Oil majors' reserves are
shrinking and investors don't mind
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[April 11, 2017]
By Ron Bousso
LONDON
(Reuters) - As crude prices recover, oil majors face a dilemma – how
quickly should they seek to replenish reserves?
It’s the same question the cyclical oil industry has tackled many times
before: go too fast and risk spending too much for little reward, go too
slowly and your rivals will be better positioned to grab market share
should oil prices rise.
New data revealed by a Reuters analysis shows the oil and gas reserves
of global majors have fallen sharply.
Reserve life - the number of years that a company can keep production
stable with its reserves - has decreased for Exxon Mobil, Shell, Total
and Statoil, according to the Reuters analysis of the firms' annual
reports.
BP and Italy's Eni saw a slight increase. (http://tmsnrt.rs/2nGfmte)
In the case of Exxon, the world's top publicly listed oil company,
reserve life dropped in 2016 to 13 years, the lowest since 1997, after
it wrote down Canadian oil sands.
Shell has its lowest reserve life since 2008 despite buying rival BG
last year.
In the past, the trend may have caused alarm among investors.
But, focused on stock market returns, investors have clear advice: be
cautious, do not overspend.
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That, they say, is because the rise of oil production from shale and the
growth of renewable energy mean oil majors should actively avoid storing
volumes of oil underground they would have held in previous cycles.
Rohan Murphy, energy analyst at Allianz Global Investors, which holds
shares in Shell, BP, Total and Statoil, sees a reserve life of eight to
10 years as "quite a healthy level".
"I don't think these companies should have a reserve life much above
eight to 10 years, especially when we are trying to get to grips with
what oil demand will be in 10 years from now."
PEAK DEMAND
The global transition away from fossil fuels to renewable sources of
energy in coming decades further reduces the need for a larger reserve
life, said Murphy.
That contrasts sharply with fears about peak supply, so widespread only
a decade ago, when investors were eagerly watching for news about
majors' reserve replacement.
Over the past decade, the world has changed so much that Saudi Arabia
now plans to list its national champion Saudi Aramco in what is widely
seen by the market as an attempt to cash in on the country's huge
reserves before demand peaks.
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Oil
companies are required to report their reserves every year based on an annual
average oil price. With an average 2016 price of around $44 a barrel, the lowest
in over a decade, firms were forced to remove reserves from high-cost projects.
Jonathan Waghorn, energy fund co-manager at Guinness Asset Management, which
holds shares in a number of oil majors, says lower reserves are not his big
concern at the moment: "The focus is on cutting costs and living within cash
flows so that they survive for the future."
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To offset the shrinkage, companies could opt to acquire other oil firms or sign
production-sharing deals with countries that hold large reserves, similar to
what BP and Total did with Abu Dhabi last year, Morgan Stanley analyst Martijn
Rats said.
Companies have also taken advantage of the rout to buy acreage for future
exploration, such as Total's investment in Brazil and Uganda and BP's buy into
Eni's Egyptian field Zohr.
"It has never been cheaper to buy reserves or find them yourself ... it is very
much a buyers' market if you want to replace reserves," Allianz's Murphy said.
LOOMING SUPPLY SHORTFALL
The drop in reserves comes not only as oil prices fell but also because
companies sharply cut spending in recent years, shelving many expensive,
large-scale developments.
"We may be starting to witness the effect of significant capex cuts. The oil
market is becoming increasingly undersupplied, which should move the oil price
higher," said Kirill Pyshkin from Mirabaud, who has Shell in his portfolio.
Last year, 10 billion barrels of oil were discovered, around one third of global
consumption, including well-appraisal activity, according to Per Magnus Nysveen,
head of analysis at Oslo-based consultancy Rystad Energy.
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Oil majors have made only a handful of large discoveries in recent years,
including Zohr, Exxon's Liza field in Guyana and BP's Tortue discovery in west
Mauritania and Senegal.
Since 2010, less than 2 billion barrels of oil has been discovered by majors per
year and most of this in existing fields, Nysveen said.
"The shortcoming of oil replacement by the drillbit has been quite drastic ...
Discoveries are not keeping up with production," said Nysveen, adding that
supply could fall short by up to 2 million barrels per day within seven to eight
years.
(Reporting by Ron Bousso, additional reporting by Dmitry Zhdannikov; Editing by
Dale Hudson and Richard Mably)
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