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Big oil sees declining reserves for the first time in 20 years

Exxon Mobil failed to find enough new oil and gas to replace what it produced last year according to the Wall Street Journal.  Exxon only managed to replace two-thirds of the oil and gas that it produced in 2015, putting it in a similar position to Royal Dutch Shell and BP, who also failed to replace last year’s production.

The fall in proven reserves is a result of the fall in oil prices rather than any shortage of oil and gas in the ground.  When companies report their reserves to the US Energy Information Administration, they have a legal requirement to report only those reserves that can be extracted at today’s prices.  So whereas a year ago they would have been reporting reserves that could be extracted at around $60 a barrel, today they can only legally report reserves at about $30 per barrel.

The difficulty for the oil companies is that investors tend to use proven reserves as a measure of the likely returns they will get from their investment.  And with the current oil glut unlikely to unwind by the end of 2016, even if OPEC agrees to stabilise production, there may be no halt to the investment flight that has taken place since prices began to fall.  Indeed, even if prices return to $60 or more, investors are likely to wait until those prices have been stable for some time before they commit to further investment.

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