Oil giants reserves ＂exhausted in the next ten years＂?
2021-10-13 14:15
Recently, Citibank released a report stating that by the end of 2020, the average "reserve life" of the world's largest international oil companies (including Exxon Mobil, Chevron, ConocoPhillips and major European oil companies) is 9.5 years, compared with 2015 Compared with the data before the oil price plummeted a year ago, it has fallen by 25%.
The so-called oil "reserve life" refers to how long the current oil reserves can be exploited based on the current oil production level, that is, the recovery-reserve ratio (R/P). For more than a century, this data has been a key indicator for judging the development direction of the oil industry. Citibank said that in the past five years, the "reserve life" of major large international oil companies has fallen by 25%, which may pose a challenge to the production and revenue of large oil companies in the next few years, and this also shows that large oil companies No longer bet on the future of oil. However, it is worth noting that for the oil giants, if the ratio of production to reserve continues to decline, how can renewable energy that has not yet formed a climate obtain the funding "power" for development?
01. Oil giants' production-reserve ratio has dropped sharply
"The average'reserve life' of international oil companies is 9.5 years, which is 25% lower than the level before the oil price crash in 2015." Profitability is an "imminent challenge".
Since the time of John D. Rockefeller, the ratio of reserves to production (R/P) has remained at a stable level. In large oil companies and the entire United States, R/P is rarely less than 10 years, and the rare data less than 10 years are often related to major oil supply disruptions. Due to the plunge in oil prices and oil demand in 2020, oil majors have cut billions of dollars in assets and have given lower R/P values in recent reports.
Take ExxonMobil as an example. Since 1993, the company's R/P has not been lower than 13 years. However, in its 2020 annual report, ExxonMobil cut its oil reserves by nearly a third, which is also the largest reserve revision move in the company's history. As of the end of 2020, ExxonMobil's reported reserves totaled 15.3 billion barrels, compared with 22.44 billion barrels in the same period last year. According to the production in 2020, it will be exhausted in 11 years.
According to the Citi report citing data from Shell, as of December 31, 2020, Shell’s proven reserves have decreased by 1.972 billion barrels of oil equivalent to 9.124 billion barrels of oil equivalent. Bloomberg quoted data and calculated that as of the end of 2020, the company's R/P was only 7.34 years.
A similar move by Chevron has produced the same effect, reducing R/P to 9.89, the first time it has fallen below 10 years since 1998. As early as last September, BP's production director Gordon Birrell (Gordon Birrell) stated that the company would set an R/P target of 8 years.
Of course, these figures do not mean that oil production will stop when the existing oil is exhausted. However, the sharp drop in R/P data of oil giants shows to a certain extent that the world is rapidly transitioning to renewable energy.
02. Crisis under the declining oil production-reserve ratio
Regarding the existing overall average R/P falling sharply, Citibank believes that financial markets seem to be under-evaluating these issues, and analysts cannot accept that the future of international oil companies is threatened. An oil company can only exist if it has reserves and can maintain production at the target level for a long period of time. If reserves and production decline, it is not only the attractiveness of such an oil company to investors, but also its viability that will be questioned.
Citibank said in a research report that the industry giant’s annual report shows that these once "great companies" are now in trouble, and low oil prices are the main reason for this growing problem. Citibank said: "This relationship between reserves and earnings is unavoidable. Therefore, we believe that analyzing reserves trends is an extremely important indicator of the health of a company."
Although as demand recovers and oil prices rise, these companies will have a lot of funds available in 2021. The question, however, is whether these companies will invest in new production and reserves or will they use it to pay dividends. Some analysts claim that the current reserves crisis is not a real problem, because most international oil companies are in the energy transition stage.
However, in order to invest in the energy transition, these companies need large amounts of cash to cope with the planned multi-billion-dollar wind, solar, and hydrogen energy projects, while also satisfying investors and shareholders. If the reserves are not enough to maintain "normal" oil and gas operations, the plan to successfully achieve the energy transition will also lose support. Therefore, for international oil companies, the decline in oil reserves is an "imminent challenge."
In addition, in the next few years, if the R/P of international oil companies continues to decline, the structure of the global oil market will undergo major adjustments. For international oil companies, due to their declining reserves and the need to reduce portfolio risk, they are now unable to pursue new opportunities as vigorously as they once were. Clean energy initiatives, socially responsible investment and sustainable development goals have all had a direct and restrictive impact on international oil companies and their ability to maintain reserves and production. One of the main effects is that while international oil companies are trying to maintain R/P, national oil companies have managed to maintain considerable reserves. Major oil producing countries such as Saudi Aramco and ADNOC are considering R/P for more than 25 years. If the output of international oil companies is cut or restricted, the demand for oil from national oil companies will increase substantially.
Citibank believes that globalized fossil energy provides security for non-fossil energy producing economies, but this system is currently under threat. The risks of the energy transition are still being evaluated, but the global energy market has shifted to rely heavily on oil from state-owned oil companies, which is unlikely to be the best solution. The stability of energy supply is supported under the mixed market structure of international oil companies and national oil companies working together to maintain a balance. If R/P does not reach more than 10 years, this stability will be threatened.