Oil Majors Only Replace 75% of Oil and Gas Produced in 2015

March 2016, Vol. 243, No. 3

The oil majors failed to replace all of the oil and gas reserves that they burned through in 2015, a worrying sign for the industry’s future.

The Wall Street Journal reported that the seven largest oil and gas companies only replaced about 75 percent of the reserves on average that they produced last year, the worst replacement rate in over a decade.

Perhaps the most eye-raising fact was that ExxonMobil, the world’s largest publically-traded oil company, was unable to replace 100 percent of the oil and gas it pulled from the ground. The oil supermajor replaced just 67 percent of the oil produced in 2015.

Because the valuations of oil companies depend very heavily on their booked oil and gas reserves, the 2015 performance presents some troubling questions about the long-term return for shareholders. If drillers work through their reserve base and fail to replace the oil and gas produced, eventually production will have to decline. That means so will the company’s share price.

To be sure, the industry retrenched and slashed exploration spending in 2015 as oil prices crashed. A less aggressive exploration campaign yielded lower results.

Moreover, low oil prices also struck a blow to the underlying reserve base that the oil industry is sitting on. High-cost reserves that are uneconomical to produce at today’s prices can be technically removed from their list of assets, as required by financial regulatory rules. As such, reserves could climb again when and if oil prices rise, so the headline-grabbing figure that the oil majors only replaced 75 percent of their produced reserves last year is less worrying than it might seem.

Still, some companies are starting to make more fundamental shifts in their corporate strategies, less focused on growth at all costs and more focused on profitability. Instead of spending huge sums on increasingly risky projects, companies are putting their dollars into the more secure prospect of boosting production from existing fields.

By Charles Kennedy of Oilprice.com

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