FINANCIAL MARKETS

SC
ANDAL ON OVERREPOTING OF RESRVES BY EXXON MOBIL

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Sir , ADNAN BASHIR

SUBMITTED BY:
FARAZ AHMED 09021920-083
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Date:
10th March 2011

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 EXXON OVERREPOTING OF OIL RESERVES:

INTRODUCTION:

Exxon is the world's largest publicly traded international oil and gas company.
It operates facilities and market products in most of the world’s countries and explore for
oil and natural gas on six continents.

HISTORY:

Over the last 125 years ExxonMobil has envolved from a regional marketer of
kerosene in the U.S. to the largest publicly traded petroleum and petrochemical enterprise
in the world. Today it operates in most of the world's countries and is best known by its
familiar brand names: Exxon, Esso and Mobil. They make the products that drive modern
transportation, power cities, lubricate industry and provide petrochemical building blocks
that lead to thousands of consumer goods.

OVERREPORTING SCANDAL:

ExxonMobil earned $10.9 billion in profits in the first quarter that was a record
for the company and the second-highest in the company's history. That lies gave pause to
consumers and policymakers worldwide. While the world's largest publicaly owned oil
company is producing a lot less oil.

Exxon's oil production was down 10 percent in the quarter, greatly accelerating
a trend that has been evident for some time. Exxon saw a 2.4 percent decline in oil
production between 2006 and 2007. The reasons were as follows,

 Venezuela half oil sales to Exxon

 The production limits set by OPEC countries where Exxon operates.
 Exxon's own decisions to sell some of its fields all contributed to the decline.

Exxon Mobil had an explanation, of course. The company's lower production

was a result of resource-rich countries' demands for bigger shares of oil and natural-gas
production as prices climbed, the decline of older fields and the loss of production when
Venezuela nationalized Exxon Mobil operations in that country in 2007.

All true. There were short-term, one-time reasons for production to fall in the first quarter
of 2008. But don't conclude that Exxon Mobil's problems are limited to that quarter. All the

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evidence argues that the company will report lower oil and natural-gas production for all of
2008, even though new projects are scheduled to come on line in the second half of the
year.

But even excluding all of these factors while oil was above $120 a barrel Exxon Mobil
reported $11 billion in first-quarter. Revenue for the quarter was up 34%, to $117 billion,
from the first quarter of 2007. And, yes, net income climbed 17%, But production of oil and
natural gas was down almost 6%. Exxon’s Second-Quarter Earnings Set a Record in 2008

The company's projections have a history of being too optimistic and it was
expected that there was a good chance that when Exxon Mobil actually reports production
for that period, investors will see not flat but falling oil production.

Company officials said they were working hard to increase production with new projects in
Africa, the Middle East and the Gulf of Mexico. The company reported that it intended to
disburse $125 billion in capital spending over the next five years in an effort to produce
more oil and natural gas.

The company buy-backed its stock that was a sign of a shrinking company; because they
are spending more to shrink their share base then they are to find new sources of oil and
gas. Finding new reserves has become especially difficult as resource-rich nations
tightened their grip on their oil and gas as commodity prices soar so Exxon over-reported
its oil reserves.

Exxon Mobil is down about 2% in pre-market trading after missing analysts' consensus in
its second quarter report. Revenues dropped 46% on significantly lower oil and natural gas
spot market pricing, but also on a 3% production decline. However, Exxon's Q2 revenue of
$74.457 billion exceeded analysts' consensus expectation for $71.29 billion, based on
Thomson Reuters data. Still, excluding "special items," XOM earned $0.81 per share, which
compared unfavorably with both the analysts' view for $1.02/share and with its prior year
earnings of $2.22 per share.

Exxon said that both lower pricing and reduced demand for its production played against
its quarterly operational results. The company also noted that it has kept with its heavy
capital investment efforts, which seemingly weighed on the total expense line, but agrees
with its long-term strategy. It also noted that share repurchases were ongoing.

Seen in the context of the production decline, Exxon's profits are even more
staggering. The $10.9 billion the company netted in the first three months of the year was a
17 percent increase over last year and was surpassed only by the $11.7 billion profit Exxon

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reported in the fourth quarter of 2007. But on a per-barrel basis (counting both oil and
natural gas), Exxon's profits in the first three months of this year leapt about 24 percent.

Profits were staying very, very high.But they were struggling to put those profits
into growing the business.However the oil companies had one reliable place they could put
their profits. Exxon accelerated its already aggressive share buy-back program, plowing $8
billion a 73 percent of the quarter's profits into the company's own stock. Exxon reduced
shares outstanding by 1.8 percent and, including dividends, distributed $9.9 billion to
shareholders in the first quarter, a 13 percent increase over last year.

ExxonMobil's earned a "fat profit" that was about 8.5 cents per dollar of sales. And
paid a fat tax bill. Actually, customers paid that bill.On a worldwide basis, in the 2nd 2008
quarter, ExxonMobil paid over $10 billion in corporate income taxes in the second quarter
alone, $9.5 billion in sales taxes, and over $12 billion in other taxes.

In other words, ExxonMobil paid (or at least collected) $32.361 billion in taxes in
the second quarter. Or in another way Exxon paid (or collected) almost $3 in taxes
($32.361 billion) for every $1 in profits ($11.68 billion).That means that for every dollar in
Exxon sales not profits, SALES 23.4 cents is for taxes. And that is averaged over all types of
sales not just gasoline.

If the government chooses to nationalize Exxon (and the other oil companies) and
take all their profit (reducing the stocks to zero value -- devastating pension funds
nationwide), and if we make the outlandish assumption that a government oil company will
run as efficiently as Exxon runs now, the price of $4 gas would drop all of 34 cents a gallon.
Meantime, government taxes exceed 94 cents a gallon.

Aftermaths of Over reporting:

Crude oil prices in the second quarter averaged more than $124 a barrel, 91 percent higher
than The sell-off in Exxon stock, as well as other oil company stocks, continued a trend of
recent weeks as oil and natural gas prices have fallen sharply from record levels. But
investor disappointment was also a response to problems that surfaced in the company’s
report, particularly a 10 percent drop in oil production and a 3 percent decline in natural
gas production from the second quarter of 2007.

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It raises the question of whether the company has been underinvesting the last few years,”
said Brian Youngberg, an energy analyst at Edward Jones, an investment firm. “High
commodity prices are driving the record earnings, not growth in production volumes of oil
and gas.”

Company officials said they were working hard to increase production with new projects in
Africa, the Middle East and the Gulf of Mexico. The company reported that it intended to
disburse $125 billion in capital spending over the next five years in an effort to produce
more oil and natural gas.

Royal Dutch Shell, Eni and Repsol, three of Europe’s largest oil companies, also reported
strong profits on Thursday, although their production results disappointed analysts. Shell
reported its output had declined by 1.6 percent in the quarter, and Repsol’s production fell
by nearly 20 percent. Eni’s production was slightly higher.

Nevertheless Shell, Europe’s largest oil company, reported a 33 percent increase in second-
quarter profit, to $11.56 billion, from $8.67 billion in the period a year ago.

Oil companies are under pressure to find new reserves as their traditional fields age and
they face increasing competition from state-run oil companies in Russia and the Middle
East. Shell is also looking to make up for production lost in Nigeria, where militants
attacked an offshore production vessel in June, and in Russia, where it had to sell its share
in the Sakhalin Island oil and natural gas project to the state-controlled energy company
Gazprom last year.

Exxon’s oil and natural gas production tumbled in the second quarter because of
Venezuela’s expropriation of Exxon’s assets last year, labor and political strife in Nigeria
and declining production in many fields around the world.

Meanwhile, under the terms of Exxon’s contracts, governments in Russia, Angola and other
places where it operates gained a larger share of production from Exxon and other
international companies as crude oil prices rose. With prices now declining, Exxon may
show higher production levels in future quarters even if profit is not as robust.

Democrats in Congress were quick to criticize Exxon’s profit, hoping that the resentment
felt by many drivers over high gasoline and diesel prices could help them in an election
year.

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“Inside the boardrooms at the major oil companies, it’s Christmas in July,” said Senator
Charles E. Schumer, Democrat of New York. “What’s shocking is that Big Oil is plowing
these profits into stock buybacks instead of increasing production or investing in
alternative energy.”

The company purchased $8 billion of its own shares over the quarter, reducing shares
outstanding by 1.7 percent.

Kenneth Cohen, an Exxon vice president, said oil companies needed the profits to search
for more oil and gas. He also challenged Congress to open up waters in the Gulf of Mexico
and off the Atlantic and Pacific coasts to drilling, as well as other federal lands where
drilling is prohibited.

“Our Congress needs to give us access to those areas that are currently off limits to the
industry,” he said.

Exxon’s income of $2.22 a share compared with $10.26 billion, or $1.83 a share, in the same
quarter a year ago. Revenue rose 40 percent, to $138.1 billion, from $98.4 billion in the
quarter a year ago.

REFERENCES:
1. www.tinyurl.com/5rnmyc
2. Wallstreat article