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Analysis: Oil majors see reserves slip for fourth straight year

Highlights

Reserves still dominated by oil over gas

Questions over pace of shift to gas

Drilling dearth hits replacement rates

London β€” Western oil majors saw their oil and gas reserves fall for a fourth straight year in 2017 and are replenishing more oil reserves than gas despite an industry trend to rebalance the production mix toward cleaner-burning natural gas.

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The world's top seven western integrated oil majors collectively saw their proven reserves slip to 86.93 billion barrels of oil equivalent last year, down 0.7% year on year and 9% below 2013 levels, according to an analysis of annual filings by S&P Global Platts.

While ExxonMobil, Chevron and BP managed to lift their proven reserves year on year in 2017, Shell, Total, Eni, and Conoco reported lower reserves figures for the year, the figures show.

Stymied by tougher access to new resources and the impact of the 2014 oil price slump, oil majors have struggled to replace all their production with reserves over recent years.

Over the last decade, the oil majors have seen their combined proven oil and gas reserves slip 3.5%, the data shows, reducing the sector's average reserve life as rising production eats into remaining reserves.

The industry's steepest decline in reserves has come in the wake of the 2014 oil price collapse. The trauma of lower prices not only triggered a massive drop in upstream spending, but forced producers to report lower reserves in projects with higher costs.



With companies required to adjust their annual reserves to reflect average oil and gas prices for the year, some of these resources could return to producer's balance sheets as proven reserves in the future as prices recover.

The proven reserves of IOCs, which are booked when final development decisions are taken on projects, have also taken a hit as swathes of upstream projects were shelved or delayed during the downturn.

SHIFT TO GAS

One trend that remains conspicuously absent in the reserves data is the industry's gradual shift towards more gas projects in recent years.

With a growing industry focus on reducing carbon intensity to hit Paris climate change goals, most producers have pledged to put greater emphasis on growing their gas production and LNG projects.

Producers are also future-proofing their upstream portfolios to meet fast-rising global demand for natural gas in power generation and as LNG. The International Energy Agency (IEA) forecasts natural gas consumption will rise 50% by 2040 as oil demand growth slows and coal consumption ebbs.

Despite a number of a high-profile, world-scale gas finds in recent years off East Africa and the eastern Mediterranean Sea, the shift to gas is yet to be borne out by the reserves data.

In fact, oil majors' reserves are more dominated by oil now than they were 10 years ago, the company filings show, with 54% of the total reserves held as liquids in 2017, up from 52% in 2008.

Part of the change may reflect the time lag in moving new gas finds into corporate balance sheets as proven reserves, with recent finds still classed as future resources.

Indeed, average volumes of conventional gas discovered have been rising relative to oil finds.

In 2008, the discovered volumes of conventional gas made up 38% of the total global finds, according to Rystad. Ten years later in 2017, gas finds accounted for 45% of the total.

HIGH-MARGIN OIL

But the shift may reflect more the growing scarcity of world-class oil prospects than a transition strategy to lower-carbon gas projects, industry watchers believe.

"I think oil companies will still try to find oil first, but the natural shift in resource availability means that, in the plays that are left, there is less oil," Rystad's senior vice president of upstream research, Espen Erlingsen, said. "Economics are still much better for an oil field than a gas field."

While building exposure to gas will likely remain a strategic objective for most IOCs as they transition towards lower-carbon portfolios, the target will be trumped by financial returns on investment in a world where oil is still considered the higher margin resource.

"The shift to gas has been going on for a long time," said Luke Parker, vice president of corporate analysis at WoodMackenzie.

"The (reserve) figures tell us that this isn't really about gas as a bridging fuel (from hydrocarbons to renewable energy). It's about majors going where growth opportunities and volumes present themselves."

Shell, which leads the pack in terms of an upstream gas focus with almost 60% of its reserves in gas fields, still has a higher ratio of oil on its books than 10 years ago and this year made a large oil find in the Gulf of Mexico. BP, which is reshaping its oil-heavy production mix with a number of large gas projects, has a 20% stake in oil-rich Rosneft and is the second most "oily" major in terms of reserves after Conoco.

RESOURCE SHORTFALL

Indeed, despite oil industry players talking up their growing gas credentials, Parker notes that the balance of the corporate reserve additions in recent years is probably still liquids rather than gas.

The trend is also likely to continue in the short term, he said, with new liquids-focused upstream opportunities opening up in the Middle East, Mexico and Brazil, potentially offsetting the impact of new headline gas finds.

Further out, it remains to be seen how the current dearth of exploration activity will feed through to booked resources and reserve replacement ratios.

New discoveries of conventional oil and gas have fallen sharply since 2015 and last year was particularly bad for drilling results.

According to Rystad, less than 7 billion barrels of conventional oil equivalent was discovered in 2017, the lowest since the 1940's and enough to replace just 11% of global oil and gas production last year.

In the coming years, IOCs may be less fussed by the oil/gas split of their resource base and more focused on their ability to replenish it at all.

--Robert Perkins, robert.perkins@spglobal.com

--Edited by Kevin Saville, newsdesk@spglobal.com