OIL RESERVES DOWN
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.
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