Oil major Exxon Mobil (NYSE:XOM) released its reserves addition for 2011 announcing that the company had managed to increase its proven reserves base in 2011 and more than replaced its total production for the year. ^[1] The oil major’s proven reserves increased from 24.8 billion barrels of energy equivalent (BBOEE) at the end of 2010 to 24.9 BBOEE by the close of last year. Exxon added 1.8 BBOEE of reserves last year of which a billion barrels came from Kearl Oil Sands project in Canada. The company also added reserves in the U.S., Nigeria, Norway, Indonesia and Malaysia. Oil firms like Exxon and Chevron (NYSE:CVX) are exploring remote resources and deepwater prospects to replace resources.

We have a $94.12 price estimate for Exxon Mobil, which at a slight premium to its current market price.

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Reserves addition

Over the past ten years, Exxon has managed to post a reserve replacement ration of 99% for liquids and a 150% replacement ratio of gas. In 2011, the Kearl oil sands project helped the company 166% replacement ratio of liquids. The oil sands project will start producing blended bitumen by the end of 2012. ^[2] The gas replacement ratio for Exxon dropped to 49% in 2011. At present production levels, the company’s reserves can last for 15 years. A strong reserve replacement ratio helps the company maintain production levels and dispose assets that yield low returns. Neglecting the effects of asset sales, the replacement rate for the company stood at 116% in 2011.

Impact on margins

From the point of view of profitability, the rising share of tar sands and gas reserves could impact the company’s upstream operating margins. In 2010, Exxon’s average production cost for a barrel of bitumen stood at $17.81 /barrel in comparison to $10.54 /barrel for liquids overall. The average production price for bitumen was 23% lower the price for crude oil and natural gas liquids in 2010. ^[3]

A higher reliance on tar sands production could impact Exxon’s operating margins in the liquids business in the long run. In addition, a bulk of the reserves additions in 2011 happened to be in geographies like North America, Europe and Africa, where production costs of the company are higher than the average production cost for the company overall. Presently high energy prices are helping companies more than offset increasing exploration and production costs as they shift to intensive resources such as shale and tar sands.

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1. Exxon Mobil Corporation Announces 2011 Reserves Replacement, Exxon Mobil [↩]
2. Fluor Secures EPC Contract for First Phase of Kearl Oil Sands Project, Exxon Mobil [↩]
3. Exxon Mobil 2010 10-K, Exxon Mobil [↩]