Canada’s fading oil promise leaves U.S. majors struggling

Oil-sands investments in Western Canada that gobbled tens of billions of dollars over the past decade are proving an Achilles heel for some of the world’s biggest energy producers.

ExxonMobil slashed proved reserves the most in its modern history after removing the entire $16 billion, 3.5-billion-barrel Kearl oil-sands project from its books on Wednesday. That followed ConocoPhillips’ announcement a day earlier that erased 1.15 billion oil-sands barrels, plunging its reserves to a 15-year low.

While prolific shale plays in Texas and Oklahoma are going through an investment boom with oil above $50 a barrel, the oil sands have fallen out of favor. Current investments in the region amount mostly to long-planned expansions by large Canadian producers like Suncor Energy Inc., while majors like Statoil have sold assets. Suncor, which took over Canadian Oil Sands less than a year ago, is down more than 3 percent this year in Toronto.

The oil-sands operations in northern Alberta are among the costliest types of petroleum projects to develop because the raw bitumen extracted from the region must be processed and converted to a thick, synthetic crude oil. In addition, Canadian crude sells for less than benchmark U.S. crude because of the added cost to ship it to American refineries and an abundance of competing supplies from shale fields. That’s why the oil sands have been particularly hard hit by the worst oil slump in a generation.

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The combined 4.65 billion barrels of oil-sands crude removed from Exxon’s and Conoco’s books are worth $183 billion, based on current prices for the Western Canada Select benchmark.

The revisions hit as both U.S. companies, along with the rest of the oil industry, strove to recover from a 2 1/2-year market slump that collapsed cash flows, wiped out hundreds of thousands of jobs and prompted many explorers to cancel their most ambitious drilling programs.

Under Securities and Exchange Commission rules, proved reserves can only include oil and gas fields that can be produced economically within the next half decade. Price trends from the previous 12 months are compared against the estimated cost to harvest crude and gas in determining which reserves are counted.

The revisions of what qualifies as proved reserves are not expected to affect the operation of the underlying projects or to alter the company’s outlook for future production volumes, Exxon said.

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Exxon’s 19 percent cut to global proved reserves amounted to the largest annual revision since at least the 1999 merger that created the company in its modern form, according to data compiled by Bloomberg. That included 1.5 billion barrels of reserves that were pumped from wells across the globe. The previous record cut was a 3 percent reduction taken during the height of the global financial crisis in 2008.

ConocoPhillips on Tuesday shrank proved reserves by more than one-fifth, the majority of it stemming from its de-booking of oil-sands crude.

Reserves are a key metric watched by investors because they are an indicator, along with commodity prices, of future cash flow. When the 2008 reserves cut was announced in February 2009, Exxon shares lost more than 4 percent in a single day, wiping out almost $17 billion in market value.

Exxon, facing a SEC probe into how it valued its portfolio amid the worst oil market collapse in a generation, signaled in October and again last month that the revision was probably coming.

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The world’s largest oil explorer by market value held out hope that the de-booked barrels will one day be restored to the proved reserves category. Higher energy prices or lower expenses to produce oil could improve the outlook for developing those fields, the company said.

“Prices to date in 2017 have been higher than the average first-of-month prices in 2016,” the Irving, Texas-based company said in a statement on Wednesday. “These revisions are not expected to affect the operation of the underlying projects or to alter the company’s outlook for future production volumes.”