A spate of reserve write-downs by global oil giants over the last 24 months, culminating in ExxonMobil’s recent removal of 3.5 billion barrels of Canadian tar sands/oil sands crude from its listed holdings, is part of an overall global retraction in reserve claims driven by forces beyond the industry’s control, the Institute for Energy Economics and Financial Analysis (IEEFA) writes.
Noting a succession of write-downs by Royal Dutch Shell, Marathon, Petro China, Statoil, and most recently ExxonMobil, the post on IEEFA’s website concludes that, “all said, the oil industry has recently now lost about 10% of its proven and probable reserves.”
More troubling for the industry’s investors should be the context. “The industry seems to have lost its ability to effectively manage prices,” the post observes. “While it has recently marshalled a production cut, that cut produced only minor price gains, and those can only be sustained by further cuts.”
Those prices, the IEEFA notes, “aren’t occurring in a vacuum.” Competition from cheaper clean energy, consumer nation strategies to reduce exposure to the volatility of world oil markets, and the ongoing implementation of the Paris climate accord are all beyond the industry’s effective control.
The report also points to an unintended consequence of an obscure provision in securities law that may be holding companies back from even greater write-offs—or misleading investors.
“One of ExxonMobil’s requirements for reporting proved reserves is that management has made significant funding commitments toward the development of the reserves,” IEEFA notes. “Are we to assume, then, that if the company makes a ‘significant funding commitment’ that those reserves will be developed?
“It seems investors are being asked to accept that the company includes in its reserve calculations large amounts of oil that it will ‘develop’ but not actually produce—which is to say these investments will not become revenue-generating assets.”
