Investing Daily Article of the Week
by Robert Rapier, Investing Daily
When I first went to work for ConocoPhillips (NYSE: COP), I worked on technology development. I had spent the previous seven years working in the chemical industry, and didn't know all that much about the oil industry. My first job at ConocoPhillips was helping with a gas-to-liquids process in which we took natural gas and converted it into diesel, in a process very similar to that in Shell's (NYSE: RDS-A) Pearl GTL plant in Qatar.
I still didn't know a lot about the art and science of oil production, but during my first year of work there I noticed something that seemed peculiar. Looking through the company's annual report, I noticed that if I divided Conoco's proved oil reserves by its production rate (the R/P ratio), I came up with a value of only 10 years or so. This alarmed me a bit, so I asked some of my coworkers if this was normal. Nobody seemed to know for sure.
If I look at the situation at ConocoPhillips today — more than a decade after I first posed that question — I read in the 2013 annual report that the company had 8.9 billion barrels of oil equivalent (BOE) and its production rate was 1.5 million BOE/day. Thus, the R/P has grown to 16.3 years. In fact, according to the 2014 BP Statistical Review of World Energy, the R/P ratio for the u.s. as a whole was 12.1 years at the end of 2013. Twenty years ago, the R/P ratio in the U.S. was only 9.6 years.
Think about the implications of that. In 1993 the U.S. had enough proved reserves to produce at the then-current rate for 9.6 years. Not only did we continue to produce for 9.6 years, today's production rate is 17% higher than it was in 1993, and yet we now have enough oil to produce for 12.1 years at current rates. And the world as a whole has a R/P ratio of 53 years.
In fact, if I go all the way back to 1965, U.S. proved reserves were 31 billion barrels. (Source: EIA). Between then and now — a span of 49 years — the U.S. produced 163 billion barrels of oil, and today our proved reserves are 44.2 billion barrels of oil. Globally proved reserves have grown steadily for more than three decades:
