Energy Prospectus

I track 52 oil dominated companies: 35 in the USA and 17 in Canada. To get an idea about their long-term future I track for each company (1) reserves, expressed in years of production and (2) Reserves Replacement Ratio (RRR).

Reserves in years of production
• Reserves of oil companies can be expressed in years of the following year production.
• If for example a company has 2023 proven reserves of 20 mln barrels and will produce 2 mln barrel in 2024, then its reserves are equivalent to 20/2 = 10 years of production.
• The ratio varies over time, as both reserves and production rates change.

Reserves Replacement Ratio
• Reserves Replacement Ratio is the ratio between reserves autonomously booked in a year, divided by the production in the same year.
• If for example a company added 2.0 mln barrels to its reserves in 2023 and produced in 2023 2.5 mln barrels then the RRR = 2.0/2.5 = 0.8.
• The RRR can be both positive and negative (=reserves de-bookings). To stay in business long-term, companies over a longer period should have a RRR > 1.0.
• Acquisitions and disposals are not part of RRR.

Results for the period 2019-2023
• For American companies the years of production between 2021 and 2024 on average fell from 12.5 years (2021) to a low 8.8 years (2024), while the average RRR over the period 2019-2023 was 0.97.
• American companies on average did not fully replace their reserves and due to a growing production have reduced the period they can maintain production at 2024 rates.
• The 17 Canadian oil companies fared better. The number of years of production dropped from 13.9 years (2021) to a still decent 12.3 years (2024). The average RRR over the period 2019-2023 was a high 1.48.
• Canadian companies booked more the reserves than they produced and can maintain their 2024 production for a longer period.

Conclusions
• Canadian oil companies have relative more reserves and a higher reserves replacement ratio than American companies
• With no fundamental changes, production wise Canadian companies will stay longer in business than their American counter parts.

Note: In above years of production and RRR are the mathematical average all companies. Exxon weighs as much as Evolution Petroleum. It does not mean that the summed numbers of all companies will follow the same trend.

Just remember that "reported proved reserves" are very conservative because they are based on 3rd party reserve reports.

Also keep in mind that commodity prices do impact recoverable reserve volumes. For example, higher ngas prices will significantly extend the economic limit of a gas well thus increasing recoverable reserves.

The USA and Canada reserves replacement Ratios (RRR) compares well with the rest of the world.

Worldwide exploration discoveries
• Oil and gas discoveries have been falling for years and are well below the volumes produced.
• According to the Gas Exporting Countries Forum, oil and gas discoveries were 10.5 B BoE (2022), and a record low 5 billion BOE (023).
• 60% of the 5-billion-barrel total were new oil discoveries and 40% were gas discoveries.
• Other sources quote different numbers: S&P Global reports 14 B BoE (2022) and 9 B BoE (2023), Statistica reports 5.0 B BoE (2023).

Booked volumes and recoverable volumes
• In my book exploration engineers are optimists and petroleum engineers are pessimists.
• Exploration engineers always want to book big volumes. The volumes are talked down by petroleum engineers, who must deliver them, typically to 50% of the original volumes.
• During appraisal, development and optimization petroleum engineers manage to roughly double the booked volumes and thus are real heroes.
• Therefore, I expect that booked exploration volumes can be doubled for recoverable volumes.

2022 and 2023 worldwide reserves replacement factor
• The world roughly consumes 100 M bbl/d of oil, or 36.5 B bbl per year.
• The oil share of the exploration finds, assuming 60% of 10.5-14 B BoE, were 6.9-8.4 B bbl in 2022, and 3.0-5.4 B bbl in 2023 (based on 5.0-9.0 B BoE).
• Doubling the exploration oil volumes to recoverable volumes gives 13.8-16.8 B bbl (2022) and 6.0-10.8 B bbl (2023).
• This means that the worldwide Reserves Replacement Ratio (RRR) in 2022 was only 13.8-18.6/36.5 = 0.38-0.51 and an even lower 6.0-10.8/36.5 = 0.16-0.30 in 2023.

Conclusion is that the world is far from replacing the oil produced. The USA and Canada may be the best places to invest your money in oil and gas. as the rest of the world slowly is running down its resources.

Rationing oil by price will be required. We are blessed to have abundant nature gas reserves in North America. We need to use more natural gas as a transportation fuel and for power generation.

We need more common sense energy supply. Upgrade to the electricity grid is over due.

PE and Dan,

I greatly appreciate your ongoing analysis of US and Canadian Producers long term outlook.

When I look at oil and gas futures, I feel paper traders significantly discount the future price of oil and gas. No one is willing to honestly look at the combination of exploration and discovery rates versus growth in demand at today's very cheap prices. Compared to the 2011-2014 period average, oil should be 60% higher than today $82.

To me, the exceedingly smart geologists of the producers have literally looked under pretty much every rock on the planet, and we just are not finding new giant basins. So I feel future production from the known basins is significantly undervalued. It seems only a matter of time before the 1% annual demand growth of oil smacks into the giant slurping sound coming from declining basins around the world.

Someday this short term thinking is going to really bite our economy.

Kevin