Exxon’s Billion-Barrel Secret

HOUSTON— (Dow Jones) The only thing that surprised the energy industry more than ExxonMobil Corp.’s mammoth oil find in the Gulf of Mexico is that it kept its size quiet for so long.

The company is notoriously closemouthed. As spokesman Patrick McGinn put it Thursday, Exxon just doesn’t “talk much”—even as it became known publicly this week that it discovered possibly one billion barrels of recoverable oil that it could lose it in a court battle with the government.

Such discoveries tend to leak out. Dozens of company personnel usually know, and in this case there were perhaps dozens more from Exxon’s 50% partner in the find, Norway’s Statoil ASA.

But for reasons both technical and legal, the fact that Exxon had made perhaps the largest discovery ever in the Gulf, and one of the largest in the company’s century-long history, wasn’t revealed until it sued the Interior Department in a Lake Charles, La., federal court last week over leases for the oil.

The find was made in 2007, and Exxon and Statoil did disclose it in January 2008, calling it significant. But the possibility of one billion barrels wasn’t spelled out.

“It’s very unusual for the company to keep quiet on something of this magnitude,” said Fadel Gheit, an analyst with Oppenheimer & Co. who has followed Exxon for decades. It is the kind of news shareholders eagerly wait for, especially as Wall Street has been wary of Exxon’s embrace of natural gas, a commodity that produces much lower returns than oil.

Exxon shares have lagged behind peers—rising 17.9% over the past year compared with 21% for Chevron Corp., which has developed large, new oil fields in recent years. “This is good news and shareholders want that. They deserve it,” Mr. Gheit said. Exxon shares fell 4.3% to $70.94 Thursday amid a broader stock-market selloff.

It isn’t all good news, though. Exxon and Statoil are suing the government because offshore-drilling regulators say the companies failed to follow federal rules and denied their application for lease extensions for the find. If Exxon should lose in court, the leases, and the oil in the ground, would revert to the government. The government would then seek a new company to begin producing oil from the find, which could translate into royalties of about $13 billion over the field’s lifetime at current prices.

Known for its conservative approach to the high-stakes game of oil exploration, Exxon had kept mum on two 2009 and 2010 discoveries in the Hadrian prospect until it could resume drilling in the area after the end of a months-long exploration moratorium. Last June, after it found a third prospect that confirmed the area contained 700 million barrels of recoverable oil and gas, it announced the finds with great fanfare.

But Exxon’s reluctance to talk openly about the huge 2007 find, known as the Julia field, was also a result of circumstances. The oilthat Exxon found there is in a deeply buried layer of rock known as the Lower Tertiary, which is far from shore and requires large investments in pipelines and remote platforms. So Exxon may not have known for a while how much oil it could get out of the ground, or whether it had the technology to do so, say analysts who have talked with the company. “It’s a relatively complicated structure. It’s not like you can rush it,” said Paul Cheng, a Barclays Capital analyst.

Then there is the added complexity of the legal battle. The oil was discovered shortly before Exxon’s leases on the area were to expire in 2008. Exxon requested an extension of the leases, but the government said the plan to develop the find was too vague and denied the extension in 2009. The plan involved extracting the oil through a production platform that Chevron planned to build for a neighboring field.

That led to a series of appeals and legal wrangling that continues. The courtroom drama is muddying the picture on how quickly those reserves can be tapped, analysts say. “This is going to create more uncertainty,” said Blake Fernandez, an analyst with Howard Weil.

– By Ángel González, Isabel Ordóñez contributed to this article, Dow Jones & Company, Inc.