While their reported 2010 reserve replacement numbers look good overall, if you dig a bit deeper, you'll find that things are not particularly what both investors and a world hungry for oil hope to see. ExxonMobil announced that additions to its proved reserves in 2010 totaled 3.5 billion barrels of oil equivalent (BOE), citing that they replaced 209 percent of production. The company also states that "our strategic focus on quality resource capture, a disciplined approach to investment and excellence in project execution have resulted in replacement of more than 100 percent of production for 17 consecutive years.".
Here’s a look at just how successful they have been from their 2009 Annual Report:
In the following paragraphs, the real story starts to emerge. I quote:
"The corporation’s reserves additions in 2010, the highest since the merger of Exxon and Mobil, reflect strategic acquisitions, new developments, as well as revisions and extensions of existing fields resulting from drilling, studies and analysis of reservoir performance. Reserves additions from acquisitions and subsequent revisions totaled 3 billion oil-equivalent barrels. Additions also came from the Sakhalin-1 Arkutun Dagi project in Russia and other countries including Canada, the United States, Nigeria, Norway and Abu Dhabi. Liquid additions totaled 905 million oil-equivalent barrels for a 102 percent replacement ratio and gas additions totaled 2.6 billion oil-equivalent barrels for a 328 percent replacement ratio.
At year-end 2010, ExxonMobil's proved reserves base increased to 24.8 billion oil-equivalent barrels, including 2.8 billion oil-equivalent barrels from XTO...." (my bold)
So, basically, of the 3.5 billion BOE ExxonMobil added in 2010, 2.8 billion BOE came from their December 2009 (closed in June 2010) all-stock, $31 billion (plus $10 billion in long-term debt) take-over of XTO, a major operator in the American shale gas resource play. On December 31st, 2009, XTO had proven gas equivalent reserves of 14.827 Tcf which included a modest 294 million barrels of oil and 12.5 Tcf of natural gas. The acquisition of XTO brought ExxonMobil's reserve mix to 53 percent natural gas and 47 percent liquids. I do find it interesting how ExxonMobil states that the "resource base" associated with the XTO acquisition is as high as 60 trillion cubic feet equivalent; "resource base" does not mean recoverable, proven reserves, rather, it refers to the total amount of gas in the ground, much of which is not ultimately recoverable because of the nature of shale gas plays. But I guess the 60 Tcf number looks and sounds sexier.
Now, let's look back at ExxonMobil’s numbers. ExxonMobil added 3.5 billion BOE in 2010, 2.8 billion BOE of which came from the XTO acquisition. That means that the XTO acquisition accounted for 80 percent of ExxonMobil's reserve additions with the balance of 0.7 billion BOE coming from other acquisitions, the drill bit, extensions of other fields and reserve revisions. In fact, in the press release, ExxonMobil admits that 3 billion BOE of the total 3.5 billion BOE added came from acquisitions and reserve revisions meaning that a rather paltry 0.5 billion BOE or 14.3 percent came from the drill bit. That's a pretty sad replacement rate for an exploration and development company.
According to ExxonMobil's Q4 2010 estimated results, they report the following daily production numbers:
If you take the 4.447 million BOE per day average for the 12 months of 2010, the company is producing around 1.65 billion BOE per year. If you look at the 0.5 billion BOE in proved reserves that were added from everything but acquisitions and reserve revisions, the company is replacing only around 30 percent of what it produces in a year with the drill bit.
One last revelation from the press release states that:
"The long-term nature of the industry, and the large size of the discrete projects that provide a significant portion of the corporation’s reserves additions, make it appropriate to consider a time horizon longer than a single year. The 10-year average reserves replacement ratio is 121 percent, with liquids replacement at 95 percent and gas at 158 percent. The reserves additions made during this period comprise a diverse range of resource types and have broad geographical representation. ExxonMobil’s reserves life at current production rates is 15 years." (my bold)
Basically, for every barrel of oil that ExxonMobil produces, they are only finding 0.95 of a barrel. That's not just the case for this past year, this is the average replacement ratio over the past 10 years. It certainly appears that oil is rather hard to find, unless of course you have the money to buy someone else’s!
It’s becoming rather apparent that significant volumes of oil are becoming increasingly difficult to find; the "elephants" are simply becoming a rather scarce commodity. In light of last week’s WikiLeaks revelation that Saudi Aramco is having difficulty with both the size of its oil reserves and production levels, it appears that it is highly likely that high oil prices will be around for the long term.