RE:RE:RE:RE:RE:Montney formationToday's edition of the Calgary Herald had a good article explaining Exxon's writedown. As a few others have noted, it's an accounting requirement, and does not necessarily mean that Exxon is pulling out of the oil sands.
Article Yedlin: ExxonMobil's massive reserve writedown not reason for oilpatch panic
Oilpatch observers were buzzing after a recent ExxonMobil filing with the U.S Securities and Exchange Commission showed the company wrote down the value of its oil and natural gas reserves by 19 per cent. A writedown of this magnitude — which included 3.5 billion barrels at Imperial Oil’s Kearl oilsands project and another 200 million barrels at Cold Lake — has not been seen in at least a decade. Yet it’s no reason to start playing This is the End. Exxon’s adjusted valuation is the result of SEC rules that require companies to value their reserves based on the average commodity price for the calendar year, with prices taken on the first day of every month and averaged through the year. The exercise essentially demonstrates the reserves, on a historical basis, are considered uneconomic because the cost to produce them exceeds the price. Canadian rules, under National Instrument 51-101, allow companies to use a price forecast that stretches over seven to 10 years when determining the value their reserves. The U.S. method is akin to driving down the highway while looking in the rear view mirror. Canada’s approach is fixed on the future. American companies can revalue their reserves when prices recover, but the net effect is to create a lot of noise that isn’t useful to making long-term investment decisions. That’s particularly true in the oilsands space, where investment decisions are made over very long time horizons, not on the historical trading price of the prior year. As of Friday, all but one major oilsands producer had reported fourth-quarter and full-year 2016 results, with Canadian Natural Resources Ltd. (CNRL) to announce its numbers Thursday. While the results are far removed from the eye-popping numbers of 2014 and several years prior, they are much better than what was reported for 2015. The story is largely positive, despite Suncor chief executive Steve Williams’ remarks on the future of oilsands mining operations. On his company’s recent conference call — where Suncor reported fourth-quarter earnings of $521 million versus a $2-billion loss for the same 2015 period — Williams said the era of investment in mining operations is coming to an end. “Not just for Suncor, but for the industry,” he said. “When we look at the absolute economics of Fort Hills, those are not projects we will be repeating in the foreseeable future.” It’s really a moot point for Suncor since the company has nothing in the hopper, after Fort Hills, on the mining front. While the technology risk remains lower for mining operations, growth in oilsands production, Suncor included, will come from in situ projects. The costs associated with developing and operating a mining project are twice that of an in situ operation. And in a world of lower prices, the game is all about cost control. One oft-heard narrative is that the oilsands are not competitive to other resources because of those higher development costs. That refrain has grown louder since prices collapsed in 2014, coupled with the election of U.S. President Donald Trump, whose administration has mused about a tax on oil imports and pledged significant revisions to the U.S. tax code. GMP FirstEnergy’s Mike Dunn, who has covered the oilsands and big cap companies for a decade, says Canadian companies are competitive and winning at the cost game. ”Reliability is better, costs are decreasing, productivity is increasing and there are still more gains to be made in terms of boosting productivity,” said Dunn. The oilsands picture is brighter than it was a year ago, with two pipeline projects approved in Canada and the prospect of Keystone XL going ahead. One example of the focus Canadian players have placed on the cost side is at CNRL, where Dunn said operating expenses at its Horizon project came in at $22 per barrel for the fully upgraded product. And that upgraded barrel fetches the West Texas Intermediate price. “When the second Horizon expansion is completed and producing in the fourth quarter of this year, sub-$20 a barrel operating costs are possible,” Dunn said. The question is how the oilsands players can stay competitive with U.S. shale producers, even with the dramatic decrease in costs that have been achieved. Dunn says they can because shale producers will face a rising cost curve, as money responds to the price signal and pours back into the shale plays. "We are expecting 10 to 15 per cent cost inflation in 2017, and if prices increase beyond US$60 a barrel, services costs could rise beyond that 10 to 15 per cent threshold,” he said. That’s not happening in the oilsands, where its slow and steady nature has an advantage. In addition to the fact significant progress has been made in developing and implementing new extraction processes, there are no mega projects needing to be staffed, which means there is no upward pressure on service costs. Even though it’s expected the oilsands will be part of the global oil supply for decades to come, a flood of new capital into the oilsands unlikely. “There is sufficient availability of labour, which means cost inflation is unlikely,” said Dunn, pointing out big projects that utilized the available labour pool, such as Suncor’s Fort Hills or Northwest Upgrading, are close to completion. All of this should not suggest the heavy lifting is over for the oilsands players. It likely never will be. But by focusing on improving productivity, decreasing costs and the prospect of gaining access to tidewater, they have created some breathing room. For now. Deborah Yedlin is a Calgary Herald columnist dyedlin@postmedia.com