Make sure to read the fine print in Exxon Mobil's announcement that it added more oil to its portfolio last year than it produced.
The world's largest publicly traded oil company did add 1.6 billion barrels of oil (and the oil equivalent of natural gas) to its books in 2007, or 101 percent of production, by the accounting method it likes to use. But as Exxon Mobil states later in the press release, its so-called reserves replacement was only 76 percent of production by the method that the Securities and Exchange Commission favors. And no matter the accounting method, Exxon Mobil's reserves replacement number was the lowest since 1993, the Wall Street Journal reported (subscription required) over the weekend.
Reserves replacement is closely watched in the oil business, as a measure of the company's most significant assets that lets Wall Street know how to weigh future prospects. Earlier this month, Chevron delivered dismal reserves replacement news, saying additions to oil and natural gas assets totaled only 15 percent of production by the SEC's accounting method. Royal Dutch Shell broke with its tradition of announcing its reserves replacement along with its earnings, signaling to analysts that grim news is ahead.
The oil companies all say that the numbers would be fairer (and, incidentally, would look better) if the SEC would simply change its accounting method. Indeed, the SEC is considering doing just that.
Some changes may make sense. For instance, there are strict restrictions on booking Canadian oil sands as reserves, since they were long considered only mining operations, but they are now a booming source of oil. And the companies say the SEC is unfair to calculate reserves based on the commodity price of a single day, December 31. Last year, that happened to be in the midst of oil's historic run-up to $100 a barrel.
That high price has a downside for the oil companies, since their production-sharing agreements with many African and former Soviet countries give them less of a share (and fewer assets to book) when oil prices rise. That hurt Chevron in particular.
But whatever new shine the SEC decides to put on the numbers, it won't hide the struggles that the oil companies face in searching for, and indeed, holding on to oil. Exxon, for instance, notes that Venezuela's appropriation of its assets reduced its reserves by 500 million barrels. Shell similarly was hurt by a grab-back of assets in Russia.
Wall Street does not seem overly concerned about the reserves numbers. It is more focused on the extraordinary profits the companies are raking in. In fact, Exxon Mobil's price is up sharply in the wake of its reserves announcement, because of another uptick in the price of crude.
But an interesting analysis by former Wall Street Journal and New York Times reporter Steve LeVine appears both on his blog and in the New Republic magazine this month. He argues that resource nationalism (in Venezuela, Russia, etc.) will help spell the end of Big Oil.