ExxonMobil is running into some second-guessing from analysts after bringing 3.2 billion barrels of tar sands/oil sands crude back into its active reserves.
“We are skeptical about the quiet return of these prodigal oil sands reserves,” write Tom Sanzillo and Kathy Hipple of the Institute for Energy Economics and Financial Analysis (IEEFA), in a briefing note released last week.
“We continue to view such actions as casting a pall on the oil and gas industry as a whole regarding how proven reserves are actually calculated,” they add. “Either ExxonMobil possesses a trade secret with significant implications for other companies—or the industry is not really served by a system of uniform accounting of reserves that allows investors to confidently compare company disclosures.”
Sanzillo, IEEFA’s director of finance, and Hipple, its financial analyst, recall that Exxon wrote off the reserves in 2017, a time when oil prices had been falling for two years, profits were down, and the industry’s outlook was weak, “particularly for high-cost oil reserves like Canada’s oil sands.” Until that moment, Exxon had resisted “de-booking” its assets, arguing that its investments were set up to weather the ups and downs of the industry’s financial cycle. But by that time, a growing list of large fossils were writing off assets in the Alberta oilpatch.
“Either ExxonMobil managers were the smartest guys in the industry, or they had adopted an accounting system that was an outlier and could not withstand scrutiny,” Sanzillo and Hipple write.
Then the world’s most colossal fossil cut its declared tar sands/oil sands reserves from 4.11 billion to 436 million barrels, saying it was complying with U.S. Securities and Exchange Commission rules that required oil and gas companies to “acknowledge the low-price environment,” Sanzillo and Hipple recount.
Now, Exxon says the “re-booking” meets SEC standards: “At year-end 2018, an additional 3.4 billion barrels of bitumen at Kearl qualified as proved reserves under the SEC definition requiring calculations based on the average of the first-day-of-the-month price during the last 12-month period.”
Sanzillo and Hipple say the move matches Exxon’s overall development plans, but might raise flags for investors.
“Re-booking assets was an extraordinary step, but fits with the company’s current aggressive approach,” they write. “In 2018, it announced a new oil sands investment, doubled down on its drilling strategy in its capital expenditure plans, and pushed the story that it has mastered low-cost production in this low-price environment. But investors might want to question the basis for the rationale.”
They note that no other fossil in the Canadian tar sands/oil sands re-booked assets last year, other producers in the region reported weak financial returns, Canadian oil prices hit historic lows, and tar sands/oil sands producers have been lagging behind the returns in the wider investment market—even though oil prices and share prices have begun to rebound.
“Saying there is a future is one thing; putting money into that future now is another thing altogether,” the two analysts conclude. “Late last year, Imperial enthusiastically announced its support for a new investment, the Aspen oil sands project. This action was touted as a long-term bullish move. The recent announcement by the company, to delay the project until 2023, suggests uncertainty. The company blamed the delay on the government of Alberta’s cap on oil sands production, which is, by all accounts, a short-term maneuver. Imperial’s action—a reverse course on its long-term commitment to oil sands development based on this short-term political blip— reveals that its long-term bullish view is more mirage than oasis.”