By Sarah Kent
LONDON--The world's biggest oil companies are draining their
petroleum reserves faster than they are replacing them--a symptom
of how a deep oil-price decline is reshaping the energy industry's
priorities.
In 2015, the seven biggest publicly traded Western energy
companies, including Exxon Mobil Corp. and Royal Dutch Shell PLC,
replaced just 75% of the oil and natural gas they pumped, on
average, according to a Wall Street Journal analysis of company
data. It was the biggest combined drop in inventory that companies
have reported in at least a decade.
For Exxon, 2015 marked the first time in more than two decades
it didn't fully replace production with new reserves, according to
the company. It reported replacing 67% of its 2015 output.
In the past, shrinking reserves could send investors and
executives into a panic over a company's future prospects.
These days, with ultralow oil prices, "it becomes less
important" to replenish stockpiles, said Luca Bertelli, chief
exploration officer at Italian oil producer Eni SpA. Eni has
shifted spending away from high-risk, high-reward projects in favor
of squeezing more out of fields that are already producing, he
said.
That shift shows how producers are responding to low prices by
pulling back on new exploration in favor of maximizing profits. The
risk is that cutting back on new projects now, when prices are low,
could lead to shortages and price spikes in the future.
Historically, energy companies spent heavily in the present to
find resources for the future--new wells that would replace the
barrels they pump every day. When they decide they can extract the
oil and gas economically, firms book those resources as proved
reserves, untapped inventories to be exploited at a profit down the
road.
The current oil glut has forced companies to cut spending
wherever they can. So they have pulled back on exploratory drilling
and spending on new projects. Across the oil sector last year,
companies approved just six new developments, according to Morgan
Stanley researchers.
That is in contrast to the past decade, when high prices led
energy firms to explore in far-flung regions. They spent billions
of dollars on so-called megaprojects, in part to keep their
inventories brimming for decades. And those investments helped to
fuel today's market glut.
Because of accounting rules, there is another drain on the
"proved reserves" that companies book and report to investors: low
oil prices. The U.S. Securities and Exchange Commission defines
proved reserves as the volume of oil and natural gas that a company
can expect to tap at a profit.
Some of the reserves companies added are too expensive to
extract profitably at today's prices. That has forced some
companies to remove barrels from their books, and in some cases to
write down the value of those assets.
Shell wrote off billions of dollars from the value of its assets
last year, and low prices contributed to a decision to cancel a
project in Canada's high-cost oil sands. The company didn't replace
any of the oil it pumped last year. Overall its reserves shrank by
20%.
Despite lower reserves, big oil companies aren't about to run
out of crude. Exxon, for instance, retains enough reserves to last
16 years at the current rate of production. And in addition to
their still-considerable proved reserves, the companies have access
to other resources that could become viable to pump if oil prices
rise.
Exxon Chief Executive Rex Tillerson told analysts earlier this
month the company's failure to fully replace the oil and gas it
produced last year reflects its focus on "deploying capital
efficiently to create that long-term shareholder value, even if it
means interrupting a 21-year trend."
SEC rules require oil companies to report "proved" reserves
based on an average price each year. On a year-to-year basis,
proved reserves can be volatile based on oil-price swings. Last
year's sharp price drop forced some companies to reduce their
proved reserves, though falling costs helped offset the reductions.
Some companies' reserves also benefited from contracts that grant
them a larger share of production when prices are low.
Among the largest oil companies, only Chevron Corp., Eni and
France's Total SA last year added more new barrels than they
pumped. BP PLC replaced 61% of its production last year--excluding
the impact of sales and acquisitions--and Norway's Statoil ASA
replaced 55%. While Shell's reserves fell, the company this year
completed a roughly $50 billion acquisition of BG Group PLC that is
expected to boost reserves by around 25% from their levels at the
end of 2014.
Companies' reserve volumes are facing other potential threats
beyond low oil prices. Some investors have expressed concern
recently that legislation to curb global warming--such as taxing
carbon emissions--could hasten a shift to cleaner energy and make
fossil fuels more expensive to burn. That could make some oil
reserves impossible to pump profitably. Oil companies counter that
the world will need large volumes of oil and gas for decades.
In a sign of their focus on profitability over finding more oil,
some investors have welcomed companies' spending cuts despite the
falling reserves.
"When the house is burning you're not worrying if you need to
paint the outside," said Christopher Wheaton, a fund manager at
Allianz Global Investors, which holds stock in several of the large
oil companies including Shell, Total and BP. "It's crisis
management at the moment."
That attitude marks a shift from the early 2000s, when companies
responded to investor pressure to grow with aggressive drilling
and, in some cases, aggressive accounting. Shell in 2004 admitted
to overstating its reserves by more than 20%. Its share price
dropped, senior executives left, and the company paid hefty fines.
Shell declined to comment.
In the years after the Shell scandal, companies raced to find
more crude and poured tens of billions of dollars into projects to
increase production--helping fuel the current glut and prompting
Shell to shift its strategy. In 2014 Shell stopped using growth in
oil and gas production as a performance metric for executive
bonuses, instead emphasizing return on capital.
Write to Sarah Kent at sarah.kent@wsj.com
(END) Dow Jones Newswires
March 27, 2016 19:03 ET (23:03 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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