E&Y: Low Commodity Prices Trigger Decline in Proven Reserves

With low oil and natural gas prices making some plays uneconomic for drilling, U.S. oil and gas companies have been forced to reclassify some oil and gas reserves.

According to Ernst & Young’s 2015 U.S. Oil and Gas Reserves Study, the top 50 U.S. E&P companies to revise downward their proven oil reserves by 4.1 billion barrels and natural gas reserves by 40 trillion cubic feet (Tcf). These companies also recorded declines in their end-of-year oil and gas reserves. Oil reserves declined 12 percent to 24.1 billion in 2015, while gas reserves fell 21 percent to 147.0 Tcf..

Companies have been forced to make the revisions as some reserves today don’t meet the U.S. Securities and Exchange Commission’s definition of proved developed reserves. Some companies in the study also had to remove proven undeveloped reserves (PUDS) because they didn’t meet the SEC threshold for a PUD in the current pricing environment. This not only includes PUDS that are uneconomic for drilling, but because the companies that own them face bankruptcy or significant liquidity issues, said Herb Listen, Assurance Oil and Gas Leader for Ernst & Young LLP in the U.S., during a media briefing Tuesday in Houston.

“One of the things to remember when we talk about reserve revisions is that these reserves are still in the ground,” said John Russell, U.S. Oil & Gas Assurance Partner, during the briefing. “They just don’t meet the definition for reporting anymore.” To meet that definition, a different price environment, or different technology that can produce oil and gas at lower cost, is needed.

Russell told reporters that he expects production to flatten out in 2016 and in 2017. He saw a similar delay in declining oil prices impacting production, when production didn’t start to fall off in 2009 and 2010 in response to the 2008 oil price downturn.

According to the study – which focused on the top 50 largest U.S. E&P companies by the size of their end-of-year oil and gas estimates – companies slashed their 2015 capital spending by 41 percent from 2014 levels and recorded property impairments of $141.8 billion. Despite these cuts, U.S. oil and gas production continued to grow in 2015. From 2006 to 2015, combined U.S. oil and gas production for the companies studied grew six percent on average.

 “When you look at 2015 alone on a BOE production basis, production was up six percent over 2014,” said Listen. “It’s amazing when you think about the significant CAPEX cutbacks companies made in 2015. What that tells us that the activity already underway in early and mid-2014 continued to sustain.”

Now that U.S. E&P companies have found themselves in the Era of Abundance, companies will seek to flourish by making smart decisions around costs, acquisitions and efficient operations, Listen said. Right now, companies are doing what they can to cover P&A [plugging and abandonment] costs and drill the wells they have to drill. Some companies are not completing wells to keep a lid on spending, Russell said. The companies E&Y works with also are focused on development spending ahead of exploration spending.

 “You’re seeing a lot of maneuvering by companies to live within the current cash flow environment,” Russell commented. “It will take a while before industry starts spending again, depending on the players.”


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