LONDON As crude prices recover, oil majors face a dilemma – how quickly should they seek to replenish reserves?
It’s the same question the cyclical oil industry has tackled many times before: go too fast and risk spending too much for little reward, go too slowly and your rivals will be better positioned to grab market share should oil prices rise.
New data revealed by a Reuters analysis shows the oil and gas reserves of global majors have fallen sharply.
Reserve life - the number of years that a company can keep production stable with its reserves - has decreased for Exxon Mobil, Shell, Total and Statoil, according to the Reuters analysis of the firms' annual reports.
BP and Italy's Eni saw a slight increase. (tmsnrt.rs/2nGfmte)
In the case of Exxon, the world's top publicly listed oil company, reserve life dropped in 2016 to 13 years, the lowest since 1997, after it wrote down Canadian oil sands.
Shell has its lowest reserve life since 2008 despite buying rival BG last year.
In the past, the trend may have caused alarm among investors.
But, focused on stock market returns, investors have clear advice: be cautious, do not overspend.
That, they say, is because the rise of oil production from shale and the growth of renewable energy mean oil majors should actively avoid storing volumes of oil underground they would have held in previous cycles.
Rohan Murphy, energy analyst at Allianz Global Investors, which holds shares in Shell, BP, Total and Statoil, sees a reserve life of eight to 10 years as "quite a healthy level".
"I don't think these companies should have a reserve life much above eight to 10 years, especially when we are trying to get to grips with what oil demand will be in 10 years from now."
The global transition away from fossil fuels to renewable sources of energy in coming decades further reduces the need for a larger reserve life, said Murphy.
That contrasts sharply with fears about peak supply, so widespread only a decade ago, when investors were eagerly watching for news about majors' reserve replacement.
Over the past decade, the world has changed so much that Saudi Arabia now plans to list its national champion Saudi Aramco in what is widely seen by the market as an attempt to cash in on the country's huge reserves before demand peaks.
Oil companies are required to report their reserves every year based on an annual average oil price. With an average 2016 price of around $44 a barrel, the lowest in over a decade, firms were forced to remove reserves from high-cost projects.
Jonathan Waghorn, energy fund co-manager at Guinness Asset Management, which holds shares in a number of oil majors, says lower reserves are not his big concern at the moment: "The focus is on cutting costs and living within cash flows so that they survive for the future."
To offset the shrinkage, companies could opt to acquire other oil firms or sign production-sharing deals with countries that hold large reserves, similar to what BP and Total did with Abu Dhabi last year, Morgan Stanley analyst Martijn Rats said.
Companies have also taken advantage of the rout to buy acreage for future exploration, such as Total's investment in Brazil and Uganda and BP's buy into Eni's Egyptian field Zohr.
"It has never been cheaper to buy reserves or find them yourself ... it is very much a buyers' market if you want to replace reserves," Allianz's Murphy said.
LOOMING SUPPLY SHORTFALL
The drop in reserves comes not only as oil prices fell but also because companies sharply cut spending in recent years, shelving many expensive, large-scale developments.
"We may be starting to witness the effect of significant capex cuts. The oil market is becoming increasingly undersupplied, which should move the oil price higher," said Kirill Pyshkin from Mirabaud, who has Shell in his portfolio.
Last year, 10 billion barrels of oil were discovered, around one third of global consumption, including well-appraisal activity, according to Per Magnus Nysveen, head of analysis at Oslo-based consultancy Rystad Energy.
Oil majors have made only a handful of large discoveries in recent years, including Zohr, Exxon's Liza field in Guyana and BP's Tortue discovery in west Mauritania and Senegal.
Since 2010, less than 2 billion barrels of oil has been discovered by majors per year and most of this in existing fields, Nysveen said.
"The shortcoming of oil replacement by the drillbit has been quite drastic ... Discoveries are not keeping up with production," said Nysveen, adding that supply could fall short by up to 2 million barrels per day within seven to eight years.
(Reporting by Ron Bousso, additional reporting by Dmitry Zhdannikov; Editing by Dale Hudson and Richard Mably)