As a result of very low prices during 2016, certain quantities of liquids and natural gas no longer qualified as proved reserves under SEC guidelines.
These amounts included the entire 3.5 billion barrels of bitumen at Kearl in Alberta, Canada. Another 800 million oil-equivalent barrels in North America did not qualify as proved reserves, mainly due to the acceleration of the projected economic end-of-field life. These revisions are not expected to affect the operation of the underlying projects or to alter the company’s outlook for future production volumes.
Consistent with SEC requirements, ExxonMobil reports reserves based on the average of the applicable market price prevailing on the first day of each calendar month during the year. Prices to date in 2017 have been higher than the average first-of-month prices in 2016. Among the factors that would result in these amounts being recognized again as proved reserves at some point in the future are a recovery in average price levels, a further decline in costs, and / or operating efficiencies
which is precisely what I (and others) have been pointing out.
1. the proven reserves are simply downgraded to another category. They remain on the books just are handled differently in terms of accounting and valuation
2. reserve audits and assessments are done each and every year for submission to SEC or similar regulatory bodies (instrument 51-101 in Canada). The average price of crude over the year must be used for economic analysis and the forecast for price increase generally cannot exceed an inflationary bump unless there is proof of a change to pricing in the future.
3. Each year is essentially a clean slate given what may not qualify as booked proven reserve this year might next year as a consequence of price or costs
4. What is reported often has little bearing on the companies ongoing activities. Companies develop resources that are currently uneconomic with a view to either being able to lower costs in the future or enjoy higher prices. Companies are all the time working on all the categories of reserves and resources
5. the impact is not that these reserves will be lost but that in the short term the company must report an impairment charge in their balance sheet which in turn could result in a large non-cash loss as has been the case for Exxon. For many smaller companies that require equity in the market or debt financing this can be problematic as it affects their ability to raise cash in the market through equity (lower valuation in any prospectus) and for those with reserve based credit facilities they will be in continuing discussions with lenders as to the overall negative impact on their ability to meet ceiling tests. Since Exxon is largely self financing the impact is not as severe.
6. the overall impact of such a write down is not readily noted until you dig through the entirety of their financials. As Rockman points out the potential impact on net revenue after tax is likely positive.
It is easy to make a mountain out of a molehill with regards to reserve write downs. If prices stay low for a number of years there will definitely be a problem but if they recover (which they have already to some extent) it isn't as big an issue.
What seems to be missed here is that even with such a large reserve write down XOM still managed a 70% reserve replacement ratio. They added 2.5 billion barrels.