Drop in Oil and Gas Prices Masks Production Problems
Moody’s says the drop in oil and gas prices over the last year may have given some US oil and gas producers an opportunity to mask production problems—as opposed to uneconomical conditions—that may have contributed to downward revisions in their reserves.
Amid the steep drop in commodity prices, the reserves considered economical to produce under SEC rules have dwindled and independent exploration and production (E&P) companies’ reported reserves have dropped accordingly, Moody’s says. Changes in pricing rules which come into effect on January 1, 2010, promise a far less volatile valuation for oil and natural gas reserves over the years.
“Last year for example, despite the enormous increase in oil prices in the first half of 2008, oil and gas prices tumbled from year-end 2007 to year-end 2008. In the case of investment-grade companies which accounted for 73% of total proved reserves, almost all revisions were price-related. Interestingly, a modest 4% of total reserves revisions in 2008 were performance-related.”
Overall, the E&P sector suffered a poor year in terms of reserves replacement. In Moody’s 54-company North American E&P universe, total proved reserves of 33.2 billion barrels of oil equivalent (boe) were revised lower from earlier reported figures by 757.2 million boe.
Around 61% of this downward revision was due to falling commodity prices; hence, companies attributed nearly 40% of their 2008 revisions to performance.
For details and company-by-company reserves see E&P Reserves Revisions: Price issue or performance problem?
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