It’s reserves reporting season in the oil and gas business. And one of the world’s biggest plays saw some major casualties this week as new numbers hit the street.

The Canadian oil sands.

ConocoPhillips

ConocoPhillips

ConocoPhillips kicked off the carnage on Tuesday. Reporting that it has cut reserves by 1.2 billion barrels at four oil sands projects — Surmont, Foster Creek, Christina Lake and Narrow Lakes. With overall reserves from these plays dropping from 2.4 billion barrels to just 1.2 billion barrels as of the end of 2016.

And the situation was even more severe for fellow oil sands producer ExxonMobil. Which announced yesterday it has written down 3.5 billion barrels of reserves from its Kearl project — representing a full 100% of the reserves previously booked here.

The driving force for the revision was lower oil prices. With both ConocoPhillips and Exxon being subject to strict reporting rules on pricing and reserves prescribed by the U.S. Securities and Exchange Commission.

Under SEC price assumptions, oil sands production no longer registers as economic. Meaning that reserves have to be scrubbed from the books — amounting to some massive deletions for mega-projects in this play.

The situation isn’t as dire as it might seem — with at least some oil sands barrels likely economic at today’s +$50/bbl price. In fact, ConocoPhillips executives told investors on a conference call that they expect to rebook the lost reserves if prices stay around current levels.

That point is also driven home by the divergence in performance between U.S. and Canadian oil sands firms. Cenovus Energy, for example, said its proved reserves rose 5% in 2016 — with that company subject to less-strict reporting rules from Canadian regulators.

But whatever the reasons, the metrics here look troubling — with Exxon’s reserves replacement ratio for 2016 plunging to just 65%. Such figures could drag down investor confidence and perhaps affect banking covenants. Watch for any knock-on effects over the next few months.

Here’s to pulling it out of thin air,

Dave Forest

Article by PiercePoints