Major Oil Refiners Falling Short in Replacing Reserves
Major oil companies will need to invest a higher proportion of their cash flow to bolster reserves and expand production, Oxford Analytica says in a new analysis.
With the exception of BP, oil majors in 2007 failed to replace reserves, according to US Securities and Exchange Commission (SEC) definitions of proved reserves. OxAn says oil refiners’ SEC filings indicate that:
- Their loss of reserves in Venezuela and Russia, and more generally through greater competition for access to resources, has hit them hard;
- Except BP and Chevron, organic growth is failing to match production levels, even for firms that produced less in 2007 than 2006;
- Chevron and BP’s Russian interests were critical in achieving organic growth above production levels; and
- Improving replacement ratios will require higher levels of future investment, implying less shareholder return.
However, OxAn notes that SEC measures do not accurately illustrate companies’ resource bases, due to stringent definitions. For example:
Unconventional resources, such as oil sands, are excluded as these were considered mining operations when SEC regulations were formulated in 1978.
Following recent consultation, changes to standards are expected, which should see the SEC come closer to other bodies’ measurement standards. When presenting to investors, companies generally use the Society of Petroleum Engineers classification system for reserve estimates. These produce a markedly different picture:
For example, Shell claims an organic reserves replacement ratio of 124%, contrasting an SEC reserve replacement ratio of 17%.
Still, OxAn says, while changes to SEC reserve reporting standards will expand companies’ reserves data, this adds little new market information. “Returning a higher proportion of cash flow for investment is required to turn large resource bases into production, thus bolstering reserves and expanding capacity.”
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