Guest post by David Middleton
With the most divisive presidential election in U.S. history just days away from concluding, it is easy to understand why more is not being made of the news, but just to tell you something seismic happened on Friday last week.
The world’s largest listed oil company, Exxon, announced that it was going to have to cut its reported proved reserves by just under a fifth—by 19 percent.
It would be the biggest reserve revision in the history of the oil industry. It is yet another sign that Big Oil is in big trouble.
For years people have been warning that Big Oil’s business model was fundamentally flawed and was not only putting the climate at risk, but millions of dollars of shareholders’ money.
For years the industry’s critics warned the industry was ignoring the risks of climate change and was just caring on drilling regardless.
But the oilmen did what the oilmen do: find oil and gas, no matter the consequences.
And the worst oil company has been Exxon which for decades has denied climate change and the impact that climate change will have on its business.
For decades it could have invested wisely in renewables but it carried on looking for oil and gas—including unconventional oil which is even more carbon intensive than conventional oil. Its critics warned this was pure folly: but the oilmen carried on drilling anyway.
Big Oil is used to doing things its own way.
The warnings have kept coming, but the boys from Exxon didn’t listen. Oil Change International, 350.org, Carbon Tracker and many others in the #keepintheground movement have been saying for years that large swathes of oil reserves must stay in the ground.
They warned that fossil fuel reserves will become “stranded assets.”
Exxon often dismissed its critics as irrelevant lentil-eating, sandal wearing hippies, who wanted to take humanity back to the stone age.
ExxonMobil has very good reasons for dismissing these sorts of critics “as irrelevant lentil-eating, sandal wearing hippies, who wanted to take humanity back to the stone age”… Although this would actually be unfair to “irrelevant lentil-eating, sandal wearing hippies.” The folks at EcoWatch clearly are dumber than “irrelevant lentil-eating, sandal wearing hippies.” It’s very appropriate that the mental health awareness ribbon is green, because “all shades of green” seems to be a form of mental illness.
ExxonMobil’s potential reserve revision has nothing to do with “keeping it in the ground” or stranded assets.
Exxon Facing Historic Reserves Reduction as Slump Persists
October 28, 2016
Exxon Mobil Corp. warned it may be facing the biggest reserves revision in its history as production sank to a seven-year low and profit slid amid a prolonged slump in energy markets.
About 3.6 billion barrels of reserves in the Canadian oil sands and the equivalent of another 1 billion barrels of oil in other North American fields may be in jeopardy if the average energy prices seen during the first nine months of 2016 persist, Exxon said in a statement on Friday. That would equate to 19 percent of Exxon’s reserves and would be the largest de-booking since the 1999 merger that created the company in its modern form.
Exxon’s accounting has prompted a U.S. Securities and Exchange Commission investigation into whether the company should have written down assets as a result of the oil slump, a person with knowledge of the matter said last month. The company didn’t say on Friday whether removing reserves from the books would result in asset-impairment charges that could hurt its financial results.
“The fact that everyone else has recorded charges and they have not created a red flag,” said Brian Youngberg, an analyst at Edward Jones & Co. in St. Louis. “In the big picture, it doesn’t mean those reserves won’t eventually get produced.”
The phrase “proved reserves” has a very precise and legally binding definition. In order to book reserves as proved, they have to be economically recoverable using the current strip prices.
Among other changes, the SEC Final Rule requires companies to estimate proved reserves using oil and natural gas prices based on the 12-month historical average of the beginning-of-month prices. Prior to the 2008 ruling the SEC rules required that a single-day, fiscal year-end spot price be used to determine economic producibility and future cash flows of oil and gas reserves. The SEC Final Rule changed this requirement to a 12-month average price, calculated as the unweighted arithmetic average of the first-day-of-the-month price for each month within the 12-month period prior to the end of the reporting period, unless prices are defined by contractual arrangements, excluding escalations based upon future conditions.2
The SEC Final Rule defines the term “proved oil and gas reserves” as “those quantities of oil and gas, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible, from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations, prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain regardless of whether deterministic or probabilistic methods are used for the estimation.”3
Reserves that were proved at $100/bbl aren’t proved at $50/bbl if they are not economically recoverable at $50/bbl. The reserves don’t vanish, they don’t become stranded and if they are already developed and producing, companies generally don’t shut them in and stop producing them. Production decisions are generally made on a “cost-forward” basis. Taking reserves off the books frequently results in impairments, forcing companies to take write-downs against earnings.
Proved (1P) and probable (2P) oil & gas reserves are accounting measures used in the valuation oil companies. Proved developed producing (PDP) reserves are worth more than proved developed non-producing (PDNP) reserves, which are worth more than proved undeveloped reserves (PUD). Product price movements routinely prove and disprove reserves.
I was going to use this as my featured image; but decided it was in poor taste.