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Big Oil Companies Couldn't Meet One of Their Most Basic Needs in 2015

By Tyler Crowe and Sean O'Reilly - Apr 5, 2016 at 3:45PM

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We dig into why oil companies haven't been able to replace their production with new reserves lately and the ripple effects it will have across the industry

For the first time in about a decade, most of the Big Oil players have replaced less than 100% of their reserves.

In this week's episode of Industry Focus: Energy, Sean O'Reilly and Tyler Crowe talk about where this fits into the state of oil today, and why it's not as alarming as it might initially sound. Then, a look at how oil could stand to recover big time once the market rebounds from the $40-per-barrel price point we're seeing today, and why it's not worth it for investors to try to predict when and how that'll happen. 

A full transcript follows the video.

This podcast was recorded on March 31, 2016. 

Sean O'Reilly: What happens when oil companies refuse to find any more oil? All that and more on this energy and materials edition of Industry Focus.

Greetings, Fools! Sean O'Reilly here at Fool headquarters in Alexandria, Va. It is Thursday, March 31, 2016, and joining me in studio is the man, the myth, the legend, Mr. Tyler Crowe. What's up, dude?

Tyler Crowe: [singing] Just the two of us ...

O'Reilly: Oh my god ... [laughs] now I'm going to have that stuck in my head all day, thanks to you.

Crowe: Oh, well, lucky you. It's a good song to have in your head.

O'Reilly: I guess.

Crowe: You could have a lot worse.

O'Reilly: But it is the fault of you and Mr. Muckerman, who is, of course, not joining us, because ... why?

Crowe: Some work training thing -- who cares.

O'Reilly: Some Motley Fool corporate-y training, it's fine. We don't need you, Muckerman!

Crowe: Please come back to us!

O'Reilly: [laughs] Do you think he'll listen to the show?

Crowe: I don't know. Probably.

O'Reilly: Probably? On his way home? So, lots of fun energy news, as always. We have a few, right off the bat. I usually tease the last story, I keep everybody going and everything, but we kind of have to talk about this, because it's a big deal. You'll explain why in a minute. Bottom line, the world's oil companies, particularly the majors, only replaced last year's 75% of their reserves. How long has it been since that happened? Ever?

Crowe: It's been like a decade. I think the last time, there was a post in The Wall Street Journal basically talking about companies not replacing their reserves at a 100% clip, and I think the last time that -- well, all the companies all at once, I think it was some time like 2004, 2005. So it's been close to a decade. Or, a little more than a decade.

O'Reilly: Did they just say the entire energy industry? Or did they take the top 20 firms and say 75% of them?

Crowe: Did not specify, but I think kind of the overall discussion was on the big players who spend all the money doing it. The Royal Dutch Shells, the ExxonMobils, the Chevrons of the world. ExxonMobil replaced about somewhere between 67% and 75% of their reserves last year, Royal Dutch Shell right around 75%, and the truth is, they're just not ... it's kind of a combination of, it's getting a little harder to find very large reserve replacements, and a little bit of less exploration spending here and there is going to tend to do that.

O'Reilly: It's not like they have an incentive, too, with oil at $30-$40 a barrel. Do you think ... obviously, long-term, this is a trend that can't remain if we're going to keep using oil. Is this something that'll reverse itself this year? What were these oil companies thinking when they cut these budgets so much that they weren't even replacing their own reserves? Were they just like, "We'll just make up for it, and then some, when oil recovers?"

Crowe: They were cutting their exploration budgets this much because they wanted to keep the lights on. I mean, if you look at cash flows for these companies and their ability to pay their dividends, which is the primary reason why somebody is going to invest in a big oil company anyway, is stability and a dividend. You're not buying them for double, triple stock price growth. So, when you're not spending any money on exploration, it's just not going to happen. And, a lot of these guys have the cushion to do it, if you look at their five-, 10-year reserve replacement rates, it's 15%-20% greater than what they produced.

So, they've been building up a little bit of cushion in the event that something like this happens. You look at ExxonMobil, they have proved reserves of more than 20 billion barrels, and then what they call their resource base, which is stuff that they're evaluating, and has been discovered in years prior and they think they can get, is up to 90 billion barrels, which is something on the range of --

O'Reilly: Absurd amount, yeah.

Crowe: -- on the range of 40-50 years of production at today's constant rates. So, it's not like the alarms should be going off and everybody's heads, "Oh my God, this is an absolute crisis!" It's a one-year thing. If you look over a five-year reserve replacement rate, they're still above 100%. And sometimes, these bad years are going to happen. And chances are that 2016 is going to be another really bad year, because they're not spending any money on it.

O'Reilly: This reminded me, you were talking about how these companies just wanted to keep the lights on. And I was reminded how even last October, when you and I went to Houston to talk to a few energy companies, we definitely got that impression. People were cutting office expenses, they weren't buying water bottles, it was definitely ... [laughs]

Crowe: Yeah, every single time that they could cut a little bit of an expense here, a little bit of an expense there, it was very prominent. And I mean, like you said, when we were talking with the oil supply and service providers, like --

O'Reilly: Even those guys, who don't necessarily have reserves of oil.

Crowe: Yeah, DistributionNOW and National Oilwell Varco, they just kept talking about how all the phone calls they were getting were, "Hey, can we get this for less?" It was all about pricing. Everybody was trying to get that little extra dime, little extra cut, so they could make that dollar go a little bit longer.

O'Reilly: So, these oil companies -- I'm very, very sorry that I missed the National Oilwell Varco interview. I had to get back here. So, people were literally calling them and being like, "Hey, can you give us 5% off on this pipe?"

Crowe: Yeah. I mean, not specifically that way, that was kind of the way he presented it. But it was like, "We're having discussions with our suppliers or our customers on how we can reduce costs." And there would also be the back and forth, like, "Well, you can reduce costs by spending less on this," or, "Here's a technology where you can get better well economics -- "

O'Reilly: "But it's going to cost more. Take your pick."

Crowe: Yeah, it's sort of trying to play that game of what's going to be the most -- not just the lowest cost, but the most economical.

O'Reilly: Does this slow replacement rate and lack of investment have anything to do with the recent rumors that ExxonMobil is looking to bid on, for lack of a better term, some huge reserves?

Crowe: It's certainly part of it. I mean, when you're looking at how expensive it is to explore for new oil, especially for a big oil company who has to go hunting -- they have to go hunting with an elephant gun versus a slingshot, if they want to replace their reserves. They're not like a Whiting Petroleum or somebody like that who's just trying to replace 150,000 or 160,000 barrels per day. We're talking about a company that needs to replace 4.1 million barrels per day. And so, when you need to move the needle that much, you need big, big exploration expenses, which normally means going offshore, and going to places where we haven't really found oil yet. And that's going to cost a lot of money.

At the same time, there is an opportunity here with other companies that are struggling for cash that need a little bit of help, and have some lucrative assets, but no way of developing them. This is the case right now, where ExxonMobil is looking at some assets from the Italian integrated oil company Eni S.p.A. They have some very attractive assets off the coast of Mozambique that's looking in the trillions and trillions of cubic feet of natural gas. It's probably one of the largest finds of natural gas that we've had in the last five to 10 years. They're also looking at some of their very lucrative assets in North Africa, such as Egypt and things like that.

O'Reilly: I was just about to ask, you said it's Eni?

Crowe: Yeah.

O'Reilly: Was it them that I read that found a huge gas field in the Mediterranean off the coast of Israel?

Crowe: No, they found a large one off Egypt.

O'Reilly: OK.

Crowe: It's kind of in the same area --

O'Reilly: It's kind of catty-corner there, between ... yeah.

Crowe: Yeah. So, there are some large gas fields off of Israel, Noble Energy for the U.S., they're on the Israel side, basically because they're the only company in the U.S. that doesn't have any ties to the Middle East, so they can operate with Israel, versus everyone else who's kind of been dabbling on the Egyptian side of the border, or, territorial boundary on that offshore area. And they're finding some very large natural gas deposits.

O'Reilly: Cool. All right. Tyler, how long have we been talking on this show about oil carnage?

Crowe: Enough that I'm guessing that listeners are really starting to --

O'Reilly: Little tired?

Crowe: -- get tired of it. [laughs]

O'Reilly: Yeah. So, before we move on, listeners, we're very sorry. [laughs]

Crowe: We have to keep talking about it!

O'Reilly: We have to! We don't have a choice! We've been saying a while how, we're Fools, we're not macro-people, we don't make macro calls, but we know economics, and we know that current oil prices are not incentivizing anybody to find more oil, which relates to our first story today. But, something's going to have to happen to change the current status quo. Recently, Bloomberg put out an article that in so many words basically said that, when the market rebounds, it could rebound big. Why did they say that?

Crowe: We always talk about supply and demand. It's kind of the overarching theory when we talk about oil, is too much or not enough supply. And the theory is that there is massive under-investment in the oil and gas industry right now to maintain current production levels. You have the natural decline of oil reservoirs wherever you go. It can be very high in places like shale, where it's up to 60%-70% annually, or it can be very low, it can be ... I think, on average, globally, natural decline rates of oil reserves, without any maintenance or repair or trying to bump the numbers, is about 9%.

O'Reilly: Which, the world currently produces, stop me, 93, 94 million barrels a day. So, if everybody stopped spending this year, it would drop to the high 80s next year.

Crowe: Right, even less. You're looking at, basically, on any given year, we have to find and replace somewhere in the range of 5 to 7 million barrels per day, of just wells drying up, just to keep pace. And at the current investment rate, we're under-investing in that level. If you look at the amount that's being spent on exploration, the amount that's being spent on production and development, not only are we seeing a production decline, but if you kind of use that gauge of the under-investment all the way across the value change, we're looking at several years of under-investment that could lead to production declines. So, if that were to happen, once the overhang of oil starts to clear --

O'Reilly: The inventories.

Crowe: The inventories, the excess production, today, bringing Iran back into the fold, and all of these things that people have been terrified about in the market, of, "Oh, it's going to kill oil prices and bring it down to $10 a barrel!" Once all of those things are reintegrated and renormalized and brought into the fold, then we're going to be looking at the situation and saying, "Holy crap, we haven't been spending enough in this industry!" And our production's going to look a little low, supply is going to look short, and then, obviously, prices follow that, and then we start to get the natural cycle of things recycling itself.

O'Reilly: And not only that, but we all know that markets tend to over-shoot, and they probably overshot to the downside, and in order to get more oil on the market, if and when we find ourselves short of supply, it just doesn't seem inconceivable to me that, I don't know, speculators on the New York Mercantile Exchange floor buying all these futures and stuff would overshoot a little.

Crowe: And, again, one of the things that's always been an issue for a long-term investor in this space is being able to sift out the noise when it comes to these sorts of things. You're looking at futures trading six to 12 months, and everybody tries to make these projections years out in advance in those things. But when you look at what you call the forward curve of oil, it's never right. There's way too many factors that go into the daily price of oil. There's thousands of factors, and on any given day, those can change. And normally, what happens with that is that you can take that forward curve and light it on fire and start again tomorrow.

O'Reilly: Really quickly, before we wrap up this section, one of the executives we met when we were in Houston, and I keep mentioning that trip on this show, for some reason, was, they had a chart of the four futures curves at various points in oil history in the past 10 or 15 years, and it was hilarious and laughable how wrong it was. It was staggering.

Crowe: Yeah. The 2008 forward curve said that oil was going to be at $220 a barrel today.

O'Reilly: Then the financial crisis happened. It's just hilarious. Cool. Before we move on, I wanted to point out to our listeners that April is financial literacy month. In that spirit, we are giving away 10 books to 10 lucky winners. These books include favorite financial picks from David Gardner, Morgan Housel, and many more. To enter to win, just go to and click on the yellow Super Podcast link at the top of the page. Once again, that is

All right, so, Tyler, I was a little nervous when I first saw this. I was like, "Oh gosh, a quiz, oh man."

Crowe: Pop quiz time, everybody. Get out your pencils!

O'Reilly: I just turned 30. I thought I was done with this eight years ago.

Crowe: This is going to be the resurrection of all those high school nightmares where you have a quiz and you didn't study for it, and all of a sudden you're like, "Why am I naked at school and taking a quiz?"

O'Reilly: Everybody's pointing and laughing at me, yeah. All right, so, I guess I'm willing to take a little bit of a shellacking, if you want to ask me the questions.

Crowe: Sure. So, what we're going to do here is, I kind of spend a day perusing around the U.S. EIA website. It's the Energy Information Administration, Anybody that's interested in energy should probably just peruse through that, because it's an amazing database of information. It tells you a lot about trends and prices and where we've come from, where we may be going in the world of energy. It's a really cool and interesting thing that anybody who's invested in or interested in energy should certainly check out. So I found some really interesting little tidbits of information, trivia, did-ya-know sort of things that we can play with.

O'Reilly: We'll be sure to put up on the video version of this the 'The More You Know' logo above my head. [laughs]

Crowe: I thought it would be interesting to throw them out there as something that people might be interested in, maybe even inspire people to go check out this website, because it is really cool.

O'Reilly: All right, first question, hit me.

Crowe: What energy source was deployed the most in 2015 for electric power generation?

O'Reilly: This is the one question I kind of cheated on, because I saw the source that you sent. For our listeners, I'll explain -- what he wants me to say is natural gas, because it's so cheap and all these coal plants are switching over. But the answer is ...

Crowe: It was wind power.

O'Reilly: I was honestly shocked, and that's why I'm sure you picked this question. What were the numbers?

Crowe: Let me pull them up ...

O'Reilly: It was, like, an extra 3,000-whatever.

Crowe: In 2015, we deployed about 20 gigawatts of new power across the United States. Maybe give or take some; I'm just adding in my head right here. Of that, 8.1 of them was wind power, according to the EIA., about 40% of all new capacity installations to the grid, 41% of them were wind.

O'Reilly: Wow. And all that was in Iowa. [laughs]

Crowe: And that was actually a complete reversal, because had this been 2014, you would have been right, because in 2014, natural gas was far and away the winner, with about 44% of all installations, while wind only took in about 26%. It was actually even behind solar in 2014. But 2015, wind was the dominant force yet again.

O'Reilly: Cool. What do we have next?

Crowe: Next question -- name the top three states in terms of most renewable power added in 2015.

O'Reilly: All right. Iowa, California, Texas.

Crowe: You got two out of three right.

O'Reilly: Not bad. I feel pretty good.

Crowe: The order was off.

O'Reilly: OK. Well, fine.

Crowe: The largest installer of renewable energy in 2015 was the great state of Texas, with a little bit, about 3, 3.5 of gigawatts of wind power added. 

O'Reilly: I was just about to say ...

Crowe: It was pretty much all wind power; there was a little bit of solar. It was far and away the largest in terms of total generation capacity. They added about 5 gigawatts of new power in 2015.

O'Reilly: Texas is basically a huge desert, in parts.

Crowe: I bet there's a lot of people in Texas right now who have just shut you down.

O'Reilly: I'm sorry, everybody, but I've been to Dallas in the summer and ... oh, boy ...

Crowe: It's quite hot and quite windy.

O'Reilly: You know what? I'll just say, I take the desert thing back. It's really sunny there. How's that? At what point do you think they'll start throwing a few more solar panels up?

Crowe: The thing is, wind is such a dominant force for them, and such a lucrative one in the sense where, in terms of the potential for wind, basically, the average wind speeds and prominence of how many --

O'Reilly: Plus, it doesn't stop at night, so there's that.

Crowe: Right. So, wind has just been a better solution for them than solar power. Then, second place, California, pretty much all of it was solar power, with a little bit of wind, and with a hint of natural gas to toss in there. Then, the third largest renewable-power installer was Oklahoma, and like Texas, it was pretty much all wind power.

O'Reilly: Got it. I was going to miss Oklahoma no matter what, because my second guess in place of Iowa would have been Nevada, with the solar thing.

Crowe: Basically any Plains state right now is installing wind power left and right.

O'Reilly: Got it.

Crowe: Third question: Name the five states with the highest growth rates in solar capacity added this year.

O'Reilly: Oh, man ...

Crowe: Now, this isn't total amount, this is percentage growth.

O'Reilly: OK.

Crowe: This is going to be a hard one.

O'Reilly: This is very difficult. It's going to be random, weird things, too. Massachusetts. You smiled, so I think I'm right. Um ... I am going to throw out California ... Connecticut, Texas. I know it's not Florida, which is sad. And, oh, I'm at four?

Crowe: Yep, one more.

O'Reilly: North Carolina. [laughs]

Crowe: You went 0 for 5.

O'Reilly: Oh, man! Oh, well.

Crowe: You were close, though! I mean, you were on the right idea with going with New England and a little bit of the Southeast. But the No. 1 state was Nevada. 

O'Reilly: Oh, OK, fine.

Crowe: They grew by 164% from about ... second place was New Hampshire --

O'Reilly: Oh, come on, I swear ...

Crowe: -- my home state. They grew by 110%. Third place, Utah, they grew by 94%. Fourth place, South Carolina with 84%, and fifth is Vermont with 79%.

O'Reilly: I was "close."

Crowe: You were dabbling in the New England area! You just got the wrong ones!

O'Reilly: How was I supposed to pick? Anyway.

Crowe: Next one. What was the last year that coal power was the most-deployed power source?

O'Reilly: 2003.

Crowe: Oh, man, you have to go way further back.

O'Reilly: Really? Oh. Wait, the last year that coal power -- so, the most-used to generate power for the grid?

Crowe: No, like, of all the new capacity additions in the United States, coal was the most dominant one, in terms of --

O'Reilly: In terms of growth?

Crowe: Yeah, in terms of capacity added.

O'Reilly: 1972.

Crowe: Little closer -- 1981. 1981 was the last year that power capacity added in the United States, the highest percentage was coal.

O'Reilly: Got it, cool.

Crowe: So, it's been quite a while.

O'Reilly: Yeah, it has.

Crowe: And, if all projects go according to schedule in 2016 -- basically, if everything that's planned and under construction right now lays in place -- what will be the most employed energy source in 2016?

O'Reilly: Solar.

Crowe: Yes.

O'Reilly: Yes! I finally got one!

Crowe: Solar. And, actually, follow-up question: How much utility-scale solar is expected to grow in 2016 compared to 2015, and I'll give you some options --

O'Reilly: Oh, boy, finally a multiple-choice question!

Crowe: Is it A, 35%? B, 110%? C, 250%? Or D, 325%?

O'Reilly: I'm going to guess B, 110%.

Crowe: Nope!

O'Reilly: Darn it!

Crowe: It's D, 325%.

O'Reilly: No way! No! Way! You're good with the trick questions, goodness.

Crowe: Yeah. So, in 2015, we added about 2.9 gigawatts of utility-scale photovoltaic solar power. In 2016, if all of the projects that we have going on come online, we are going to add 9.5. And that is utility only. That does not include any --

O'Reilly: That's not rooftop anything.

Crowe: -- not residential, rooftop, anything like that.

O'Reilly: Wow. You're saying "just utility," and it's not a big deal, but does that include rooftop stuff on Whole Foods?

Crowe: Nope.

O'Reilly: Nothing, OK.

Crowe: So, they're looking at just utility-scale only, basically being built for power plants and by utilities and things like that.

O'Reilly: That is crazy! Wow. That actually leads us nicely into this last little story that we needed to talk about --

Crowe: Well, I think we need to give you a grade. How many did you get right? Maybe one? The one that you knew the answer to already? [laughs]

O'Reilly: I think I got a D-. [laughs] I guessed the solar growth this year!

Crowe: That's true. OK two out of five.

O'Reilly: And there's 50 states. You had to give me that I was --

Crowe: That was a tough one.

O'Reilly: And I know Massachusetts has actually been doing a lot with solar, just from my readings and editing and stuff. But we have to talk about SunEdison (SUNEQ) before we get out of here.

Crowe: Talk about how wonderful solar is growing, and we'll talk about the one company that seems to be going bankrupt when it comes to solar.

O'Reilly: It's weird, yeah! I mean, what's the stock at? $0.40?

Crowe: It's somewhere around $0.40-$0.50.

O'Reilly: You compare them to being the Icarus of the solar industry, of course alluding to the Greek myth about the kid that had the wax wings --

Crowe: Flew too close to the sun.

O'Reilly: Too close to the sun, even though he was flying, and melted the wings, and down he went. Why do you make that analogy?

Crowe: Well, if you look at the solar industry, and this happens with a lot of new technologies. You have something new and wonderful --

O'Reilly: Well, it's the bubble, boom, you know.

Crowe: Right. And, it's so easy to get excited about the potential for the disruption, the ability to grow into this multitrillion-dollar market. And one of the things that everybody gets caught up on when it comes to things like this is growth rates, and how spectacular they look. So, when you have a company that comes in like a SunEdison that talks about how much they're going to grow and how quickly, and you can see the growth trajectory of revenue growth and things like that, and all these new projects that are coming online, and how much they're spending on new projects, and it just looks very tempting. The only problem is, especially in an industry like electricity, it's not a fast-growing industry in general. We only grow electricity consumption by 1% --

O'Reilly: It follows population growth, more or less.

Crowe: Yeah. And all we're basically doing is replacing old capacity with a little bit of added new. It's not like an iPhone, where everybody's going to pick it up and go. It's basically trying to compete with an existing industry. So, when you have a company like SunEdison that grows this fantastically, and is taking on large amounts of debt, and you look at the situation of how they had it, it wasn't exactly the most well-managed. They're looking at doing all these massive spin-offs, because they're just trying to inhale capital as fast as they can to grow, and the only problem is, there was never any cash flows or any growth of the bottom line to support that. Now, you contrast that with the companies that have been successful in the solar industries in the past couple years. You look at First Solar, you look at SunPower, they haven't chased the rainbows in the industry. They set pretty modest growth targets, "We're going to grow at this rate, we're going to build great panels, and we're not going to get caught up trying to build out with huge amounts of debt, we're going to try to live within our cash flows." And they've done much better jobs at maintaining that and being a better long-term investment, versus somebody like SunEdison who got everybody a little too excited.

O'Reilly: That happens. All right, thanks for your thoughts, Tyler. We'll see you next week. 

If you're a loyal listener and have questions or comments, we would love to hear from you, just email us at Again, that's As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against those stocks, so don't buy or sell anything based solely on what you hear on this program.

For Tyler Crowe, I am Sean O'Reilly. Thanks for listening, and Fool on!

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