# EXXON MOBIL CORP (XOM) FY 2021 MD&A Verbatim Item 7 Management's Discussion and Analysis from EXXON MOBIL CORP's 10-K for fiscal year 2021. SEC filing source: https://www.sec.gov/Archives/edgar/data/34088/000003408822000011/xom-20211231.htm Accession: 0000034088-22-000011 Filing date: 2022-02-23 Report date: 2021-12-31 Extracted from a later financial-section MD&A body after the formal Item 7 span was a short reference. Confidence: high Company profile: /company/XOM/ All MD&A years: /company/XOM/mda/ Next year: /company/XOM/mda/fy2022/ (FY 2022) MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS Outlooks, projections, goals, targets, descriptions of strategic plans and objectives, and other statements of future events or conditions in this release are forward-looking statements. Similarly, emission-reduction roadmaps are dependent on future market factors, such as continued technological progress and policy support, and also represent forward-looking statements. Actual future results, including future energy demand and mix; financial and operating performance; realized price and margins; dividends and shareholder returns, including the timing and amounts of share repurchases; volume growth; project plans, timing, costs, and capacities; capital expenditures, including lower-emissions and environmental expenditures; cost reductions and structural cost savings; integration benefits; emission intensity and absolute emissions reductions; achievement of ambitions to reach Scope 1 and Scope 2 net-zero from operated assets by 2050, to reduce methane emissions and flaring, or to complete major asset emission reduction roadmaps; implementation and outcomes of carbon capture and storage projects and infrastructure, renewable fuel projects, blue hydrogen projects, and other technology efforts; the impact of new technologies on society and industry; capital expenditures and mix; investment returns; accounting and financial reporting effects resulting from market or regulatory developments and ExxonMobil’s responsive actions, including potential impairment charges; and the outcome of litigation and tax contingencies, could differ materially due to a number of factors. These include global or regional changes in the supply and demand for oil, natural gas, petrochemicals, and feedstocks and other market or economic conditions that impact demand, prices and differentials; policy and consumer support for lower-emission products and technologies in different jurisdictions; the impact of company actions to protect the health and safety of employees, vendors, customers, and communities; actions of competitors and commercial counterparties; the ability to access short- and long-term debt markets on a timely and affordable basis; the severity, length and ultimate impact of COVID-19 variants and government responses on people and economies; reservoir performance; the outcome of exploration projects and timely completion of development and construction projects; regulatory actions targeting public companies in the oil and gas industry; changes in local, national, or international law, taxes, regulation or policies affecting our business, including environmental regulations and timely granting of governmental permits; war, trade agreements and patterns, shipping blockades or harassment, and other political or security disturbances; the pace of regional and global economic recovery from the pandemic and the occurrence and severity of future outbreaks; opportunities for and regulatory approval of potential investments or divestments; the actions of competitors; the capture of efficiencies within and between business lines and the ability to maintain near-term cost reductions as ongoing efficiencies while maintaining future competitive positioning; unforeseen technical or operating difficulties; the development and competitiveness of alternative energy and emission reduction technologies; the results of research programs; the ability to bring new technologies to commercial scale on a cost-competitive basis; general economic conditions including the occurrence and duration of economic recessions; and other factors discussed under Item 1A. Risk Factors. Energy demand models are forward-looking by nature and aim to replicate system dynamics of the global energy system, requiring simplifications. The reference to any scenario in this report, including any potential net-zero scenarios, does not imply ExxonMobil views any particular scenario as likely to occur. In addition, energy demand scenarios require assumptions on a variety of parameters. As such, the outcome of any given scenario using an energy demand model comes with a high degree of uncertainty. For example, the IEA describes its NZE scenario as extremely challenging, requiring unprecedented innovation, unprecedented international cooperation and sustained support and participation from consumers. Third-party scenarios discussed in this report reflect the modeling assumptions and outputs of their respective authors, not ExxonMobil, and their use by ExxonMobil is not an endorsement by ExxonMobil of their underlying assumptions, likelihood or probability. Investment decisions are made on the basis of ExxonMobil’s separate planning process, but may be secondarily tested for robustness or resiliency against different assumptions, including against various scenarios. Any use of the modeling of a third-party organization within this report does not constitute or imply an endorsement by ExxonMobil of any or all of the positions or activities of such organization. OVERVIEW The following discussion and analysis of ExxonMobil’s financial results, as well as the accompanying financial statements and related notes to consolidated financial statements to which they refer, are the responsibility of the management of Exxon Mobil Corporation. The Corporation’s accounting and financial reporting fairly reflect its integrated business model involving exploration for, and production of, crude oil and natural gas, manufacture, trade, transport and sale of crude oil, natural gas, petroleum products, petrochemicals and a wide variety of specialty products; and pursuit of lower-emission business opportunities including carbon capture and storage, hydrogen, and biofuels. ExxonMobil's operating segments are Upstream, Downstream, and Chemical. Where applicable ExxonMobil voluntarily discloses additional U.S., Non-U.S. and regional splits to help investors better understand the company's operations. In January 2022, the Corporation announced that effective April 2022 it is streamlining its business structure by combining the Chemical and Downstream businesses. The company will be organized along three businesses – Upstream, Product Solutions, and Low Carbon Solutions, aligning along market-focused value chains. Product Solutions will consist of Energy Products, Specialty Products and Chemical Products. Low Carbon Solutions will continue to be included in Corporate and Financing. The businesses will be supported by a combined technology organization, and other centralized service-delivery groups, building on the establishment of a worldwide major projects organization in 2019. 42 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ExxonMobil, with its resource base, financial strength, disciplined investment approach and technology portfolio, is well-positioned to participate in substantial investments to develop new energy supplies. The company’s integrated business model, with significant investments in Upstream, Downstream and Chemical segments and Low Carbon Solutions business, generally reduces the Corporation’s risk from changes in commodity prices. While commodity prices depend on supply and demand and may be volatile on a short-term basis, ExxonMobil’s investment decisions are grounded on fundamentals reflected in our long-term business outlook, and use a disciplined approach in selecting and pursuing the most attractive investment opportunities. The corporate plan is a fundamental annual management process that is the basis for setting operating and capital objectives in addition to providing the economic assumptions used for investment evaluation purposes. The foundation for the assumptions supporting the corporate plan is the Energy Outlook and corporate plan volume projections are based on individual field production profiles, which are also updated at least annually. Price ranges for crude oil, natural gas, including price differentials, refinery and chemical margins, volumes, development and operating costs, including greenhouse gas emission prices, and foreign currency exchange rates are based on corporate plan assumptions developed annually by major region and are utilized for investment evaluation purposes. Major investment opportunities are evaluated over a range of potential market conditions. Once major investments are made, a reappraisal process is completed to ensure relevant lessons are learned and improvements are incorporated into future projects. BUSINESS ENVIRONMENT Long-Term Business Outlook ExxonMobil’s business planning is underpinned by a deep understanding of long-term energy fundamentals. These fundamentals include energy supply and demand trends, the scale and variety of energy needs worldwide; capability, practicality and affordability of energy alternatives including low-carbon solutions; greenhouse gas emission-reduction technologies; and supportive government policies. The company’s Energy Outlook (Outlook) considers these fundamentals to form the basis for the company’s long-term business planning, investment decisions, and research programs. The Outlook reflects the company’s view of global energy demand and supply through 2050. It is a projection based on current trends in technology, government policies, consumer preferences, geopolitics, and economic development. In addition, ExxonMobil considers a range of scenarios - including remote scenarios - to help inform perspective of the future and enhance strategic thinking over time. Included in the range of these scenarios are the Intergovernmental Panel on Climate Change Lower 2°C and the International Energy Agency's Net Zero Emissions (IEA NZE) by 2050 scenario. To effectively evaluate the pace of change, ExxonMobil uses many scenarios to help identify signposts that provide leading indicators of future developments and allow for timely adjustments to the Outlook. The IEA describes the IEA NZE as extremely challenging, requiring all stakeholders – governments, businesses, investors and citizens – to take action this year and every year after so that the goal does not slip out of reach. The scenario assumes unprecedented and sustained energy efficiency gains, innovation and technology transfer, lower-emission investments, and globally coordinated greenhouse gas reduction policy. The IEA acknowledges that society is not on the IEA NZE pathway. By 2050, the world’s population is projected at around 9.7 billion people, or about 2 billion more than in 2019. Coincident with this population increase, the Corporation expects worldwide economic growth to average close to 2.5 percent per year, with economic output growing by around 125 percent by 2050 compared to 2019. As economies and populations grow, and as living standards improve for billions of people, the need for energy is expected to continue to rise. Even with significant efficiency gains, global energy demand is projected to rise by almost 15 percent from 2019 to 2050. This increase in energy demand is expected to be driven by developing countries (i.e., those that are not member nations of the Organisation for Economic Co-operation and Development (OECD)). As expanding prosperity drives global energy demand higher, increasing use of energy-efficient technologies and practices as well as lower-emission products will continue to help significantly reduce energy consumption and emissions per unit of economic output over time. Substantial efficiency gains are likely in all key aspects of the world’s economy through 2050, affecting energy requirements for power generation, transportation, industrial applications, and residential and commercial needs. Under our Outlook, global electricity demand is expected to increase almost 75 percent from 2019 to 2050, with developing countries likely to account for about 80 percent of the increase. Consistent with this projection, power generation is expected to remain the largest and fastest growing major segment of global primary energy demand, supported by a wide variety of energy sources. The share of coal-fired generation is expected to decline substantially and approach 15 percent of the world’s electricity in 2050, versus nearly 35 percent in 2019, in part as a result of policies to improve air quality as well as reduce greenhouse gas emissions to address risks related to climate change. From 2019 to 2050, the amount of electricity supplied using natural gas, nuclear power, and renewables is expected to more than double, accounting for the entire growth in electricity supplies and offsetting the reduction of coal. Electricity from wind and solar is expected to increase more than 600 percent, helping total renewables (including other sources, e.g. hydropower) to account for about 80 percent of the increase in electricity supplies worldwide through 2050. Total renewables are expected to reach about 50 percent of global electricity supplies by 2050. Natural gas and nuclear are also expected to increase shares over the period to 2050, reaching more than 25 percent and about 10 percent of global electricity supplies, respectively, by 2050. Supplies of electricity by energy type will reflect significant differences across regions reflecting a wide range of factors including the cost and availability of various energy supplies and policy developments. 43 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Under our Outlook, energy for transportation - including cars, trucks, ships, trains and airplanes - is expected to increase by almost 25 percent from 2019 to 2050. Transportation energy demand is expected to account for over 40 percent of the growth in liquid fuels demand worldwide over this period. Light-duty vehicle demand for liquid fuels is projected to peak by around 2025 and then decline to levels seen in the early-2000s by 2050 as the impact of better fuel economy and significant growth in electric cars, led by China, Europe, and the United States, work to offset growth in the worldwide car fleet of about 75 percent. By 2050, light-duty vehicles are expected to account for around 15 percent of global liquid fuels demand. During the same time period, nearly all the world’s commercial transportation fleets are expected to continue to run on liquid fuels, including biofuels, which are widely available and offer practical advantages in providing a large quantity of energy in small volumes. Liquid fuels provide the largest share of global energy supplies today reflecting broad-based availability, affordability, ease of transportation, and fitness as a practical solution to meet a wide variety of needs. By 2050, global demand for liquid fuels is projected to grow to approximately 114 million barrels of oil equivalent per day, an increase of about 14 percent from 2019. The non-OECD share of global liquid fuels demand is expected to increase to nearly 70 percent by 2050, as liquid fuels demand in the OECD is expected to decline by more than 20 percent. Much of the global liquid fuels demand today is met by crude production from traditional conventional sources; these supplies will remain important, and significant development activity is expected to offset much of the natural declines from these fields. At the same time, a variety of emerging supply sources - including tight oil, deepwater, oil sands, natural gas liquids and biofuels - are expected to grow to help meet rising demand. The world’s resource base is sufficient to meet projected demand through 2050 as technology advances continue to expand the availability of economic and lower-carbon supply options. However, timely investments will remain critical to meeting global needs with reliable and affordable supplies. Natural gas is a lower-emission, versatile and practical fuel for a wide variety of applications, and it is expected to grow the most of any primary energy type from 2019 to 2050, meeting about 55 percent of global energy demand growth. Global natural gas demand is expected to rise nearly 35 percent from 2019 to 2050, with more than half of that increase coming from the Asia Pacific region. Significant growth in supplies of unconventional gas - the natural gas found in shale and other tight rock formations - will help meet these needs. In total, about 50 percent of the growth in natural gas supplies is expected to be from unconventional sources. At the same time, conventionally-produced natural gas is likely to remain the cornerstone of global supply, meeting more than two-thirds of worldwide demand in 2050. Liquefied natural gas (LNG) trade will expand significantly, meeting about 40 percent of the increase in global demand growth, with much of this supply expected to help meet rising demand in Asia Pacific. The world’s energy mix is highly diverse and will remain so through 2050. Oil is expected to remain the largest source of energy with its share remaining close to 30 percent in 2050. Coal is currently the second largest source of energy, but it is expected to lose that position to natural gas in the next few years. The share of natural gas is expected to reach more than 25 percent by 2050, while the share of coal falls to about half that of natural gas. Nuclear power is projected to grow significantly, as many nations are likely to expand nuclear capacity to address rising electricity needs as well as energy security and environmental issues. Total renewable energy is expected to exceed 20 percent of global energy by 2050, with biomass, hydro and geothermal contributing a combined share of more than 10 percent. Total energy supplied from wind, solar and biofuels is expected to increase rapidly, growing over 420 percent from 2019 to 2050, when they are projected to be about 10 percent of the world energy mix. To meet this projected demand under our Outlook, the Corporation anticipates that the world’s available oil and gas resource base will grow not only from new discoveries, but also from increases in previously discovered fields. Technology will underpin these increases. The investments to develop and supply resources to meet global demand through 2050 will be significant. This reflects a fundamental aspect of the oil and natural gas business as the International Energy Agency (IEA) describes in its World Energy Outlook 2021. International accords and underlying regional and national regulations covering greenhouse gas emissions continue to evolve with uncertain timing and outcome, making it difficult to predict their business impact. For many years, the Corporation has taken into account policies established to reduce energy-related greenhouse gas emissions in its long-term Energy Outlook. The climate accord reached at the Conference of the Parties (COP 21) in Paris set many new goals, and many related policies are still emerging. Our Energy Outlook reflects an environment with increasingly stringent climate policies and is consistent with the global aggregation of Nationally Determined Contributions (NDCs), as available at the end of 2020, which were submitted by signatories to the United Nations Framework Convention on Climate Change (UNFCCC) 2015 Paris Agreement. Our Energy Outlook seeks to identify potential impacts of climate-related policies, which often target specific sectors. It estimates potential impacts of these policies on consumer energy demand by using various assumptions and tools - including, depending on the sector, and, as applicable, use of a proxy cost of carbon or assessment of targeted policies (e.g. automotive fuel economy standards). For purposes of the Energy Outlook, a proxy cost on energy-related CO2 emissions is assumed to reach about $100 per metric ton in 2050 in OECD nations. China and other leading non-OECD nations are expected to trail OECD policy initiatives. Nevertheless, as people and nations look for ways to reduce risks of global climate change, they will continue to need practical solutions that do not jeopardize the affordability or reliability of the energy they need. The Corporation continues to monitor the updates to the NDCs that nations provided around COP 26 in Glasgow in November 2021 as well as other policy developments in light of net-zero ambitions recently formulated by some nations. 44 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information provided in the Outlook includes ExxonMobil’s internal estimates and projections based upon internal data and analyses as well as publicly available information from external sources including the International Energy Agency. Leading the Drive to Net Zero The company plans to play a leading role in the energy transition by leveraging its core capabilities to meet society’s needs for products essential for modern life, while addressing the challenge of climate change. The Corporation announced its ambition to achieve net-zero emissions from its operated assets by 2050 (Scope 1 and 2 greenhouse gas emissions) and is taking a comprehensive approach centered on developing detailed emission-reduction roadmaps for major operated assets. The company’s roadmap approach identifies greenhouse gas emission-reduction opportunities and the investment and future policy needs required to achieve net-zero. The roadmaps are tailored to account for facility configuration and maintenance schedules, and they will be updated as technologies and policies evolve. Net-zero roadmaps for major assets, covering about 90% of the company’s greenhouse gas emissions, are scheduled to be completed by year-end 2022, and the remainder in 2023. Our strategy uses our advantages in scale, integration, technology and people to build globally competitive businesses that lead industry in earnings and cash flow growth across a broad range of scenarios. The company’s plans to reduce greenhouse gas emissions through 2030 compared to 2016 levels support its net-zero ambition. The plans are expected to result in a 20-30% reduction in corporate-wide greenhouse gas intensity, including reductions of 40-50% in upstream intensity, 70-80% in methane intensity and 60-70% in flaring intensity. These plans include actions that are expected to reduce absolute corporate-wide greenhouse gas emissions by approximately 20%, including an estimated 70% reduction in methane emissions, 60% reduction in flaring emissions and 30% reduction in upstream emissions. ExxonMobil established its Low Carbon Solutions business in early 2021, leveraging its unique combination of capabilities such as geophysics expertise and complex project management, to establish a new business in carbon capture and storage, hydrogen, and biofuels to accelerate emission reductions for customers and in its existing businesses. The Corporation plans to invest in initiatives to lower greenhouse gas emissions. A significant focus is on scaling up carbon capture and storage, hydrogen, and biofuels. Stronger policy further accelerates development and deployment of lower-emission technologies, and would provide ExxonMobil additional investment opportunities to reduce greenhouse gas emissions. The company's robust research and development process, continued evaluation of emerging technologies, and global collaborations will be key to identifying and growing lower-emission opportunities. During the start-up phase, the Low Carbon Solutions business will be reflected in Corporate and Financing. Recent Business Environment In early 2020, the balance of supply and demand for petroleum and petrochemical products experienced two significant disruptive effects. On the demand side, the COVID-19 pandemic spread rapidly through most areas of the world resulting in substantial reductions in consumer and business activity and significantly reduced demand for crude oil, natural gas, and petroleum products. This reduction in demand coincided with announcements of increased production in certain key oil-producing countries which led to increases in inventory levels and sharp declines in prices for crude oil, natural gas, and petroleum products. Demand for petroleum and petrochemical products has continued to recover through 2021, with the Corporation's financial results benefiting from stronger prices and margins, notably prices for crude oil and natural gas as well as Chemical product margins. The rate and pace of recovery, however, has varied across geographies and business lines, with Downstream margins only reaching the lower end of the 10-year range late in 2021 and jet demand continuing to lag. The Corporation continues to closely monitor industry and economic conditions amid this uneven global recovery from the COVID-19 pandemic which has brought unprecedented uncertainties to near-term economic outlooks. The general rate of inflation across major countries of operation experienced a brief decline in the initial stage of the COVID-19 pandemic. However inflation rates increased in 2021 across major economies, with some regions experiencing multi-decade highs, largely reflecting overall imbalances between supply and demand recoveries from the pandemic. The underlying factors include, but are not limited to, global supply chain disruptions, shipping bottlenecks, labor market constraints, and side effects from monetary and fiscal expansions. The global economic recovery remains uneven, with uncertainties remaining. Prices for services and materials continue to evolve in response to fast-changing commodity markets, industry activities, as well as government policies, impacting operating and capital costs. The Corporation closely monitors market trends and works to mitigate cost impacts in all price environments through its economies of scale in global procurement, efficient project management practices, and general productivity improvements. Organizational changes implemented over the past several years enabled the Corporation to realize nearly $5 billion of structural cost savings1 versus 2019, leveraging increased operational efficiencies and reduced overhead costs. Included in these savings is the completion of the workforce reduction programs, announced in late 2020 and early 2021, which are estimated to generate savings of approximately $2 billion per year compared to 2019 from lower employee and contractor costs. The company continues to take actions to streamline its business structure to improve effectiveness and reduce costs. The changes more fully leverage global functional capabilities, improve line of sight to markets, and enhance resource allocation to the highest corporate priorities. (1) Refer to Frequently Used Terms for definition of structural cost savings. 45 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BUSINESS RESULTS Upstream ExxonMobil continues to sustain a diverse growth portfolio of exploration and development opportunities, which enables the Corporation to be selective, maximizing shareholder value and mitigating political and technical risks. ExxonMobil’s fundamental strategies guide our global Upstream business, including capturing material and accretive opportunities to continually high-grade the resource portfolio, selectively developing attractive oil and natural gas resources, developing and applying high-impact technologies, and pursuing productivity and efficiency gains as well as a reduction in greenhouse gas emissions. These strategies are underpinned by a relentless focus on operational excellence, development of our employees, and investment in the communities within which we operate. As future development projects and drilling activities bring new production online, the Corporation expects a shift in the geographic mix and in the type of opportunities from which volumes are produced. Based on current investment plans, the proportion of oil-equivalent production from the Americas is generally expected to increase over the next several years. About half of the Corporation's global production comes from unconventional, deepwater and LNG resources. This proportion is generally expected to grow over the next few years. The Upstream capital program continues to prioritize low cost-of-supply opportunities. In addition to continued development of Guyana, Brazil, and the Permian Basin, ExxonMobil has a strong pipeline of development projects. Most notable are our LNG developments in Mozambique, Papua New Guinea, and the Golden Pass LNG facility. The Corporation anticipates several projects will come online over the next few years providing additional production capacity. However, actual volumes will vary from year to year due to the timing of individual project start-ups; operational outages; reservoir performance; performance of enhanced oil recovery projects; regulatory changes; the impact of fiscal and commercial terms; asset sales; weather events; price effects on production sharing contracts; changes in the amount and timing of capital investments that may vary depending on the oil and gas price environment; international trade patterns and relations; and other factors described in Item 1A. Risk Factors. ExxonMobil believes prices over the long term will continue to be driven by market supply and demand, with the demand side largely being a function of general economic activities, alternative energy sources, levels of prosperity, technology advances, consumer preference and government policies. On the supply side, prices may be significantly impacted by political events, the actions of OPEC and other large government resource owners, and other factors. To manage the risks associated with price, ExxonMobil tests the resiliency of its annual plans and major investments across a range of price scenarios. Key Recent Events Significant progress was made on key new developments in Guyana, Brazil, the Permian Basin, and Mozambique during 2021. Guyana: Exploration success continued with additional discoveries increasing the estimated recoverable resource on the Stabroek block. The Liza Unity floating production, storage and offloading vessel arrived in Guyanese waters in late 2021 and started production in February 2022. In Payara, the third project, development drilling activities started in late 2021 and it remains on schedule for 2024 start-up. Yellowtail is the fourth and largest world-class development project and is expected to achieve first oil in 2025, following issuance of the production license. Permian: Production volumes averaged about 460 thousand oil-equivalent barrels per day (koebd) in 2021, nearly 100 koebd year-on-year production increase which exceeded expectations. The Corporation was successful in increasing drilling performance and continuing to improve capital efficiency. In December, ExxonMobil announced plans to achieve net-zero greenhouse gas emissions (Scope 1 and 2) by 2030 from our unconventional operations in the Permian Basin. Brazil: ExxonMobil announced its Final Investment Decision for the Bacalhau Phase 1 development in June 2021 with start-up planned for 2024. Mozambique: The Area 4 Coral South Floating LNG (FLNG) development continues as planned, targeting start-up in 2022, making Mozambique an LNG exporter. The Coral Sul FLNG vessel began tow to field in November 2021. 46 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Upstream Financial Results [[GREPCENT_TABLE]] [["","2021","","2020","","2019"],["","(millions of dollars)"],["Earnings (loss) (U.S. GAAP)"],["United States","3,663","","","(19,385)","","","536"],["Non-U.S.","12,112","","","(645)","","","13,906"],["Total","15,775","","","(20,030)","","","14,442"],["Identified Items (1)"],["United States","(263)","","","(17,092)","","","\u2014"],["Non-U.S.","(280)","","","(2,602)","","","4,434"],["Total","(543)","","","(19,694)","","","4,434"],["Earnings (loss) excluding Identified Items (1)"],["United States","3,926","","","(2,293)","","","536"],["Non-U.S.","12,392","","","1,957","","","9,472"],["Total","16,318","","","(336)","","","10,008"]] [[/GREPCENT_TABLE]] 2021 Upstream Earnings Factor Analysis (millions of dollars) Price – Higher realizations increased earnings by $14,960 million. Volume – Unfavorable volume and mix effects decreased earnings by $340 million. Other – All other items increased earnings by $2,040 million, primarily driven by lower expenses of $1,360 million and one-time favorable tax items. Identified Items (1) – 2020 $(19,694) million loss primarily impairments of dry gas assets; 2021 $(543) million loss as a result of impairments of $(752) million and contractual provisions of $(250) million, partly offset by a $459 million gain from the U.K. Central and Northern North Sea divestment. (1) Refer to Frequently Used Terms for definition of Identified Items and earnings (loss) excluding Identified Items. 47 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 2020 Upstream Earnings Factor Analysis (millions of dollars) Price – Lower realizations reduced earnings by $11,210 million. Volume – Unfavorable volume and mix effects decreased earnings by $300 million. Other – All other items increased earnings by $1,170 million, primarily driven by lower expenses of $960 million. Identified Items (1) – 2019 $4,434 million gain primarily the $3,700 million gain from the Norway non-operated divestment; 2020 $(19,694) million loss primarily impairments of dry gas assets. (1) Refer to Frequently Used Terms for definition of Identified Items and earnings (loss) excluding Identified Items. Upstream Operational Results [[GREPCENT_TABLE]] [["","","2021","","2020","","2019"],["Production of crude oil, natural gas liquids, bitumen and synthetic oil"],["Net production","","(thousands of barrels daily)"],["United States","","721","","685","","646"],["Canada/Other Americas","","560","","536","","467"],["Europe","","22","","30","","108"],["Africa","","248","","312","","372"],["Asia","","695","","742","","748"],["Australia/Oceania","","43","","44","","45"],["Worldwide","","2,289","","2,349","","2,386"],["Natural gas production available for sale"],["Net production","","(millions of cubic feet daily)"],["United States","","2,746","","2,691","","2,778"],["Canada/Other Americas","","195","","277","","258"],["Europe","","808","","789","","1,457"],["Africa","","43","","9","","7"],["Asia","","3,465","","3,486","","3,575"],["Australia/Oceania","","1,280","","1,219","","1,319"],["Worldwide","","8,537","","8,471","","9,394"],["","","(thousands of oil-equivalent barrels daily)"],["Oil-equivalent production (2)","","3,712","","3,761","","3,952"],["(2) Natural gas is converted to an oil-equivalent basis at six million cubic feet per one thousand barrels."]] [[/GREPCENT_TABLE]] 48 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 2021 Liquids production – 2.3 million barrels per day decreased 60 thousand barrels per day reflecting higher demand and growth, more than offset by entitlements, decline, and divestments. Natural gas production available for sale – 8.5 billion cubic feet per day increased 66 million cubic feet per day from 2020, reflecting higher demand, partly offset by divestments and Groningen production limit. 2020 Liquids production – 2.3 million barrels per day decreased 37 thousand barrels per day reflecting the impacts of government mandates, divestments, and lower demand, partly offset by growth and lower downtime. Natural gas production available for sale – 8.5 billion cubic feet per day decreased 923 million cubic feet per day from 2019, reflecting divestments, lower demand, and higher downtime, partly offset by growth. [[GREPCENT_TABLE]] [["Upstream Additional Information"],["","2021","","2020"],["","(thousands of barrels daily)"],["Volumes Reconciliation (Oil-equivalent production) (1)"],["Prior Year","3,761","","","3,952"],["Entitlements - Net Interest","(1)","","","(9)"],["Entitlements - Price / Spend / Other","(97)","","","67"],["Government Mandates","8","","","(110)"],["Divestments","(24)","","","(151)"],["Demand / Growth / Other","65","","","12"],["Current Year","3,712","","","3,761"],["(1) Natural gas is converted to an oil-equivalent basis at six million cubic feet per one thousand barrels."]] [[/GREPCENT_TABLE]] Listed below are descriptions of ExxonMobil’s volumes reconciliation factors which are provided to facilitate understanding of the terms. Entitlements - Net Interest are changes to ExxonMobil’s share of production volumes caused by non-operational changes to volume-determining factors. These factors consist of net interest changes specified in Production Sharing Contracts (PSCs) which typically occur when cumulative investment returns or production volumes achieve defined thresholds, changes in equity upon achieving pay-out in partner investment carry situations, equity redeterminations as specified in venture agreements, or as a result of the termination or expiry of a concession. Once a net interest change has occurred, it typically will not be reversed by subsequent events, such as lower crude oil prices.  Entitlements - Price, Spend and Other are changes to ExxonMobil’s share of production volumes resulting from temporary changes to non-operational volume-determining factors. These factors include changes in oil and gas prices or spending levels from one period to another. According to the terms of contractual arrangements or government royalty regimes, price or spending variability can increase or decrease royalty burdens and/or volumes attributable to ExxonMobil. For example, at higher prices, fewer barrels are required for ExxonMobil to recover its costs. These effects generally vary from period to period with field spending patterns or market prices for oil and natural gas. Such factors can also include other temporary changes in net interest as dictated by specific provisions in production agreements.  Government Mandates are changes to ExxonMobil's sustainable production levels due to temporary non-operational production limits imposed by governments, generally upon a sector, type or method of production. Divestments are reductions in ExxonMobil’s production arising from commercial arrangements to fully or partially reduce equity in a field or asset in exchange for financial or other economic consideration.  Demand, Growth and Other factors comprise all other operational and non-operational factors not covered by the above definitions that may affect volumes attributable to ExxonMobil. Such factors include, but are not limited to, production enhancements from project and work program activities, acquisitions including additions from asset exchanges, downtime, market demand, natural field decline, and any fiscal or commercial terms that do not affect entitlements.  49 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Downstream ExxonMobil’s Downstream continues to be one of the largest, most integrated businesses among international oil companies (IOC), with significant positions across the full value chain including logistics, trading, refining, and marketing. The Corporation has a well-established presence in the Americas, Europe, and Asia Pacific. Downstream strategies competitively position the business across a range of market conditions. These strategies focus on providing high-value and lower-emission products that customers need to power global mobility; leveraging strong operations performance; capitalizing on integration across all ExxonMobil businesses; maximizing value from advantaged technology and a robust pipeline of lower-emission opportunities; and improving portfolio competitiveness and resilience with advantaged investments and divestments. With its large manufacturing footprint, ExxonMobil’s Downstream earnings are closely tied to industry refining margins. Refining margins improved steadily throughout 2021, recovering from historic lows in 2020 driven by COVID-19 pandemic demand impacts. By the end of 2021, refining margins had recovered to the bottom of the 10-year historical band from 2010 to 2019. Demand for gasoline and diesel had essentially recovered to normal levels by the end of 2021, while jet fuel demand remained below historical levels reflecting continued COVID-19 restrictions. Refining margins are anticipated to further improve in the near term as the recovery in international travel increases demand for jet fuel, and strong chemical demand persists for products essential to modern life. With improving market conditions, we restarted projects in Beaumont, Texas and Singapore to further strengthen the portfolio by increasing production of high-value fuels and lubricants. Refining margins are largely driven by differences in commodity prices and are a function of the difference between what a refinery pays for its raw materials and the market prices for the range of products produced. Crude oil and many products are widely traded with published prices, including those quoted on multiple exchanges around the world (e.g. New York Mercantile Exchange and Intercontinental Exchange). Prices for these commodities are determined by the global marketplace and are influenced by many factors, including global and regional supply/demand balances, inventory levels, industry refinery operations, import/export balances, currency fluctuations, seasonal demand, weather, and political climate. ExxonMobil’s outlook is that industry refining margins will remain volatile subject to shifting consumer demand as well as capacity changes from refinery additions and closures. ExxonMobil’s significant integration both within the Downstream value chains including lubricants, logistics, trading, refining, and marketing, as well as with Upstream and Chemical, improves our ability to generate shareholder value in a variety of market conditions. ExxonMobil continues to grow fuels product sales in new markets near major production assets with continued progress in the Mexico and Indonesia markets. Similarly, the lubricants business continues to grow, especially in Asia Pacific and the industrial sector, leveraging world class brands and integration with basestocks refining capability. Through the Mobil brands, such as Mobil 1, ExxonMobil is the worldwide leader in synthetic motor oils. The Downstream business is characterized by periods of margin volatility resulting from short-term and long-term supply and demand fluctuations. Proposed carbon policy and other climate-related regulations in many countries have the potential to increase industry volatility, both favorably and unfavorably. ExxonMobil continually evaluates the Downstream portfolio during all phases of the business cycle, which has resulted in numerous asset divestments and terminal conversions over the past decade to strengthen overall profitability and resiliency. When investing in the Downstream, ExxonMobil remains focused on projects resilient across a broad range of market conditions to support capturing value when opportunities emerge. Key Recent Events Lower-emission fuels: ExxonMobil announced plans for more than 40 thousand barrels per day of lower-emission fuels by 2025, including a new renewable diesel unit at the Strathcona refinery, and purchase agreements with Global Clean Energy in the U.S. and Biojet AS in Norway. Terminal conversions: ExxonMobil converted the Slagen, Norway and Altona, Australia refineries into product import terminals capable of serving existing markets. Additionally, Refining New Zealand announced conversion of its refinery (in which ExxonMobil owns a 17% minority share) to a product import terminal in 2022. 50 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Downstream Financial Results [[GREPCENT_TABLE]] [["","2021","","2020","","2019"],["","(millions of dollars)"],["Earnings (loss) (U.S. GAAP)"],["United States","1,314","","","(852)","","","1,717"],["Non-U.S.","791","","","(225)","","","606"],["Total","2,105","","","(1,077)","","","2,323"],["Identified Items (1)"],["United States","4","","","(4)","","","\u2014"],["Non-U.S.","\u2014","","","(855)","","","(9)"],["Total","4","","","(859)","","","(9)"],["Earnings (loss) excluding Identified Items (1)"],["United States","1,310","","","(848)","","","1,717"],["Non-U.S.","791","","","630","","","615"],["Total","2,101","","","(218)","","","2,332"]] [[/GREPCENT_TABLE]] 2021 Downstream Earnings Factor Analysis (millions of dollars) Margins – Increased earnings by $1,920 million as industry refining conditions improved. Volume – Increased earnings by $100 million reflecting demand recovery and favorable mix. Other – Increased earnings by $300 million due to lower expenses of $560 million, partly offset by unfavorable foreign exchange and LIFO impacts. Identified Items (1) – 2020 $(859) million loss primarily as a result of impairments and unfavorable tax items. (1) Refer to Frequently Used Terms for definition of Identified Items and earnings (loss) excluding Identified Items. 51 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 2020 Downstream Earnings Factor Analysis (millions of dollars) Margins – Decreased earnings by $3,820 million including the impact of weaker industry refining conditions. Volume – Increased earnings by $370 million as manufacturing/yield improvement impacts were partly offset by weaker demand. Other – Increased earnings by $900 million due to lower expenses of $1,290 million, partly offset by unfavorable LIFO inventory impacts of $410 million. Identified Items (1) – 2020 $(859) million loss primarily as a result of impairments and unfavorable tax items. (1) Refer to Frequently Used Terms for definition of Identified Items and earnings (loss) excluding Identified Items. Downstream Operational Results [[GREPCENT_TABLE]] [["","","2021","","2020","","2019"],["Refinery throughput","","(thousands of barrels daily)"],["United States","","1,623","","1,549","","1,532"],["Canada","","379","","340","","353"],["Europe","","1,210","","1,173","","1,317"],["Asia Pacific","","571","","553","","598"],["Other","","162","","158","","181"],["Worldwide","","3,945","","3,773","","3,981"],["Petroleum product sales (2)"],["United States","","2,257","","2,154","","2,292"],["Canada","","448","","418","","476"],["Europe","","1,340","","1,253","","1,479"],["Asia Pacific","","653","","651","","738"],["Other","","464","","419","","467"],["Worldwide","","5,162","","4,895","","5,452"],["Gasoline, naphthas","","2,158","","1,994","","2,220"],["Heating oils, kerosene, diesel oils","","1,749","","1,751","","1,867"],["Aviation fuels","","220","","213","","406"],["Heavy fuels","","269","","249","","270"],["Specialty petroleum products","","766","","688","","689"],["Worldwide","","5,162","","4,895","","5,452"],["(2) Data reported net of purchases/sales contracts with the same counterparty."]] [[/GREPCENT_TABLE]] 52 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Chemical ExxonMobil is a leading global manufacturer and marketer of petrochemicals that support modern living. ExxonMobil helps meet society’s evolving needs by providing a wide range of innovative, valuable product solutions in an efficient and responsible manner. This is enabled by ExxonMobil’s proprietary technology combined with industry-leading scale and integration. These competitive advantages are underpinned by operational excellence, advantaged investments, and cost discipline. In 2021, while many markets continued to be negatively impacted by COVID-19, demand for chemical products remained resilient in several key segments including food packaging, hygiene and medical. Overall chemical industry margins improved compared to 2020 due to continued strong packaging demand and industry supply disruptions. We were uniquely positioned to capture value from the market in 2021 due to our integration, enabling nimble feed and product optimization, and our advantaged global supply and logistics. These, along with our outstanding reliability performance and continued structural cost savings, delivered record annual earnings. Worldwide demand for chemicals is expected to grow faster than the economy as a whole, driven by global population growth, an expanding middle class, and improving living standards. ExxonMobil’s integration with refining, together with our high-value performance products and unique project execution capability, enhances our ability to generate returns on investments across a range of market environments. In 2021, ExxonMobil completed construction of our joint venture ethane cracker and associated derivative units near Corpus Christi, Texas. The project started up in late 2021 below budget and ahead of schedule. With improving market conditions, we also restarted other U.S. Gulf Coast growth projects, including projects in Baytown, Texas and Baton Rouge, Louisiana that will support the growing demand for high-value chemicals products. Key Recent Events China investment: ExxonMobil reached final investment decision to proceed with a multi-billion dollar chemical complex in the Dayawan Petrochemical Industrial Park in Huizhou, Guangdong Province in China. The facility will help meet expected demand growth for performance chemical products in China. Advanced recycling: The Corporation is progressing construction of one of North America’s largest plastic waste advanced recycling facilities in Baytown, Texas, which is expected to start operations in 2022. In addition, plans are underway for up to 500,000 metric tons annually of advanced recycling capacity to be added across multiple sites by 2026. These investments enabled commercial volumes of certified circular polymers to be made available to the market in 2021. Materia acquisition: ExxonMobil acquired Materia, Inc., a technology company that has pioneered the development of a Nobel prize-winning technology for manufacturing a new class of materials. The innovative materials can be used in a number of applications, including wind turbine blades, electric vehicle parts, sustainable construction, and anticorrosive coatings. Santoprene divestment: ExxonMobil Chemical Company sold its global Santoprene business to Celanese. The sale included two manufacturing sites, one in the United States and one in the United Kingdom. Chemical Financial Results [[GREPCENT_TABLE]] [["","2021","","2020","","2019"],["","(millions of dollars)"],["Earnings (loss) (U.S. GAAP)"],["United States","4,502","","","1,277","","","206"],["Non-U.S.","3,294","","","686","","","386"],["Total","7,796","","","1,963","","","592"],["Identified Items (1)"],["United States","494","","","(90)","","","\u2014"],["Non-U.S.","136","","","(24)","","","2"],["Total","630","","","(114)","","","2"],["Earnings (loss) excluding Identified Items (1)"],["United States","4,008","","","1,367","","","206"],["Non-U.S.","3,158","","","710","","","384"],["Total","7,166","","","2,077","","","590"]] [[/GREPCENT_TABLE]] (1) Refer to Frequently Used Terms for definition of Identified Items and earnings (loss) excluding Identified Items. 53 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 2021 Chemical Earnings Factor Analysis (millions of dollars) Margins – Stronger margins increased earnings by $4,480 million driven by resilient demand and industry supply constraints. Volume – Higher volumes increased earnings by $250 million on record production supported by exceptional reliability. Other – All other items increased earnings by $360 million primarily as a result of favorable foreign exchange, lower expenses, and favorable LIFO impacts. Identified Items (1) – 2020 $(114) million loss primarily as a result of impairments; 2021 $630 million gain as a result of the Santoprene divestment. 2020 Chemical Earnings Factor Analysis (millions of dollars) Margins – Stronger margins increased earnings by $930 million. Volume – Lower volumes decreased earnings by $150 million. Other – All other items increased earnings by $710 million primarily as a result of lower expenses. Identified Items (1) – 2020 $(114) million loss primarily as a result of impairments. (1) Refer to Frequently Used Terms for definition of Identified Items and earnings (loss) excluding Identified Items. Chemical Operational Results [[GREPCENT_TABLE]] [["","","2021","","2020","","2019"],["Chemical prime product sales (2)","","(thousands of metric tons)"],["United States","","9,724","","9,010","","9,127"],["Non-U.S.","","16,608","","16,439","","17,389"],["Worldwide","","26,332","","","25,449","","","26,516"],["(2) Data reported net of purchases/sales contracts with the same counterparty."]] [[/GREPCENT_TABLE]] 54 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Corporate and Financing Corporate and Financing is comprised of corporate activities that support the Corporation’s operating segments and ExxonMobil’s Low Carbon Solutions business. Corporate activities include general administrative support functions, financing and insurance activities. Low Carbon Solutions activities are included in Corporate and Financing as the business continues to mature through commercialization and deployment of technology. Corporate and Financing Financial Results [[GREPCENT_TABLE]] [["","2021","","2020","","2019"],["","(millions of dollars)"],["Earnings (loss) (U.S. GAAP)","(2,636)","","","(3,296)","","","(3,017)"],["Identified Items (1)","(64)","","","(361)","","","308"],["Earnings (loss) excluding Identified Items (1)","(2,572)","","","(2,935)","","","(3,325)"],["(1) Refer to Frequently Used Terms for definition of Identified Items and earnings (loss) excluding Identified Items."]] [[/GREPCENT_TABLE]] 2021 Corporate and Financing expenses were $2,636 million in 2021 compared to $3,296 million in 2020, with the decrease mainly due to the absence of prior year severance costs and lower financing costs. 2020 Corporate and Financing expenses were $3,296 million in 2020 compared to $3,017 million in 2019, with the increase mainly due to higher financing costs and employee severance costs, partly offset by lower corporate costs. 55 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS [[GREPCENT_TABLE]] [["LIQUIDITY AND CAPITAL RESOURCES"],["Sources and Uses of Cash"],["","2021","","2020","","2019"],["","(millions of dollars)"],["Net cash provided by/(used in)"],["Operating activities","48,129","","","14,668","","","29,716"],["Investing activities","(10,235)","","","(18,459)","","","(23,084)"],["Financing activities","(35,423)","","","5,285","","","(6,618)"],["Effect of exchange rate changes","(33)","","","(219)","","","33"],["Increase/(decrease) in cash and cash equivalents","2,438","","","1,275","","","47"],["","(December 31)"],["Total cash and cash equivalents","6,802","","","4,364","","","3,089"]] [[/GREPCENT_TABLE]] Total cash and cash equivalents were $6.8 billion at the end of 2021, up $2.4 billion from the prior year. The major sources of funds in 2021 were net income including noncontrolling interests of $23.6 billion, the adjustment for the noncash provision of $20.6 billion for depreciation and depletion, contributions from operational working capital of $4.2 billion, proceeds from asset sales of $3.2 billion, and other investing activities of $1.5 billion. The major uses of funds included a debt reduction of $19.7 billion, spending for additions to property, plant and equipment of $12.1 billion, dividends to shareholders of $14.9 billion, and additional investments and advances of $2.8 billion. Total cash and cash equivalents were $4.4 billion at the end of 2020, up $1.3 billion from the prior year. The major sources of funds in 2020 were the adjustment for the noncash provision of $46.0 billion, a net debt increase of $20.1 billion, proceeds from asset sales of $1.0 billion, and other investing activities of $2.7 billion. The major uses of funds included a net loss including noncontrolling interests of $23.3 billion, spending for additions to property, plant and equipment of $17.3 billion, dividends to shareholders of $14.9 billion, and additional investments and advances of $4.9 billion. The Corporation has access to significant capacity of long-term and short-term liquidity. In addition to cash balances, commercial paper continues to provide short-term liquidity, and is reflected in “Notes and loans payable” on the Consolidated Balance Sheet with changes in outstanding commercial paper between periods included in the Consolidated Statement of Cash Flows. The Corporation took steps to strengthen its balance sheet in 2021, reducing debt by nearly $20 billion and ending the year with $47.7 billion in total debt. On December 31, 2021, the Corporation had undrawn short-term committed lines of credit of $10.7 billion and undrawn long-term lines of credit of $0.6 billion. To support cash flows in future periods, the Corporation will need to continually find or acquire and develop new fields, and continue to develop and apply new technologies and recovery processes to existing fields, in order to maintain or increase production. After a period of production at plateau rates, it is the nature of oil and gas fields to eventually produce at declining rates for the remainder of their economic life. Decline rates can vary widely by individual field due to a number of factors, including, but not limited to, the type of reservoir, fluid properties, recovery mechanisms, work activity, and age of the field. In particular, the Corporation’s key tight-oil plays have higher initial decline rates which tend to moderate over time. Furthermore, the Corporation’s net interest in production for individual fields can vary with price and the impact of fiscal and commercial terms. The Corporation has long been successful at mitigating the effects of natural field decline through disciplined investments in quality opportunities and project execution. The Corporation anticipates several projects will come online over the next few years providing additional production capacity. However, actual volumes will vary from year to year due to the timing of individual project start-ups; operational outages; reservoir performance; performance of enhanced oil recovery projects; regulatory changes; the impact of fiscal and commercial terms; asset sales; weather events; price effects on production sharing contracts; and changes in the amount and timing of investments that may vary depending on the oil and gas price environment. The Corporation’s cash flows are also highly dependent on crude oil and natural gas prices. Please refer to Item 1A. Risk Factors for a more complete discussion of risks. The Corporation’s financial strength enables it to make large, long-term capital expenditures. Capital and exploration expenditures in 2021 were $16.6 billion, reflecting the Corporation’s continued active investment program. The Corporation plans to invest in the range of $21 billion to $24 billion in 2022. 56 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Actual spending could vary depending on the progress of individual projects and property acquisitions. The Corporation has a large and diverse portfolio of development projects and exploration opportunities, which helps mitigate the overall political and technical risks of the Corporation’s Upstream segment and associated cash flow. Further, due to its financial strength and diverse portfolio of opportunities, the risk associated with failure or delay of any single project would not have a significant impact on the Corporation’s liquidity or ability to generate sufficient cash flows for operations and its fixed commitments. The Corporation, as part of its ongoing asset management program, continues to evaluate its mix of assets for potential upgrade. Because of the ongoing nature of this program, dispositions will continue to be made from time to time which will result in either gains or losses. In light of commodity price volatility, and depending on the pace of demand recovery, the Corporation's planned divestment program could be adversely affected by fewer financially suitable buyers. This could result in a slowing of the pace of divestments, certain assets being sold at a price below current book value, or impairment charges if the likelihood of divesting certain assets increases. Additionally, the Corporation continues to evaluate opportunities to enhance its business portfolio through acquisitions of assets or companies, and enters into such transactions from time to time. Key criteria for evaluating acquisitions include potential for future growth and attractive current valuations. Acquisitions may be made with cash, shares of the Corporation’s common stock, or both. ExxonMobil closely monitors the potential impact of Interbank Offered Rate (IBOR) reform, including LIBOR, under a number of scenarios and has taken steps to mitigate the potential impact. Accordingly, ExxonMobil does not believe this event represents a material risk to the Corporation’s consolidated results of operations or financial condition. Cash Flow from Operating Activities 2021 Cash provided by operating activities totaled $48.1 billion in 2021, $33.5 billion higher than 2020. The major source of funds was net income including noncontrolling interests of $23.6 billion, an increase of $46.8 billion. The noncash provision for depreciation and depletion was $20.6 billion, down $25.4 billion from the prior year. The adjustment for the net gain on asset sales was $1.2 billion, an increase of $1.2 billion. The adjustment for dividends received less than equity in current earnings of equity companies was a reduction of $0.7 billion, compared to an increase of $1.0 billion in 2020. Changes in operational working capital, excluding cash and debt, increased cash in 2021 by $4.2 billion. 2020 Cash provided by operating activities totaled $14.7 billion in 2020, $15.0 billion lower than 2019. Net income (loss) including noncontrolling interests was a loss of $23.3 billion, a decrease of $38.0 billion. The noncash provision for depreciation and depletion was $46.0 billion, up $27.0 billion from the prior year, mainly due to asset impairments. The noncash provision for deferred income tax benefits was $8.9 billion and also included impacts from asset impairments. The adjustment for the net loss on asset sales was $4 million, a decrease of $1.7 billion. The adjustment for dividends received less than equity in current earnings of equity companies was an increase of $1.0 billion, compared to a reduction of $0.9 billion in 2019. Changes in operational working capital, excluding cash and debt, decreased cash in 2020 by $1.7 billion. Cash Flow from Investing Activities 2021 Cash used in investing activities netted to $10.2 billion in 2021, $8.2 billion lower than 2020. Spending for property, plant and equipment of $12.1 billion decreased $5.2 billion from 2020. Proceeds from asset sales and returns of investments of $3.2 billion compared to $1.0 billion in 2020. Additional investments and advances were $2.0 billion lower in 2021, while proceeds from other investing activities including collection of advances decreased by $1.2 billion. 2020 Cash used in investing activities netted to $18.5 billion in 2020, $4.6 billion lower than 2019. Spending for property, plant and equipment of $17.3 billion decreased $7.1 billion from 2019. Proceeds from asset sales and returns of investments of $1.0 billion compared to $3.7 billion in 2019. Additional investments and advances were $1.0 billion higher in 2020, while proceeds from other investing activities including collection of advances increased by $1.2 billion. 57 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Cash Flow from Financing Activities 2021 Cash used in financing activities was $35.4 billion in 2021, $40.7 billion higher than 2020. Dividend payments on common shares increased to $3.49 per share from $3.48 per share and totaled $14.9 billion. During 2021, the Corporation utilized cash to reduce debt by $19.7 billion. ExxonMobil share of equity increased $11.4 billion to $168.6 billion. The addition to equity for earnings was $23.0 billion. This was offset by reductions for distributions to ExxonMobil shareholders of $14.9 billion, all in the form of dividends. Foreign exchange translation effects of $0.9 billion for the stronger U.S. dollar reduced equity and a $3.8 billion change in the funded status of the postretirement benefits reserves increased equity. During 2021, Exxon Mobil Corporation suspended its share repurchase program used to offset shares or units settled in shares issued in conjunction with the company’s benefit plans and programs. In 2022, the Corporation initiated a share repurchase program of up to $10 billion over 12 to 24 months. 2020 Cash flow from financing activities was $5.3 billion in 2020, $11.9 billion higher than 2019. Dividend payments on common shares increased to $3.48 per share from $3.43 per share and totaled $14.9 billion. During 2020, the Corporation issued $23.2 billion of long-term debt. Total debt increased $20.7 billion to $67.6 billion at year-end. ExxonMobil share of equity decreased $34.5 billion to $157.2 billion. The reduction to equity for losses was $22.4 billion and the reduction for distributions to ExxonMobil shareholders of $14.9 billion, all in the form of dividends. Foreign exchange translation effects of $1.8 billion for the weaker U.S. dollar and a $1.0 billion change in the funded status of the postretirement benefits reserves increased equity. During 2020, Exxon Mobil Corporation acquired 8 million shares of its common stock for the treasury. Purchases were made to offset shares or units settled in shares issued in conjunction with the company’s benefit plans and programs. Shares outstanding decreased from 4,234 million to 4,233 million at the end of 2020. Contractual Obligations The Corporation has contractual obligations involving commitments to third parties that impact its liquidity and capital resource needs. These contractual obligations are primarily for leases, debt, asset retirement obligations, pension and other postretirement benefits, take-or-pay and unconditional purchase obligations, and firm capital commitments. See Notes 9, 11, 14 and 17 for information related to asset retirement obligations, leases, long-term debt and pensions, respectively. In addition, the Corporation also enters into commodity purchase obligations (volumetric commitments but no fixed or minimum price) which are resold shortly after purchase, either in an active, highly liquid market or under long-term, unconditional sales contracts with similar pricing terms. Examples include long-term, noncancelable LNG and natural gas purchase commitments and commitments to purchase refinery products at market prices. These commitments are not meaningful in assessing liquidity and cash flow, because the purchases will be offset in the same periods by cash received from the related sales transactions. Take-or-pay obligations are noncancelable, long-term commitments for goods and services. Unconditional purchase obligations are those long-term commitments that are noncancelable or cancelable only under certain conditions, and that third parties have used to secure financing for the facilities that will provide the contracted goods or services. These obligations mainly pertain to pipeline, manufacturing supply and terminal agreements. The total obligation at year-end 2021 for take-or-pay and unconditional purchase obligations was $30,031 million. Cash payments expected in 2022 and 2023 are $4,004 million and $3,560 million, respectively. 58 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Guarantees The Corporation and certain of its consolidated subsidiaries were contingently liable at December 31, 2021 for guarantees relating to notes, loans and performance under contracts (Note 16). Where guarantees for environmental remediation and other similar matters do not include a stated cap, the amounts reflect management’s estimate of the maximum potential exposure. These guarantees are not reasonably likely to have a material effect on the Corporation’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. Financial Strength On December 31, 2021, the Corporation had total unused short-term committed lines of credit of $10.7 billion (Note 6) and total unused long-term committed lines of credit of $0.6 billion (Note 14). The table below shows the Corporation’s consolidated debt to capital ratios. [[GREPCENT_TABLE]] [["","2021","","2020","","2019"],["Debt to capital (percent)","21.4","","29.2","","19.1"],["Net debt to capital (percent)","18.9","","27.8","","18.1"]] [[/GREPCENT_TABLE]] Management views the Corporation’s financial strength to be a competitive advantage of strategic importance. The Corporation’s financial position gives it the opportunity to access the world’s capital markets across a range of market conditions, and enables the Corporation to take on large, long-term capital commitments in the pursuit of maximizing shareholder value. Industry conditions in 2020 led to lower realized prices for the Corporation’s products which resulted in substantially lower earnings and operating cash flow in comparison to 2019. The Corporation took steps to strengthen its liquidity in 2020, including issuing $23.2 billion of long-term debt and implementing significant capital and operating cost reductions. The Corporation ended 2020 with $67.6 billion in total debt. Stronger prices and margins improved the Corporation's financial results in 2021. The Corporation reduced debt by $19.9 billion and ended the year with $47.7 billion in total debt. Litigation and Other Contingencies As discussed in Note 16, a variety of claims have been made against ExxonMobil and certain of its consolidated subsidiaries in a number of pending lawsuits. Based on a consideration of all relevant facts and circumstances, the Corporation does not believe the ultimate outcome of any currently pending lawsuit against ExxonMobil will have a material adverse effect upon the Corporation’s operations, financial condition, or financial statements taken as a whole. There are no events or uncertainties beyond those already included in reported financial information that would indicate a material change in future operating results or financial condition. Refer to Note 16 for additional information on legal proceedings and other contingencies. CAPITAL AND EXPLORATION EXPENDITURES Capital and exploration expenditures (Capex) represents the combined total of additions at cost to property, plant and equipment, and exploration expenses on a before-tax basis from the Consolidated Statement of Income. ExxonMobil’s Capex includes its share of similar costs for equity companies. Capex excludes assets acquired in nonmonetary exchanges, the value of ExxonMobil shares used to acquire assets, and depreciation on the cost of exploration support equipment and facilities recorded to property, plant and equipment when acquired. While ExxonMobil’s management is responsible for all investments and elements of net income, particular focus is placed on managing the controllable aspects of this group of expenditures. [[GREPCENT_TABLE]] [["","2021","","2020"],["","U.S.","","Non-U.S.","","Total","","U.S.","","Non-U.S.","","Total"],["","(millions of dollars)"],["Upstream (1)","4,018","","","8,236","","","12,254","","","6,817","","","7,614","","","14,431"],["Downstream","1,000","","","1,095","","","2,095","","","2,344","","","1,877","","","4,221"],["Chemical","1,367","","","876","","","2,243","","","2,002","","","714","","","2,716"],["Other","3","","","\u2014","","","3","","","6","","","\u2014","","","6"],["Total","6,388","","","10,207","","","16,595","","","11,169","","","10,205","","","21,374"]] [[/GREPCENT_TABLE]] (1) Exploration expenses included. 59 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Capex in 2021 was $16.6 billion, as the Corporation continued to pursue opportunities to find and produce new supplies of oil and natural gas to meet global demand for energy. The Corporation plans to invest in the range of $21 billion to $24 billion in 2022. Included in the 2022 capital spend range is $8.3 billion of firm capital commitments. An additional $10.7 billion of firm capital commitments have been made for years 2023 and beyond. Actual spending could vary depending on the progress of individual projects and property acquisitions. Upstream spending of $12.3 billion in 2021 was down 15 percent from 2020, primarily in the U.S. Permian Basin. Investments in 2021 included the U.S. Permian Basin and key development projects in Guyana and Brazil. Development projects typically take several years from the time of recording proved undeveloped reserves to the start of production and can exceed five years for large and complex projects. The percentage of proved developed reserves was 66 percent of total proved reserves at year-end 2021, and has been over 60 percent for the last ten years. Capital investments in the Downstream totaled $2.1 billion in 2021, a decrease of $2.1 billion from 2020, reflecting lower global project spending. Chemical capital expenditures of $2.2 billion, decreased $0.5 billion, representing reduced spend on growth projects. TAXES [[GREPCENT_TABLE]] [["","2021","","2020","","2019"],["","(millions of dollars)"],["Income taxes","7,636","","","(5,632)","","","5,282"],["Effective income tax rate","31","%","","17","%","","34","%"],["Total other taxes and duties","32,955","","","28,425","","","33,186"],["Total","40,591","","","22,793","","","38,468"]] [[/GREPCENT_TABLE]] 2021 Total taxes on the Corporation’s income statement were $40.6 billion in 2021, an increase of $17.8 billion from 2020. Income tax expense, both current and deferred, was $7.6 billion compared to a $5.6 billion benefit in 2020. The effective tax rate, which is calculated based on consolidated company income taxes and ExxonMobil’s share of equity company income taxes, was 31 percent compared to 17 percent in the prior year due primarily to a change in mix of results in jurisdictions with varying tax rates. Total other taxes and duties of $33.0 billion in 2021 increased $4.5 billion. 2020 Total taxes on the Corporation’s income statement were $22.8 billion in 2020, a decrease of $15.7 billion from 2019. Income tax expense, both current and deferred, was a benefit of $5.6 billion compared to $5.3 billion expense in 2019. The relative benefit was driven by asset impairments recorded in 2020. The effective tax rate, which is calculated based on consolidated company income taxes and ExxonMobil’s share of equity company income taxes, was 17 percent compared to 34 percent in the prior year due primarily to a change in mix of results in jurisdictions with varying tax rates. Total other taxes and duties of $28.4 billion in 2020 decreased $4.8 billion. 60 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ENVIRONMENTAL MATTERS Environmental Expenditures [[GREPCENT_TABLE]] [["","2021","","2020"],["","(millions of dollars)"],["Capital expenditures","1,202","","","1,087"],["Other expenditures","3,361","","","3,389"],["Total","4,563","","","4,476"]] [[/GREPCENT_TABLE]] Throughout ExxonMobil’s businesses, new and ongoing measures are taken to prevent and minimize the impact of our operations on air, water and ground. These include a significant investment in refining infrastructure and technology to manufacture clean fuels, as well as projects to monitor and reduce nitrogen oxide, sulfur oxide and greenhouse gas emissions, and expenditures for asset retirement obligations. Using definitions and guidelines established by the American Petroleum Institute, ExxonMobil’s 2021 worldwide environmental expenditures for all such preventative and remediation steps, including ExxonMobil’s share of equity company expenditures, were $4.6 billion, of which $3.4 billion were included in expenses with the remainder in capital expenditures. The total cost for such activities is expected to increase to approximately $5.3 billion in 2022, with capital expenditures expected to account for approximately 30 percent of the total. Costs for 2023 are anticipated to be higher as the Low Carbon Solutions business matures and the Corporation progresses its emission-reduction plans. Environmental Liabilities The Corporation accrues environmental liabilities when it is probable that obligations have been incurred and the amounts can be reasonably estimated. This policy applies to assets or businesses currently owned or previously disposed. ExxonMobil has accrued liabilities for probable environmental remediation obligations at various sites, including multiparty sites where the U.S. Environmental Protection Agency has identified ExxonMobil as one of the potentially responsible parties. The involvement of other financially responsible companies at these multiparty sites could mitigate ExxonMobil’s actual joint and several liability exposure. At present, no individual site is expected to have losses material to ExxonMobil’s operations or financial condition. Consolidated company provisions made in 2021 for environmental liabilities were $146 million ($263 million in 2020) and the balance sheet reflects liabilities of $807 million as of December 31, 2021, and $902 million as of December 31, 2020. MARKET RISKS [[GREPCENT_TABLE]] [["Worldwide Average Realizations (1)","2021","","2020","","2019"],["Crude oil and NGL ($ per barrel)","61.89","","","35.41","","","56.32"],["Natural gas ($ per thousand cubic feet)","4.33","","","2.01","","","3.05"]] [[/GREPCENT_TABLE]] (1) Consolidated subsidiaries. Crude oil, natural gas, petroleum product and chemical prices have fluctuated in response to changing market forces. The impacts of these price fluctuations on earnings from Upstream, Downstream and Chemical operations have varied. For the year 2022, a $1 per barrel change in the weighted-average realized price of oil would have approximately a $500 million annual after-tax effect on Upstream consolidated plus equity company earnings, excluding the impact of derivatives. Similarly, a $0.10 per thousand cubic feet change in the worldwide average gas realization would have approximately a $155 million annual after-tax effect on Upstream consolidated plus equity company earnings, excluding the impact of derivatives. For any given period, the extent of actual benefit or detriment will be dependent on the price movements of individual types of crude oil, results of trading activities, taxes and other government take impacts, price adjustment lags in long-term gas contracts, and crude and gas production volumes. Accordingly, changes in benchmark prices for crude oil and natural gas only provide broad indicators of changes in the earnings experienced in any particular period. In the very competitive downstream and chemical environments, earnings are primarily determined by margin capture rather than absolute price levels of products sold. Refining margins are a function of the difference between what a refiner pays for its raw materials (primarily crude oil) and the market prices for the range of products produced. These prices in turn depend on global and regional supply/demand balances, inventory levels, refinery operations, import/export balances and weather. The global energy markets can give rise to extended periods in which market conditions are adverse to one or more of the Corporation’s businesses. Such conditions, along with the capital-intensive nature of the industry and very long lead times associated with many of our projects, underscore the importance of maintaining a strong financial position. Management views the Corporation’s financial strength as a competitive advantage. 61 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In general, segment results are not dependent on the ability to sell and/or purchase products to/from other segments. Instead, where such sales take place, they are the result of efficiencies and competitive advantages of integrated refinery and chemical complexes. Additionally, intersegment sales are at market-based prices. The products bought and sold between segments can also be acquired in worldwide markets that have substantial liquidity, capacity, and transportation capabilities. Refer to Note 18 for additional information on intersegment revenue. Although price levels of crude oil and natural gas may rise or fall significantly over the short to medium term due to global economic conditions, political events, decisions by OPEC and other major government resource owners and other factors, industry economics over the long term will continue to be driven by market supply and demand. Accordingly, the Corporation evaluates the viability of its major investments over a range of prices. The Corporation has an active asset management program in which underperforming assets are either improved to acceptable levels or considered for divestment. The asset management program includes a disciplined, regular review to ensure that assets are contributing to the Corporation’s strategic objectives. Risk Management The Corporation’s size, strong capital structure, geographic diversity and the complementary nature of the Upstream, Downstream and Chemical businesses reduce the Corporation’s enterprise-wide risk from changes in commodity prices, currency rates and interest rates. In addition, the Corporation uses commodity-based contracts, including derivatives, to manage commodity price risk and to generate returns from trading. The Corporation’s commodity derivatives are not accounted for under hedge accounting. At times, the Corporation also enters into currency and interest rate derivatives, none of which are material to the Corporation’s financial position as of December 31, 2021 and 2020, or results of operations for the years ended 2021, 2020 and 2019. Credit risk associated with the Corporation’s derivative position is mitigated by several factors, including the use of derivative clearing exchanges and the quality of and financial limits placed on derivative counterparties. No material market or credit risks to the Corporation’s financial position, results of operations or liquidity exist as a result of the derivatives described in Note 13. The Corporation maintains a system of controls that includes the authorization, reporting and monitoring of derivative activity. The Corporation is exposed to changes in interest rates, primarily on its short-term debt and the portion of long-term debt that carries floating interest rates. The impact of a 100-basis-point change in interest rates affecting the Corporation’s debt would not be material to earnings or cash flow. The Corporation has access to significant capacity of long-term and short-term liquidity. Internally generated funds are generally expected to cover financial requirements, supplemented by long-term and short-term debt as required. Commercial paper is used to balance short-term liquidity requirements. Some joint-venture partners are dependent on the credit markets, and their funding ability may impact the development pace of joint-venture projects. The Corporation conducts business in many foreign currencies and is subject to exchange rate risk on cash flows related to sales, expenses, financing and investment transactions. Fluctuations in exchange rates are often offsetting and the impacts on ExxonMobil’s geographically and functionally diverse operations are varied. The Corporation makes limited use of currency exchange contracts to mitigate the impact of changes in currency values, and exposures related to the Corporation’s use of these contracts are not material. 62 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CRITICAL ACCOUNTING ESTIMATES The Corporation’s accounting and financial reporting fairly reflect its integrated business model involving exploration for, and production of, crude oil and natural gas; manufacture, trade, transport and sale of crude oil, natural gas, petroleum products, petrochemicals and a wide variety of specialty products; and pursuit of lower-emission business opportunities including carbon capture and storage, hydrogen and biofuels. The preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles (GAAP) requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. The Corporation’s accounting policies are summarized in Note 1. Oil and Natural Gas Reserves The estimation of proved oil and natural gas reserve volumes is an ongoing process based on rigorous technical evaluations, commercial and market assessments and detailed analysis of well information such as flow rates and reservoir pressure declines, development and production costs, and other factors. The estimation of proved reserves is controlled by the Corporation through long-standing approval guidelines. Reserve changes are made within a well-established, disciplined process driven by senior level geoscience and engineering professionals, assisted by the Global Reserves and Resources Group which has significant technical experience, culminating in reviews with and approval by senior management. Notably, the Corporation does not use specific quantitative reserve targets to determine compensation. Key features of the reserve estimation process are covered in Disclosure of Reserves in Item 2. Oil and natural gas reserves include both proved and unproved reserves. •Proved oil and natural gas reserves are determined in accordance with Securities and Exchange Commission (SEC) requirements. Proved reserves are those quantities of oil and natural gas which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible under existing economic and operating conditions and government regulations. Proved reserves are determined using the average of first-of-month oil and natural gas prices during the reporting year. Proved reserves can be further subdivided into developed and undeveloped reserves. Proved developed reserves include amounts which are expected to be recovered through existing wells with existing equipment and operating methods. Proved undeveloped reserves include amounts expected to be recovered from new wells on undrilled proved acreage or from existing wells where a relatively major expenditure is required for completion. Proved undeveloped reserves are recognized only if a development plan has been adopted indicating that the reserves are scheduled to be drilled within five years, unless specific circumstances support a longer period of time. The Corporation is reasonably certain that proved reserves will be produced. However, the timing and amount recovered can be affected by a number of factors including completion of development projects, reservoir performance, regulatory approvals, government policy, consumer preferences and significant changes in oil and natural gas price levels. •Unproved reserves are quantities of oil and natural gas with less than reasonable certainty of recoverability and include probable reserves. Probable reserves are reserves that, together with proved reserves, are as likely as not to be recovered. Revisions in previously estimated volumes of proved reserves for existing fields can occur due to the evaluation or re-evaluation of (1) already available geologic, reservoir or production data, (2) new geologic, reservoir or production data or (3) changes in the average of first-of-month oil and natural gas prices and/or costs that are used in the estimation of reserves. Revisions can also result from significant changes in development strategy or production equipment and facility capacity. Unit-of-Production Depreciation Oil and natural gas reserve volumes are used as the basis to calculate unit-of-production depreciation rates for most upstream assets. Depreciation is calculated by taking the ratio of asset cost to total proved reserves or proved developed reserves applied to actual production. The volumes produced and asset cost are known, while proved reserves are based on estimates that are subject to some variability. In the event that the unit-of-production method does not result in an equitable allocation of cost over the economic life of an upstream asset, an alternative method is used. The straight-line method is used in limited situations where the expected life of the asset does not reasonably correlate with that of the underlying reserves. For example, certain assets used in the production of oil and natural gas have a shorter life than the reserves, and as such, the Corporation uses straight-line depreciation to ensure the asset is fully depreciated by the end of its useful life. To the extent that proved reserves for a property are substantially de-booked and that property continues to produce such that the resulting depreciation charge does not result in an equitable allocation of cost over the expected life, assets will be depreciated using a unit-of-production method based on reserves determined at the most recent SEC price which results in a more meaningful quantity of proved reserves, appropriately adjusted for production and technical changes. 63 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Impairment The Corporation tests assets or groups of assets for recoverability on an ongoing basis whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. The Corporation has a robust process to monitor for indicators of potential impairment across its asset groups throughout the year. This process is aligned with the requirements of ASC 360 and ASC 932, and relies, in part, on the Corporation’s planning and budgeting cycle. Because the lifespans of the vast majority of the Corporation’s major assets are measured in decades, the future cash flows of these assets are predominantly based on long-term oil and natural gas commodity prices and industry margins, and development and production costs. Significant reductions in the Corporation’s view of oil or natural gas commodity prices or margin ranges, especially the longer-term prices and margins, and changes in the development plans, including decisions to defer, reduce, or eliminate planned capital spending, can be an indicator of potential impairment. Other events or changes in circumstances, including indicators outlined in ASC 360, can be indicators of potential impairment as well. In general, the Corporation does not view temporarily low prices or margins as an indication of impairment. Management believes that prices over the long term must be sufficient to generate investments in energy supply to meet global demand. Although prices will occasionally drop significantly, industry prices over the long term will continue to be driven by market supply and demand fundamentals. On the supply side, industry production from mature fields is declining. This is being offset by investments to generate production from new discoveries, field developments and technology, and efficiency advancements. OPEC investment activities and production policies also have an impact on world oil supplies. The demand side is largely a function of general economic activities, alternative energy sources and levels of prosperity. During the lifespan of its major assets, the Corporation expects that oil and gas prices and industry margins will experience significant volatility, and consequently these assets will experience periods of higher earnings and periods of lower earnings, or even losses. In assessing whether events or changes in circumstances indicate the carrying value of an asset may not be recoverable, the Corporation considers recent periods of operating losses in the context of its longer-term view of prices and margins. Energy Outlook and Cash Flow Assessment. The annual planning and budgeting process, known as the Corporate Plan, is the mechanism by which resources (capital, operating expenses, and people) are allocated across the Corporation. The foundation for the assumptions supporting the Corporate Plan is the Energy Outlook, which contains the Corporation’s demand and supply projections based on its assessment of current trends in technology, government policies, consumer preferences, geopolitics, and economic development. Reflective of the existing global policy environment, the Energy Outlook does not project the degree of required future policy and technology advancement and deployment for the world, or the Corporation, to meet net-zero by 2050. As future policies and technology advancements emerge, they will be incorporated into the Energy Outlook, and the Corporation’s business plans will be updated accordingly. If events or changes in circumstances indicate that the carrying value of an asset may not be recoverable, the Corporation estimates the future undiscounted cash flows of the affected properties to judge the recoverability of carrying amounts. Cash flows used in recoverability assessments are based on the assumptions developed in the Corporate Plan, which is reviewed and approved by the Board of Directors, and are consistent with the criteria management uses to evaluate investment opportunities. These evaluations make use of the Corporation’s assumptions of future capital allocations, crude oil and natural gas commodity prices including price differentials, refining and chemical margins, volumes, development and operating costs including greenhouse gas emission prices, and foreign currency exchange rates. Volumes are based on projected field and facility production profiles, throughput, or sales. Management’s estimate of upstream production volumes used for projected cash flows makes use of proved reserve quantities and may include risk-adjusted unproved reserve quantities. The greenhouse gas emission prices reflect existing or anticipated policy actions that countries or localities may take in support of Paris Accord pledges. While third-party scenarios, such as the International Energy Agency Net Zero Emissions by 2050, may be used to test the resiliency of the Corporation's businesses or strategies, they are not used as a basis for developing future cash flows for impairment assessments. Fair Value of Impaired Assets. An asset group is impaired if its estimated undiscounted cash flows are less than the asset group’s carrying value. Impairments are measured by the amount by which the carrying value exceeds fair value. The assessment of fair value is based upon the views of a likely market participant. The principal parameters used to establish fair value include estimates of acreage values and flowing production metrics from comparable market transactions, market-based estimates of historical cash flow multiples, and discounted cash flows. Inputs and assumptions used in discounted cash flow models include estimates of future production volumes, throughput and product sales volumes, commodity prices which are consistent with the average of third-party industry experts and government agencies, refining and chemical margins, drilling and development costs, operating costs and discount rates which are reflective of the characteristics of the asset group. 64 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Other Impairment Estimates. Unproved properties are assessed periodically to determine whether they have been impaired. Significant unproved properties are assessed for impairment individually, and valuation allowances against the capitalized costs are recorded based on the Corporation's future development plans, the estimated economic chance of success and the length of time that the Corporation expects to hold the properties. Properties that are not individually significant are aggregated by groups and amortized based on development risk and average holding period. Long-lived assets that are held for sale are evaluated for possible impairment by comparing the carrying value of the asset with its fair value less the cost to sell. If the net book value exceeds the fair value less cost to sell, the assets are considered impaired and adjusted to the lower value. Judgment is required to determine if assets are held for sale and to determine the fair value less cost to sell. Investments in equity companies are assessed for possible impairment when events or changes in circumstances indicate that the carrying value of an investment may not be recoverable. Examples of key indicators include a history of operating losses, negative earnings and cash flow outlook, significant downward revisions to oil and gas reserves, and the financial condition and prospects for the investee’s business segment or geographic region. If the decline in value of the investment is other than temporary, the carrying value of the investment is written down to fair value. In the absence of market prices for the investment, discounted cash flows are used to assess fair value, which requires significant judgment. Recent Impairments. In 2021, the Corporation identified situations where events or changes in circumstances indicated that the carrying value of certain long-lived assets may not be recoverable and performed impairment assessments. After-tax impairment charges of $1.0 billion, including impairments of suspended wells, were recognized during the year largely as a result of changes to Upstream development plans. In 2020, as part of the Corporation's annual review and approval of its business and strategic plan, a decision was made to no longer develop a significant portion of the dry gas portfolio in the U.S., Canada and Argentina. The impairment of these assets resulted in after-tax charges of $18.4 billion in Upstream. Other after-tax impairment charges of $1.1 billion, $0.6 billion and $0.2 billion were recognized in Upstream, Downstream and Chemical, respectively. These charges include impairments of property, plant and equipment, goodwill and equity method investments. In 2019, after-tax impairment charges were $0.2 billion. Factors which could put further assets at risk of impairment in the future include reductions in the Corporation’s price or margin outlooks, changes in the allocation of capital or development plans, reduced long-term demand for the Corporation's products, and operating cost increases which exceed the pace of efficiencies or the pace of oil and natural gas price or margin increases. However, due to the inherent difficulty in predicting future commodity prices or margins, and the relationship between industry prices and costs, it is not practicable to reasonably estimate the existence or range of any potential future impairment charges related to the Corporation’s long-lived assets. For further information regarding impairments in goodwill, equity method investments, property, plant and equipment and suspended wells, refer to Notes 3, 7, 9 and 10, respectively. Asset Retirement Obligations The Corporation is subject to retirement obligations for certain assets. The fair values of these obligations are recorded as liabilities on a discounted basis, which is typically at the time the assets are installed. In the estimation of fair value, the Corporation uses assumptions and judgments regarding such factors as the existence of a legal obligation for an asset retirement obligation; technical assessments of the assets; estimated amounts and timing of settlements; discount rates; and inflation rates. Asset retirement obligations are disclosed in Note 9. Suspended Exploratory Well Costs The Corporation continues capitalization of exploratory well costs when it has found a sufficient quantity of reserves to justify completion as a producing well and the Corporation is making sufficient progress assessing the reserves and the economic and operating viability of the project. Exploratory well costs not meeting these criteria are charged to expense. Assessing whether the Corporation is making sufficient progress on a project requires careful consideration of the facts and circumstances. The facts and circumstances that support continued capitalization of suspended wells at year-end are disclosed in Note 10. 65 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Pension Benefits The Corporation and its affiliates sponsor about 80 defined benefit (pension) plans in over 40 countries. The Pension and Other Postretirement Benefits footnote (Note 17) provides details on pension obligations, fund assets and pension expense. Some of these plans (primarily non-U.S.) provide pension benefits that are paid directly by their sponsoring affiliates out of corporate cash flow rather than a separate pension fund because applicable tax rules and regulatory practices do not encourage advance funding. Book reserves are established for these plans. The portion of the pension cost attributable to employee service is expensed as services are rendered. The portion attributable to the increase in pension obligations due to the passage of time is expensed over the term of the obligations, which ends when all benefits are paid. The primary difference in pension expense for unfunded versus funded plans is that pension expense for funded plans also includes a credit for the expected long-term return on fund assets. For funded plans, including those in the U.S., pension obligations are financed in advance through segregated assets or insurance arrangements. These plans are managed in compliance with the requirements of governmental authorities and meet or exceed required funding levels as measured by relevant actuarial and government standards at the mandated measurement dates. In determining liabilities and required contributions, these standards often require approaches and assumptions that differ from those used for accounting purposes. The Corporation will continue to make contributions to these funded plans as necessary. All defined-benefit pension obligations, regardless of the funding status of the underlying plans, are fully supported by the financial strength of the Corporation or the respective sponsoring affiliate. Pension accounting requires explicit assumptions regarding, among others, the long-term expected earnings rate on fund assets, the discount rate for the benefit obligations and the long-term rate for future salary increases. Pension assumptions are reviewed annually by outside actuaries and senior management. These assumptions are adjusted as appropriate to reflect changes in market rates and outlook. The long-term expected earnings rate on U.S. pension plan assets in 2021 was 5.3 percent. The 10-year and 20-year actual returns on U.S. pension plan assets were 9 percent and 7 percent, respectively. The Corporation establishes the long-term expected rate of return by developing a forward-looking, long-term return assumption for each pension fund asset class, taking into account factors such as the expected real return for the specific asset class and inflation. A single, long-term rate of return is then calculated as the weighted average of the target asset allocation percentages and the long-term return assumption for each asset class. A worldwide reduction of 0.5 percent in the long-term rate of return on assets would increase annual pension expense by approximately $190 million before tax. Differences between actual returns on fund assets and the long-term expected return are not recognized in pension expense in the year that the difference occurs. Such differences are deferred, along with other actuarial gains and losses, and are amortized into pension expense over the expected remaining service life of employees. Litigation and Tax Contingencies A variety of claims have been made against the Corporation and certain of its consolidated subsidiaries in a number of pending lawsuits. The Corporation accrues an undiscounted liability for those contingencies where the incurrence of a loss is probable and the amount can be reasonably estimated. For contingencies where an unfavorable outcome is reasonably possible and which are significant, the Corporation discloses the nature of the contingency and where feasible, an estimate of the possible loss. Management has regular litigation reviews, including updates from corporate and outside counsel, to assess the need for accounting recognition or disclosure of these contingencies. The status of significant claims is summarized in Note 16. Management judgment is required related to contingent liabilities and the outcome of litigation because both are difficult to predict. However, the Corporation has been successful in defending litigation in the past. Payments have not had a material adverse effect on operations or financial condition. In the Corporation’s experience, large claims often do not result in large awards. Large awards are often reversed or substantially reduced as a result of appeal or settlement. The Corporation is subject to income taxation in many jurisdictions around the world. The benefits of uncertain tax positions that the Corporation has taken or expects to take in its income tax returns are recognized in the financial statements if management concludes that it is more likely than not that the position will be sustained with the tax authorities. For a position that is likely to be sustained, the benefit recognized in the financial statements is measured at the largest amount that is greater than 50 percent likely of being realized. Significant management judgment is required in the accounting for income tax contingencies and tax disputes because the outcomes are often difficult to predict. The Corporation’s unrecognized tax benefits and a description of open tax years are summarized in Note 19. 66