Say You'll Be There - Crude and Gas Reserves In Doubt

Back in the early 2000s, the outlook for energy security in the U.S. was bleak. Domestic oil production had been on a steady decline since 1985 and gas production was also well off its apex in the 1970s. M. King Hubbert’s concept of peak oil ignited fears of eventual energy scarcity. Given fossil fuels’ ubiquity underlying our entire Western economic and industrial structure, it’s no wonder that folks were concerned. But then the Shale Revolution changed everything. It’s often been said that necessity is the mother of invention and, after many trials and with considerable ingenuity, U.S. producers learned to wring massive volumes of previously trapped hydrocarbons from shale and gave the U.S. energy industry a new lease on life. But there are still limits on how much crude oil, natural gas and NGLs can be economically produced — and concerns lately that the best of the U.S.’s shale resources may have already been exploited. In today’s RBN blog, we examine crude oil and gas reserves: how they are estimated and what they tell us about the longevity of U.S. production.

One of the major shocks of the pandemic was walking into supermarkets to see vast stretches of bare shelves where, for decades, stacks of toilet paper, diapers, infant formula, cooking oil, and even white flour used to magically repopulate overnight. The fix turned out to be relatively easy: Get people back to work and work out the kinks in delivery networks. (Now our only concern is how expensive everything is!) Rebuilding inventories in the oil and gas industry, in contrast, is an ever-present concern, longer-term in nature and more complicated, involving a wide range of variables and uncertainties. In today’s RBN blog, we examine the challenges that exploration and production (E&P) companies face in their efforts to more efficiently and cost effectively replace their oil and gas reserves — and we highlight some early warnings signs of potential future inventory issues.

U.S. E&Ps’ dramatic strategic shift from prioritizing growth to focusing on cash flow generation and shareholder returns has resulted in more earnings-call talk about dividends and share buybacks and less discussion about efforts to replenish and build their proven oil and gas reserves — a critically important factor in establishing company value. The emphasis on financial results has largely masked a sizable increase in the costs E&Ps are incurring to organically replace their reserves and a significant decrease in the volumes replaced. In today’s RBN blog, we’ll analyze the weakening in reserve replacement metrics over the last two years, a trend that has led many producers to grow their reserves through M&A.