Millions of Barrels of Oil Are About to Vanish

The below summary on disappearing oil won't cause a change and attitude or understanding among investors who really, pardon the pun, drill down into the numbers (which is something you should always do). But it will surprise less careful investors who take SEC reports as gospel.

 Bloomberg reports:

Millions of barrels of untapped oil that U.S. shale drillers discovered during the boom years are about to disappear from their inventories.

Six years ago, the industry pushed the Securities and Exchange Commission to make it easier for companies to claim proved reserves for wells that wouldn’t be drilled for years. Some prospects considered sure-things when crude was $95 a barrel are money losers at today’s $60. When crude crashed in 2008, 44 U.S. companies wiped 630 million barrels from their books.

Now the stakes are higher. Of all the proved reserves of oil and natural gas liquids found by the 44 companies since 2008, more than half -- 5.4 billion barrels out of the 9.7 billion -- is attributed to wells that don’t exist yet, according to data compiled by Bloomberg.

“We’re going to see a lot of proved undeveloped reserves get vaporized,” said Ed Hirs, a managing director at Houston-based Hillhouse Resources LLC, an independent energy company, who also teaches energy economics at the University of Houston. “It could easily be 10 or 20 years before some of these wells get drilled if prices stay at these levels.”...

While undrilled prospects have always been part of oil companies’ inventories, they’ve become a much larger share since the SEC changed the rules. Undeveloped properties account for 43 percent of proved reserves for the 44 companies, the data show, up from 26 percent at the end of 2008.

The SEC limits proved reserves to those resources that companies are reasonably certain can be profitably extracted with existing technology. The estimates are based on prices, geology, engineering and the historical performance of similar wells...

The regulator agreed, with a catch: To count the undrilled properties as proved reserves, the companies had to tap them within five years or erase them from their books.

“This was a big gift the SEC gave all the shale players,” said Art Berman, a petroleum geologist who worked for Amoco for 20 years and is now an independent energy consultant in Houston. “Suddenly, you were able to book all these new reserves. It gave the industry a whole new lease on life in terms of being able to attract capital.”...

The five-year clock is ticking on those undeveloped wells. Oil has fallen 45 percent since June, and companies have cut spending and slowed development. The SEC rules also prohibit booking proved reserves for money-losing wells. Profitability is determined by averaging the price on the first day of each month during the calendar year. In 2014, it was about $95 a barrel. So far this year, it’s about $52....

“The oil hasn’t disappeared,” said Hirs of Hillhouse Resources. “It’s always been in the ground, but the company that booked the reserves may not be around anymore to drill it.”