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Exxon Mobil Corporation (XOM) & A Major Challenge

Exxon Mobil Corporation (NYSE:XOM), the world’s largest publicly traded oil company, recently announced that it’s beginning development of a major ultra-deepwater project — the Julia oil field in the Gulf of Mexico. The project is expected to cost more than $4 billion and will begin producing oil in 2016, the company said in a statement.

Exxon Mobil Corporation (NYSE:XOM)

The field, located about 250 miles southwest of New Orleans, is one of the biggest oil discoveries in the ultra-deepwater frontier of the Gulf of Mexico and is estimated to contain nearly 6 billion barrels of oil resource in place. Exxon Mobil Corporation (NYSE:XOM) and Statoil ASA(ADR) (NYSE:STO), the Norwegian oil and gas giant, each hold a 50% interest in the field.

Initial development of Julia, which is located more than 30,000 feet below the ocean’s surface, will include six wells that are expected to produce some 34,000 barrels of oil per day. “The development of Julia will provide a new source of domestic energy and well-paying jobs over the next several years. Access to resources such as Julia will contribute to US energy security for many years,” said Neil W. Duffin, president of ExxonMobil Development.

A major challenge for the oil majors
Exxon Mobil Corporation (NYSE:XOM)’s decision to commence development of the Julia oil field highlights an important trend among the world’s largest integrated oil companies. Over the past few years, most have struggled to grow annual oil and gas production, as their conventional fields have largely been depleted after decades of intensive drilling.

For instance, embattled British oil giant BP plc (ADR) (NYSE:BP) saw its first-quarter total oil and gas production fall 5% from year-ago levels, while French oil major TOTAL S.A. (ADR) (NYSE:TOT) reported a 2% drop. Even Exxon Mobil Corporation (NYSE:XOM), despite its massive reserves and unparalleled efficiency in allocating capital, saw a 3.5% year-over-year decline in first-quarter production.

To combat this issue, the supermajors have been forced to venture into some of the most remote locations around the world in their never-ending quest for black gold. These have included the harsh, icy waters of the Arctic Ocean, bituminous oil sands deposits in Canada, and ultra-deepwater locations in offshore Brazil.

Several oil majors have even plowed billions of dollars into prospecting areas offshore Africa, despite the risk of unexpected actions by conflict-ridden governments. For instance, Chevron Corporation (NYSE:CVX) has acquired exploration blocks in Liberia and Sierra Leone, while Royal Dutch Royal Dutch Shell plc (ADR) (NYSE:RDS.A) and Brazilian oil giant Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) are jointly exploring deepwater acreage off the coast of Tanzania.

The shocking implication for oil prices
While these projects are enticing, given the massive quantities of oil and gas they could potentially hold, their development costs are sky-high and continue to soar.

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