Big Oil is unwilling to bet on future of crude

For a century, there’s been a key metric for judging the direction of the oil industry: The number of years it would take for wells to run dry. The reserves-to-production ratio or R/P — calculated as oil reserves, divided by annual production — has remained at eerily consistent levels since John D Rockefeller’s day. At major oil companies and in the US as a whole, it has rarely dropped below 10, and those moments have been associated with major disruptions.
When America’s R/P slipped below the critical level in the late 1960s, it came amid fears that the country might be approaching peak oil, heralding the heady geopolitics of the 1970s oil crises. When Royal Dutch Shell Plc’s R/P fell below 10 in 2004 due to a reserves writedown, the event was a major scandal, prompting the departure of a string of top executives and the payment of nearly half a billion dollars to aggrieved shareholders.
Now, Big Oil is running down its tank again. That’s an indication that when executives say oil demand may have peaked and the world is transitioning fast to renewables, it’s more than just words. If you still think crude will see bright prospects in the 2030s, you should be exploring and developing the oilfields to supply it. As with the collapse in their non-maintenance capital expenditure since 2016, the erosion of petroleum reserves is a sign that even Big Oil is capitulating to the decline of its key product.
Take Exxon Mobil Corp, whose traditionally Texas-sized R/P hasn’t fallen below 13 years in data going back to 1993. The 15.2 billion barrels of reserves declared in its annual report last week would run out in 11.05 years at 2020’s production rates. At the average of the three previous, non-pandemic-hit years, it would run for just 10.62 years.
Chevron Corp’s more modest reserve reduction announced the following day had the same effect, reducing its R/P to 9.89 — the first drop below 10 since at least 1998. Shell, meanwhile, has been running on fumes for some time. At the end of 2020, it was holding onto just 7.34 years of production, and Chief Financial Officer Jessica Uhl has declared the measure more or less irrelevant for the future of the business. “The reserves will be what the reserves will be,” she told an investor call last month.
While official figures for BP Plc and Total SE won’t be clear until they publish their annual reports later this month, all the supermajors appear to be trending in the same direction. BP’s production chief Gordon Birrell, for instance, told investors last September the company would target an eight-year R/P ratio, without giving a date for it.
Things are little different at the non-Opec state oil companies, which in the 2000s were seen by many as the future of crude production. Petroleo Brasileiro SA and India’s Oil & Natural Gas Corp. both now have R/Ps well below 10, while PetroChina Co is heading rapidly down the same path.
On a national level, traditional major exporters such as Ecuador, Indonesia, Mexico, and Trinidad and Tobago, have all fallen below 10. If it wasn’t for the vast, multi-decade deposits in the Middle East and Russia — plus huge pools of heavy oil in Venezuela and Canada that may never be developed — the world would be looking distinctly short.
None of these numbers mean that oil production will stop when current reserves run out. The core business of resources companies is to constantly add to their reserves — one reason why US crude supplies didn’t run out in the middle of World War II, as some of the earliest R/P ratios around the start of the 20th century would have suggested.
Reserves are also profoundly affected by expectations about where the oil price is headed. Technically, they’re the bit of an oil reservoir that companies expect to be able to produce profitably.

—Bloomberg