Save for later Print Download Share LinkedIn Twitter Neil Chapman is a senior vice president at Exxon Mobil, overseeing the US major’s upstream business. Chapman spoke to concerns of underinvestment in oil and gas at this year’s Energy Intelligence Forum, as well as the new criteria used to sanction investments and why carbon capture and storage (CCS) is front and center in Exxon’s low-carbon strategy.Q: Given pressures on oil and gas suppliers to withhold capital investment regardless of prevailing price signals, can producers sufficiently respond to the current blowout in gas prices?A: Gas, I think, is going to be challenged — certainly in the short term because the short-cycle investments, frankly, are more associated with the unconventional business, and there’s not a lot of other latent capacity that's not being produced today.If you look in Europe, the biggest gas field — Groningen — is going to be shut in in the next 12 months. In the North Sea, there has not been as much investment going in. So from a European perspective, you've got a sort of declining local production, and so then you're reliant either on gas from Russia or from LNG cargoes.The short-cycle stuff is in North America. You've seen prices at Henry Hub go up to $5 [per million Btu] or thereabouts. So it's very high versus what we've seen in the last 10 years. Definitely rigs [are] coming back on, but they're not coming on as quickly as you'd expect. And I think part of that is because of how painful it was for everybody last year. So even though the prices are so strong, there is a reluctance to lean into it as fast as we've seen historically.Q: What about on the oil side over the medium term?A: We have been talking about the lack of investment in the industry for the last two or three years. Our calculation would suggest there's just simply not enough investment going in to meet the demand. But of course it all depends on what your view is of demand. If you think demand is going to drop off very, very quickly, then it's a different story. If you think demand is going to drop off — and it will drop off of course — more slowly, then it's going to be much tighter.I think a lot of it depends on two factors in terms of what production can be put on in the short term. It's Opec-plus and it’s the unconventionals.In North America, again, we've seen a rebound since the depths of 2020. It just hasn't come on as quickly as you would have historically anticipated with this kind of price rise. There certainly is capacity to bring on more. What I observe is there has been a reluctance to really lean in quickly because it was so painful last year.I think from Opec and Opec-plus — that story’s to be told. Again, very, very painful for all producers last year, so how much investment went into West Africa, went into the Middle East, went into Russia — it's somewhat questionable. In total, our view is that there hasn't been enough investment and therefore if demand is sort of consistent with where we are today, it has the potential to get pretty tight.Q: CCS is the bedrock of Exxon's low-carbon energy strategy, but you’ve also begun talking about biofuels and hydrogen paired with CCS. Why the emphasis on CCS, and what is bringing other opportunities onto your radar?A: You're trying to find that intersect between where's the market demand and where is your competitive advantage or where is your capability. So for a decade or so, we have been investing in what we always describe as the difficult-to-decarbonize sectors — heavy industry, commercial transportation (think heavy goods vehicles, think planes) and power generation where the climate conditions just aren't commensurate with the energy demand. And so we've worked a lot in the laboratories on new innovation to be more effective at closing those gaps. And we see CCS, hydrogen and biofuels being the critical technologies to help fill that gap.One thing that's really consistent in all of the [energy transition] scenarios that have been developed is that the faster oil and gas goes down, the faster hydrogen, biofuels and CCS goes up. And that's what we see. So for us, what's really, really important is we believe we can apply our capabilities as a corporation in subsurface, in hydrogen, in concentrating carbon dioxide — those are the elements where we think we have a capability set which will be very, very competitive.I'm a very optimistic guy, but it has been quite incredible the response we've had from around the world. I think the world is starting to realize the important role those three technologies will play in an energy transition. I think people understand renewables [solar, wind power generation] are critical to achieving these lower-carbon levels in the atmosphere, but they're not sufficient on their own.I have responsibility for the upstream band of our low-carbon solutions within Exxon Mobil, and the number of countries, the number of companies who come to us and come to me saying, we want to partner with you, we don't know how to do this, how are you going to do it? So we just felt it was an opportune time to launch [our low-carbon business unit].It's not just commercializing new technologies. It's building a new business in those three technologies. It will support the decarbonization of Exxon Mobil's existing facilities, but will grow a new business supporting the decarbonization of third-party facilities.Q: Exxon has made clear that policy and fiscal supports are must-haves for CCS. Momentum is building, particularly in the US and Canada. What is in place in these jurisdictions already that needs to remain? What do you still need?A: There is a very different cost structure [for CCS] depending on the concentration of the stream of carbon dioxide and the accessibility to somewhere to sequester the carbon.Just to give an example. If you're venting a stream into the atmosphere today which has a very high concentration of CO2 — so think the front end of a gas-processing unit or a hydrogen unit, so, relatively small volume, but high concentration — it means you don't have to do a lot to that stream to be able to sequester it in the ground. If you can sequester locally to that stream, then the cost to do that is quite, quite cheap.In the US today, we have the 45-Q tax facility, which, order of magnitude is $50 a ton [tax credit], so you can probably do that today. We're certainly progressing projects that are going after those high-concentration streams which are local or in close proximity to somewhere to sequester. But it's a relatively small amount [of an economy’s CO2 emissions].The much larger volume of CO2 is from industrial applications — think furnaces and boilers. Now it's a different story. Now you've got to do something to that stream to concentrate the CO2, and that can be an expensive step. If you have to do that and you have to move that concentrated CO2 a long distance to sequester the carbon, it's a much different proposition, and the $50 45-Q won't get you there. So there has to be policy support at some stage to be able to get after the bulk of the CO2 emissions. I know there are numbers out there that people talk about, but I see it in that $100 a ton range, you could make a very, very significant impact, particularly where the heavy industry is on places like the Gulf Coast.Having said that, there are places in the world today where you can progress CCS and/or hydrogen based on the incentives that already exist. In Canada today, there is the opportunity to do that and to get a return and bring value to the shareholders, as well as to society.What we're doing as a company is we want to move quickly. We're progressing very, very quickly with projects where there is either a direct line of sight to get a return today, or we see one coming in a relatively not-too-distant future.We've talked about this concept called a Houston [CCS] hub. Of course there's a colossal concentration of industry in the Greater Houston-Beaumont area, not just from the refining and chemical industry, but from power generation, etc. And it has close proximity to the Gulf of Mexico. But it's low-concentration streams. So I think there is definitely an opportunity for the US and for the Houston area and for Texas to make a significant step change in decarbonizing industry — but you've got to get that policy support at the same time.But I would say we're having that conversation not just in the US. We're having that conversation in many jurisdictions around the world.Q: Historically shale has been considered a more carbon-intensive asset given the sheer number of wells and fracking required for development, but Exxon and others are starting to tout the US Permian Basin as advantaged. Can you walk us through this?A: I would like to put it in three buckets. The first bucket is methane. There's a lot of methane produced. We know how to reduce methane leaks, leaks from valves, etc. We know how to do that. I think the whole industry is getting after what we know — where leaks could happen and we're replacing them. But one of the keys here is detection, not just calculation of leaks.There’s a lot of technology going into surveillance. It's when you have a big leak — how do you identify that quickly and fix it? I think a tremendous amount of effort has gone into that area. It will continue. We definitely have a line of sight on getting that down to absolute minimum amounts of methane leaks, and anything we do have which will be as a result of some incident, we could detect it as an industry very quickly.The second part is flaring. When you flow back a well in the unconventional space, you either build facilities to contain that gas and process it, or you can flare it. If you go back 10 years, quite frankly, there's a lot of flaring going on. But as an industry, protocols are coming in place now where I think the industry in general and certainly Exxon Mobil is moving towards zero routine flaring. We’re not going to tolerate it.And then you say OK, well, what's left? It's the energy and the power you have to put into drilling and fracking that. We can decarbonize. It's just a question of can you bring in electrical rigs, can you bring in electrical power that is renewable? The answer to that is, absolutely yes if you can get access to renewable energy or generate it yourselves locally, and all those are possibilities.So there is absolutely a line of sight to get the unconventionals — and particularly the Permian — to industry global-leading low greenhouse gas emissions intensity. We're very optimistic.Q: Exxon has been one of the most aggressive in pulling back capital expenditure. For the investments you’re still making, how has the criteria used to FID new projects evolved?A: What's really key is the competitiveness of the portfolio because nobody actually knows what's going to happen in the future. I'm less interested in what returns they will generate because I don't know what the price set is going to be. What's really important is how competitive those investments are in terms of cost of supply.One of the things that I've been very, very keen on that we talk about internally and externally is that we need to ensure that our investments have a cost of supply — and the way we look at cost of supply is what's the price of crude oil to generate a 10% return over the life of the asset — it's got to be $35 or less. Last year we talked externally about 90% of all of our investments through 2025 had a cost of supply less than $35 a barrel. That is the most important thing to me. It becomes important any time in our industry’s history, but when you're going to a period of uncertainty, I believe that's even more important. Because if demand does start to come down, I want our barrels still to be produced because they’re the lowest-cost barrels.And so that’s quite, quite a dramatic change in our portfolio. It doesn't happen overnight. But it has happened over the last two years, and you're going to see it accelerate as we bring more Guyana or more Permian or more Brazil production on in the coming two or three years. And I think the intensity of that discussion on the production cost and the cost of supply is the major change.I guess the one thing that I think has really hit the forefront more in the last two or three years of course is greenhouse gas emissions and carbon intensity for sure. We are very public in terms of setting our objectives on carbon intensity and to meet that, everything that we bring into our portfolio must be certainly in the first quartile of the industry’s greenhouse gas intensity. And you know, we target in each individual sector to have a leading greenhouse gas intensity.Q: How are you finding conversations with partners in terms of alignment of interests?A: We've made somewhat of a pivot here in the last two or three years in Exxon, where we are spreading our capital dollars across less assets. We’re really focused on our core assets in terms of where we're spending our capital. When you do that, you have a better chance of alignment. If you are the operator — and I'm sort of pretty keen that we are the operator in the majority of what we do — then that gives you a much higher chance of being able to lead your partners to that point.Having said that, I would say in all the assets that we are spending significant capital dollars we've got very good alignment with all of the partners and with the host governments because this whole drive toward decarbonization is a world issue. It's an industry issue as well as an Exxon Mobil issue. We all want to achieve the same objective. It's just how efficiently can you get there and at what pace do you get it? We have a great, great determination, as I said, where we're spending our capital dollars to be industry leading and as a minimum first quartile in terms of greenhouse gas intensity. And the reason for that is quite simple — we can't reach our corporate objectives unless we do that.