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Oil Majors See Reserves Evaporate: Write Downs Continue

Oil tanker

In its third-quarter report, Exxon warned it might have to write off 4.6 billion barrels of oil and oil equivalent from its proved reserves if international prices remain at the current level into the end of the year. The company explained that at these prices, the reserves were uneconomical to tap, and therefore fail to meet the Securities and Exchange Commission’s definition of proved reserves.

Most of these assets that are no longer in play are in Canada in the Alberta oil sands, and about a billion barrels of oil equivalent are in the U.S.

Exxon’s warning suggests that the new normal for oil prices continues to take its toll on the industry despite the hype about lower-than-ever production costs in the shale patch and the supermajors started refocusing on smaller, quicker-return projects.

The true significance of these developments seems to be much more fragmentary than the industry would like to admit. For instance, in the shale patches, some producers are indeed pumping crude at breakeven prices that make it possible for them to turn in a profit. But this, as Oilprice wrote last month, is not really thanks to any special efforts undertaken after the price crash. Rather, it is a combination of geology and length of presence, and most of all, discounts on oilfield services as that industrial segment also struggles to survive.

All shale is not equal, however, and in some places, the breakeven is higher than current market prices. This is also true for conventional oil extraction in parts of the oil sands, if we are to trust Exxon. And there is no reason why we shouldn’t, when it comes to matters of reserve de-booking.

According to the Motley Fool, things are not much different for Canadian oil companies. Even though they are not yet de-booking reserves, they might start doing it soon, as they approach the end of their current development phases. If prices remain low, which is very likely unless OPEC hammers out a production cut agreement, a lot of these projects may become economically unviable. Related: Oil Tanks As Iran 'Claims' To Have Ramped Up Oil Production

The good news is that the de-booking does not need to be permanent. The oil and gas will still be there when prices start improving. If they don’t, there won’t be any point in developing these higher-cost reserves.

Things are different with reserve replacement ratios, however. These are essential for the valuation of oil companies: the ratio serves to inform investors and traders about the future production of a company.

Last year, Big Oil saw the worst year of new discoveries since 1952, with the combined reserve replacement ratio of the supermajors falling below 100 percent, which is the minimum required to maintain current levels of production. At the time, Morgan Stanley warned that even if oil demand falls to 86 million bpd, from the current 90-plus million bpd, E&Ps would need new fields to satisfy it.

So, forget about de-booking reserves, which can be re-booked at the first sign of price improvement. Reserve replacement is the bigger problem; its solution depends on a more sustainable oil price improvement, and that’s nowhere in sight for now.

By Irina Slav of Oilprice.com

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  • RussianJew on November 12 2016 said:
    I am glad Saudis can't read in English - otherwise we are in trouble ...

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