Prolonged Oil Recession Takes Toll on Reserve Replacements

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Getty Images

Oil companies have metrics which keep track of the expansion of their oil and natural gas production. One metric, known as a reserve-replacement ratio, divides the total amount of oil reserves purchased in one year by the total amount of oil and gas extracted in that same year. It shows investors whether or not a company can find new opportunities and if it has the resources required to continually grow.

The ratio also represents how long a company can maintain current levels of production. Exxon’s reserve-replacement ratio has been at least at 100 percent for the past 21 years, and in 2014, it was estimated that the company had 17.4 years in which it could maintain current levels of production. 2015 was the first year in which the metric fell to 67 percent, which told investors that the company could continue current operations for sixteen years into the future.

Sixteen years does still seem like a long time to ensure operations. However, the fact that this is the first time in 21 years that Exxon’s reserve-replacement has actually decreased should serve as an indicator of the struggle companies are going through to stay afloat in a turbulent ocean of oil. Companies must make sacrifices as they attempt to maintain normal operations while the price of their commodity is decreasing. Taking these kinds of hits now will ideally ensure the company’s future security.

Article written by HEI contributor Timothy McNally.

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