Why We Should Be Very Worried About Reserve Replacement at Exxon Mobil

By Deborah Lawrence Rogers

One of the primary metrics used to assess an oil and gas company is its reserve replacement ratio. Investors use this as an indicator of operating performance, good or bad. It is a relatively simple metric which measures the amount of proved reserves added relative to the amount of hydrocarbon produced. So if the ratio falls below 1:1 for instance, then the company is depleting its own reserves and will eventually run out of oil. For these reasons, Exxon Mobil’s announcement of the underlying components of its 2012 ratio is grounds for alarm.

According to the company press release:

“Exxon Mobil Corporation (NYSE:XOM) announced today it replaced 115 percent of its 2012 production by adding proved oil and gas reserves totaling 1.8 billion oil-equivalent barrels, including a 174 percent replacement ratio for crude oil and other liquids.”

This sounds great on the surface which is precisely what press releases are designed to do. But a closer inspection is warranted because down in the body of the release it is admitted that:

“Reserve additions in 2012 from the liquids-rich Woodford and Bakken plays in the United States totaled almost 750 million oil equivalent barrels.”

So approximately 40% of the replacement reserves (750 million of 1.8 billion) for the world’s largest oil and gas company are coming from two unconventional plays with known exceedingly steep declines and short lives.

Since the Woodford play has already dropped from 84 rigs a few years ago to a mere 4 today and production is plummeting like the proverbial lead balloon, it is not worth examining. So let’s examine actual data from the Bakken.

Several independent assessments have been released on the Bakken in the past few months. A recent report by the Post Carbon Institute examined production data on approximately 60,000 wells in every shale play in the U.S. including the Bakken and the following characteristics of the play emerged:

“Bakken wells exhibit steep production declines over time….The first year decline is 69 percent and overall decline in the first five years is 94%. This puts average Bakken well production at slightly above the category of “stripper” wells in a mere six years, although the longer term production declines are uncertain owing to the short lifespan of most wells.”

So Exxon Mobil is relying heavily on two fields, one of which is already in steep decline and the other with wells that have exhibited the propensity to be at “stripper well” status in a mere 6 years, 94% played out by year five.

And it gets worse.

PCI continues:

“The yearly overall field decline rate is about 40 percent…The lack of growth in IP’s (initial potential) in new wells indicates that the increases from “better” technology have [already] been achieved and the sweet spots have been located and are being drilled off. These are the symptoms of an early-middle-aged shale play.”

Is it any wonder that financing could not be obtained for building the pipeline infrastructure out of the Bakken? Industry has committed to shipping the crude by rail at three times the cost instead. A pipeline simply would not pay for itself. Further, by the time it was built, the play would be done. Based on EIA estimates of available well locations left to drill plus existing wells, this yields calculations which, according to PCI, estimate the average well production for the entire play to fall to stripper well status by 2022 or less than 10 years. Further, these calculations are corroborated by the USGS estimates as well.

And yet Rex Tillerson, CEO of Exxon Mobil stated in the press release:

“Replacing production with new sources of oil and gas enables ExxonMobil to develop new supplies of energy that will be critical to support future demand, economic growth and improved living standards.”

Replacing production would indeed support future demand, economic growth and improved living standards if it was long lived and exhibited consistency. The fact that the world’s largest oil and gas company is reduced to relying on such fields for a significant portion of their reserve replacement is alarming at best.

As one geologist put it: these companies appear to be in slow liquidation.