to shut in any U.S. or Canadian natural gas wells, Rosenthal said during a conference call to discuss the latest earnings report. But the super major, which holds a massive leasehold, has moved a "substantial" number of its dry gas drilling rigs to liquids-prone plays.

"We remain bullish on the future of natural gas as an energy source," Rosenthal told financial analysts, reminding them that last month ExxonMobil published "Outlook for Energy: A View to 2040," which forecast that gas would make the biggest global gains in energy demand (see Shale Daily, Dec. 9, 2011). "As you know we are bullish on the demand side for natural gas as a resource in the United States. Given the steep decline in conventional gas, unconventionals will lay a dominant role going forward.

"In that regard, we're very pleased with our unconventional portfolio and we plan to be a major participant in the space."

However, "as you all know, due to record production and storage levels -- and a relatively mild winter to date -- prices have weakened recently. I can tell you that we have not curtailed any gas production. We have 65 to 70 rigs across the space." But "a substantial number" has been shifted in the past year from dry gas to liquids-prone plays.

Rosenthal said he couldn't give specific details on how many dry gas rigs continued to be used. More details are expected during an investor conference in March, he said.

"The overall size of the fleet is the same," he said. "We are still drilling dry gas wells. A few of those are required for at least maintenance and other contractual obligations. We are drilling those [dry gas wells] that provide good economics. We have a drillable inventory [in North America] of over 40,000 wells. We want to be able to put those things in order and have significant optionality to drill them and to be able to maximize the resource over time...

"We're focused on the long term and making adjustments to higher-value, higher-margin products."

Among the unconventional liquid targets in North America that ExxonMobil is delineating and testing wells are the:

"A lot of our drilling has been delineation in nature; a lot of wells are not online yet for production," Rosenthal explained. Beyond North America ExxonMobil also is testing unconventional wells in Argentina, as well as Poland. Other unconventional areas in North America that continue to be tested include the Utica Shale.

"We do have one well going down [in the Utica] as we speak," Rosenthal said. "The acreage position is about 75,000 acres today and we are looking forward to working on that..."

In the gassy Horn River Basin of Canada, where ExxonMobil is the largest leaseholder, a drilling program "is planned for this year, about the same as we had last year, and again related to evaluation and delineation as opposed to production," he said. "We'll have about two to three wells, which is typical of what we've been doing."

Asked if ExxonMobil had been working on any plans to monetize the Canadian gas for liquefied natural gas export, Rosenthal said he didn't have "specific information to provide other than with a resource potentially as large as that, we are exploring all options out there and will continue to do so..."

It's unlikely that the producer will increase its North American rig count this year, despite early indications of success in the emerging liquids plays.

"I think it's reasonable to expect to see us expand our focus on liquids and liquids-rich plays, particularly in areas where we've had good initial success and we look forward to bringing on more wells there," said Rosenthal. "We'll see how the year progresses."

ExxonMobil's exploration and production profitability in the United States was impacted by the decline in gas prices. However, the company continued to make efficiency gains in its gassy portfolio, most of which it acquired in 2009 when it acquired shale king XTO Energy Inc.

"Some of the objectives we set out at the time of the merger are coming to fruition," said Rosenthal. "We are seeing an improvement in capital efficiency, reductions in operating expense and improved productivity on wells, from pad spacing, to length of laterals, to how we lay the laterals...A number of engineering and technical expertise that we brought to the table is paying off. From that standpoint, we are progressing well. But at the end of the day profitability on a book basis certainly was impacted by the price trend we saw at the end of the year."

The move to liquids plays failed to make a dent in ExxonMobil's quarterly or year-end production numbers. In fact, U.S. gas output was up by more than 1 Bcf/d in 2011 from 2010. Those figures likely will be changing by the end of this year, said the investor relations chief.

"We're really figuring out what we've got and figuring out the best way to optimize the total over the long period of time as opposed to being in a big hurry," he said. ExxonMobil wants to determine field sizes, where the sweet spots are, and then where to go first to optimize development.

"We probably spend more time than others working on front-end design but we are focused on the long-term value out of that. That's front-end investment in time and resources. Even as we are doing some of the delineation and appraisal wells, we are seeing some efficiency gains as we go from one area to another. We're not starting out from scratch..."

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