[NEW YORK] Millions of barrels of untapped oil that US 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 US$95 a barrel are money losers at today's $60. When crude crashed in 2008, 44 US 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 vaporised," 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."
The shale boom has pushed US oil production to the highest in more than 40 years and slashed the country's reliance on imported fuel. The untapped resources are viewed by investors and lenders as a sign of a company's growth potential, and helped the industry attract more than US$230 billion in bonds, loans and share sales since the end of 2008.
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 per cent of proved reserves for the 44 companies, the data show, up from 26 per cent 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.
Fracking pioneers such as Devon Energy Corp. and Chesapeake Energy Corp., both based in Oklahoma City, were among the oil and natural gas producers that lobbied to make it easier to book undeveloped reserves. Before the rule changed, untapped wells typically needed to be close to a producing property.
Fracking Pioneers Devon and Chesapeake were among the first companies to unlock oil and gas trapped in deep underground layers of shale using a combination of horizontal drilling and hydraulic fracturing, which frees hydrocarbons with a high-pressure blast of water, sand and chemicals. The oil industry argued that these techniques made shale formations predictable across wide expanses, and that the SEC should allow the untapped wells further from producing properties should still count as proved.
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."
Judith Burns, an SEC spokeswoman, declined to comment. Representatives for Devon and Chesapeake also declined to comment.
At EOG Resources Inc, the world's top shale oil producer, more than 69 per cent of its US oil and liquids reserves have yet to be drilled, compared with 22 per cent at the end of 2008, the last year before the new rule went into effect, according to company filings. For Continental Resources Inc., founded and run by billionaire Harold Hamm, it's 61 per cent, up from 24 per cent.
K Leonard, a spokeswoman for Houston-based EOG, didn't return calls and e-mails seeking comment. Kristin Thomas, a spokeswoman for Continental in Oklahoma City, declined to comment.
The five-year clock is ticking on those undeveloped wells. Oil has fallen 45 per cent 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 US$95 a barrel. So far this year, it's about US$52.
Some of those wells may never be drilled, while others may return to inventories if prices rise. A company's deletions may be offset by the addition of new prospects, purchased properties or an increase in the estimated amount of crude each well will produce.
Even though drilling costs are coming down, it may no longer be economical to tap all of the undeveloped wells, said Julie Hilt Hannink, head of energy research at CFRA, an accounting advisory firm in New York.
Drilling plans "could be predicated on $100 oil," and wells won't be developed unless prices rise, she said.
When crude plunged 77 per cent to US$34 a barrel in 2008, the 44 drillers deleted 7.8 per cent from their proved oil and liquids reserves, according to data compiled by Bloomberg.
The same thing happened again in 2012, when natural gas prices fell to the lowest in a decade, and the 44 producers revised their reserves of the fuel lower by 18 per cent. The 44 companies are all US-based members of the Bloomberg Intelligence North America Independent Explorers and Producers Index that have reserves information dating back to 2008.
Reserve reports for 2015 won't be published until early next year, and will be the first real test of how the undeveloped wells stand up to lower prices.
"The oil hasn't disappeared," said Mr 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."