Oil Majors Must Count on M&A to Replenish Reserves, WoodMac Says

Royal Dutch Shell Plc's Oil Lubricants Plant

Lower oil prices have taken a toll on majors’ reserves, with some of them -- such as Royal Dutch Shell Plc -- forced to write down as much as 200 million barrels.

Photographer: Andrey Rudakov/Bloomberg
  • Companies have cut exploration budgets to ride out oil’s slump
  • Shell had worst replacement ratio last year among the majors

Major oil producers will rely on acquisitions for about half their reserve replacement in the future after cutting exploration budgets to weather the crude-price collapse, according to Wood Mackenzie Ltd.

Big oil companies are no longer trying to replace all their production through conventional exploration, the energy consulting company said in a report published Tuesday.

"Now their reserves replacement will also require inorganic, brownfield or shale investments," Andrew Latham, vice president of exploration research at Edinburgh-based WoodMac, said in an interview. "Exploration has become incremental."

Investors often use the reserve-replacement ratio -- the proportion of oil and gas production offset by new resources -- to value companies since it forms the basis for future output. Among seven oil majors, only three added more oil than they pumped last year. Exploration spending dropped by half from a year earlier to $7 billion, according to WoodMac, whichsees the industry slashing $1 trillion from exploration and development until the end of the decade.

Acquisitions Push

“The need for M&A in exploration is likely to be here for a considerable time," Latham said. The focus “will be on assets rather than on taking over companies.”

Woodside Petroleum Ltd. is among those snapping up exploration assets. The Australian company agreed to buy ConocoPhillips’ interests off Senegal for $350 million in July. The purchase included the deep-water SNE discovery, which operator Cairn Energy Plc estimates has 473 million barrels in resources.

Exxon Mobil Corp. was also said to be intalks with Anadarko Petroleum Corp. for a stake in a natural-gas discovery off Mozambique, and in advanced discussions with Eni SpA over a stake in another prospect in the same area.

Lower oil prices have taken a toll on majors’ reserves, with some of them -- such as Royal Dutch Shell Plc -- forced to write down as much as 200 million barrels. Shell had the worst reserve-replacement ratio last year at minus 20 percent, the lowest in 12 years, it said in February.

The companies are also disposing of costly assets as oil prices below $50 a barrel curb revenue. The Hague-based Shell aims to raise $30 billion from asset sales in three years following its $54 billion acquisition of BG Group in 2015. Among the assets it may sell are aging North Sea fields.

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