LONDON (Reuters) – Major oil firms insist they are more than replacing energy reserves they extract with new resources even though U.S. regulatory accounting indicates they are failing to do so.
In the last three weeks, BP, Exxon Mobil and Total have all said they more than replaced the volume of hydrocarbons they drew out of the ground in 2004, according to their traditional accounting systems.
However, using reporting guidelines set by the U.S. Securities and Exchange Commission, BP and Exxon say they fell far short of this target, while analysts say Total likely did the same.
Royal Dutch/Shell — which pushed the reserves issue into the spotlight last year when admitting it had overbooked on several big ventures — and ChevronTexaco also warned their SEC reserve replacement figures would be low.
Analysts say that there is little doubt oil exploration is throwing up fewer prospects that are significant enough for the majors to take on, while admitting the SEC’s rules are less than perfect.
“There is no doubt it is getting harder and harder to find what would be material prospects for these really large companies, particularly for the supermajors,” said Ken Chew, Vice President for Industrial Performance and Strategy for upstream consultants IHS Energy.
“What we are picking up is that the majors probably struggled to replace their resources through the drill-bit last year,” said Robert Plummer, senior corporate analyst at upstream consultancy Wood Mackenzie.
DIFFERENT DEFINITIONS
The world’s biggest private oil firm Exxon Mobil said it replaced 83 percent of production with new proved reserves on an SEC basis in 2004, but 112 percent using its own preferred accounting system.
BP said it replaced only 89 percent of production on an SEC basis, but indicated UK accounting practices gave a replacement ratio of 110 percent.
In the United States, while most large independent oil and natural gas producers said they managed to more than replace production last year, integrated firms were less successful (see story )
Energy firms have far more oil and gas up their sleeves than they plan to produce. Much of their resource base is uneconomical to extract, so the measure of proved reserves is needed to show how much of the total can be exploited given current market conditions.
Because such a number is inherently subjective, there are differences in its calculation.
The SEC requires companies to use oil and gas prices from the last day of the year in assessing project viability.
This meant that a brief but short fall in bitumen prices at the end of 2004 had a large effect on the apparent viability of heavy oil sands projects in Canada, forcing firms to debook reserves there even though development plans were unaffected.
“Reserves as defined by the SEC don’t tell you nearly as much as you would like to know. It is supposed to protect the investor, but in fact it leaves the investor particularly uninformed,” said IHS Energy’s Chew.
DRILLING SUCCESS LIMITED
The time lag between discovery and development sanction means proved reserve bookings can follow many years after a resource was first found.
“The SEC filings are about proved reserves. The real problems with proved reserves are that the industry does not make its investment decisions based upon proved reserves and at year end prices,” said WoodMac’s Plummer.
A closer look at the reserves bookings reported in 2004 results highlights a development led strategy.
Of the 1.8 billion barrels of oil equivalent of new proved reserves Exxon booked for 2004 under its own system, 1.7 billion came from Liquefied Natural Gas projects in Qatar.
“This is part of an increasing trend where the companies look to add reserves through the development of resources that have already been discovered, in addition to the drill bit,” Plummer said.
The importance of year-end pricing in heavy oil sands projects for overall reserves also shows how firms are increasingly looking at developing existing resources.
“From the shift away from exploration spending and toward development spending you can see that the supermajors in particular are focusing on getting their returns from what they have got already, rather than going out and finding more,” said IHS Energy’s Chew.
