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An In-Depth Look into Gas and Oil Reserve Replacement

June 14, 2018

Solomon’s Strategic Advisory Services recently completed its May 2018 Topic Report, US and Canadian Gas and Oil Reserve Replacement for 2017. Using publicly available 2017 data from annual information forms, annual reports, and 10-K reports, this topic report compares data from the 30 top gas and oil producers. The analysis and conclusions it provides give subscribers a detailed view of US and Canadian gas and oil reserve replacement.

A question often asked by non-producer clients in the Service or Pipeline sectors is, “Why should I care about the Producing sector’s reserve replacement?”

The answer, of course, comes from looking at the reserve life index — year-end reserves divided by yearly production. Reserve life is an indicator of future development opportunities in inventory. Think about how a firm like Walmart strives to have “just-in-time” inventory to minimize carry cost in order to get the best return from capital deployed — they would likely cringe at the thought of having over 15 years of inventory on the shelf! The exploration and production business obviously has longer cycle times than the consumer goods business; however, with the advent of pad drilling, these cycle times have been compressing, all while ability to add reserves has increased. The ability of firms with high (>12) reserve life index to lower inventory by increasing production leads directly to their ability to unlock increased revenues and shareholder value.

This means that participants from the Service or Pipeline sectors should be prioritizing producers with high reserve life indexes for business development opportunities. These producers need to have multiyear plans to increase production and monetize current high inventory levels.

The chart below shows the US proved gas reserve life index of the top 30 gas producers, which in aggregate increased to 13.5 years in 2017 from 10.8 years in 2016. Gas production for the US top 30 dropped to 11.0 trillion cubic feet (Tcf) in 2017, down 8% from 11.9 Tcf in 2016. The producers in green and yellow areas should be high-priority targets for service and pipeline sales and marketing departments.

Us Gas Reserve Life Index Blog Figure