Analysis: Cuts hit majors' reserves replacement

OREANDA-NEWS. The majors' drive to improve capital discipline is putting constraints on their ability to replace production with proven reserves additions.

The average reserves replacement ratio (RRR) for the group fell to 76pc last year from 124pc in 2013, partly because of fewer final investment decisions. Replacing output could be more challenging this year as spending cuts deepen and lower oil prices pressure project economics.

Proven reserves are resources deemed "economically producible" based on average crude and natural gas prices in the previous 12 months under US SEC rules. Downgrades are likely in some regions at the end of 2015 if crude prices stay at current levels. The exception will be in countries where the majors operate under production-sharing contracts, which usually allow companies to book a higher share of reserves when oil prices fall.

The majors only book reserves for projects that have received significant funding commitments. This means that discoveries can take several years to be classified as proven reserves. Shell says 2014 was "the most successful year we have had with the drill bit for several years". But the firm's RRR fell to 26pc, its lowest since 2007. RRRs are usually based on exploration success 4-5 years ago, Shell says.

The company's decision to rein in capital expenditure led to a fall in the number of upstream final investment decisions to three last year from six in 2013. Asset sales were another key factor behind Shell's weak performance. The firm lost over 320mn bl of oil equivalent (boe) of proven reserves, mainly in the US and Australia, through selling about \$11bn of upstream assets.

Fewer final investment decisions helped push BP's RRR down to 60pc from 182pc in 2013. The firm added 364mn boe through discoveries and extensions to existing fields last year, compared with 765mn boe in 2013. BP's main additions last year were in Angola, Azerbaijan, Iraq, Oman, Trinidad and Tobago, Russia, Argentina and the US, while reduced activity and reservoir performance led to material reductions in Norway, the UK, Indonesia and Australia. The firm's 2013 RRR was boosted by the change in its Russian holdings.

Chevron's RRR was 89pc last year, the second year in a row that it failed to replace all of its output. The US accounted for 45pc of its 840mn boe of reserves additions. Chevron replaced 98pc of its gas output, mainly through development drilling at the 15.6mn t/yr Gorgon LNG project in Australia. Gas made up 44pc of the firm's reserves at the end of 2014, up from 43pc.

Total's RRR was 100pc last year, helped by a final investment decision for the 650mn bl Kaombo oil field offshore Angola. The firm is the only major so far to secure a stake in the new Adco onshore concession in Abdu Dhabi, but the deal was struck too late for the reserves to be included in its 2014 estimate. Lacklustre exploration results in recent years have yet to filter through to Total's RRR. But the firm has pledged a fresh strategy this year to boost its performance.

ExxonMobil achieved an RRR of over 100pc for the 21st consecutive year, driven by liquids reserves additions in North America. The company added almost 700mn bl through a revision to its reserves estimate for the Kearl oil sands project in Canada. And it replaced over 170pc of its US crude production, underpinned by reserves additions in the Gulf of Mexico and the Permian, Bakken and Woodford shale formations. Liquids made up 54pc of ExxonMobil's reserves at the end of last year, up from 53pc at the end of 2013 and 51pc at the end of 2012.