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A recent Wall Street Journal article discussed major oil company reserve holdings and how investors should evaluate a company’s reserve quality, quantity and global geographic distribution. It is an interesting story about a very important topic, but a lack of clarity with regard to some of the methodology and terminology leaves many questions unanswered. However, the overarching corporate strategy discussion provides food for thought as analysts and economists continue evaluating the major integrated oil company business model created by the wave of mega-mergers that began 10 to 15 years ago.

The analysis hinges on data compiled by consultancy Rystad Energy, which estimated the world’s 11 largest listed firms’ “oil & gas resources” in billion barrels of oil equivalent – a common metric that combines oil and gas. Whether the “largest” companies are defined by operational criteria like reserves/production or financial metrics like market capitalization is unclear. Additionally, it is not clear how “oil & gas resources” are defined.

This issue came up at the recent USAEE/IAEE North America Conference, where Wagner & Brown Senior Petroleum Engineer Billy Harris explained reserves identification and said the Petroleum Resources Management System is the most widely accepted measurement framework.

The PRMS was jointly developed by the Society of Petroleum Engineers (SPE), Society of Petroleum Evaluation Engineers (SPEE), American Association of Petroleum Geologists (AAPG), and the World Energy Council (WEC), said Harris. He also said this is the system essentially adopted by the US Securities and Exchange Commission, which makes it the most widely-accepted US reserve reporting metric and the numbers Wall Street uses to evaluate oil companies, as all NYSE-listed firms are required to report their reserves on this basis in their regulatory filings.

So what does this mean? Harris explains the situation as such: “Reserves are those quantities of petroleum anticipated to be to commercially recoverable by application of development projects to known accumulations from a given date forward under defined conditions.” Reserves must further satisfy four criteria. They must be:




•Remaining (as of a given date) based upon the development project(s) applied

The major reserves categories are Proved Developed, Proved Undeveloped, Probable, Possible and Prospective Resources.

In his slide presentation, Harris used a humorous fish analogy – attributed to respected petroleum engineer Arlen Edgar – to explain what these categories mean.


Circling back to the Wall Street Journal story, the analysis includes PetroChina and Rosneft in the universe of “largest listed” companies, which begs many questions and probably does not offer the most level playing field. PetroChina is the listed subsidiary of fully-state owned China National Petroleum Corporation, which holds 86.5% of the company’s shares. While PetroChina lists some of its shares on Chinese exchanges and American Depository Shares on the NYSE, it remains a national oil company at heart, arguably beholden more to Chinese government interests than shareholder wealth maximization. Additionally, given the complex corporate structure vis-a-vis its state-owned parent, the degree to which PetroChina’s oil & gas reserves reporting aligns with SEC regulations is questionable.

Rosneft is in a similar situation, it remains a majority state-controlled company with shares listed on Russian exchanges and 9% of its total shares listed as Global Depository Receipts on the London Stock Exchange. Rosneft is largely a Kremlin oil policy tool in which shareholder interests could be subordinate to those of the state, where those interests diverge.

As a result, comparing these companies on the basis of loosely-defined reserves figures and corporate strategy would appear to be of limited usefulness.

However, the interesting question of whether the international “super majors” are better off as fully-integrated enterprises or perhaps broken down into more focused component companies becomes increasingly important as the global oil and gas industry evolves in the current century.

Replacing reserves – finding more oil & gas than they produce each year – has become a huge challenge for these behemoths. The refining and marketing business faced strong headwinds – particularly in North America – in recent years, which caused some larger integrateds like ConocoPhillips to spin off their downstream operations. And much of the world’s “easy” oil has been discovered and is controlled by national oil companies, thus leaving it off limits to the international majors, which are increasingly forced into ultra deepwater, the Arctic and unconventional resources. Not to mention shifting liquids consumption from the Western Hemisphere to the East of Suez market and the increasing importance of natural gas and decreasing market share of oil in many of these companies portfolios.

How one defines “resources” and how successful companies are at replacing reserves is extremely important for investors assessing enterprise value and long-term corporate strategy. Lumping state-controlled firms – that happen to float some shares – together with privately-held international oil companies can be challenging at best and yield misleading results at worst.