Potential impact on proved reserves and resources considering 2°C scenarios

Report April 23, 2021

Potential impact on proved reserves and resources considering 2°C scenarios

Over the coming decades, oil and natural gas will continue to play a critical role in meeting the world's energy demand,  even considering the Intergovernmental Panel on Climate Change (IPCC) Lower 2°C scenarios. The following analysis is intended to address the potential impacts to the Company's proved reserves and resources1 through 2040 and beyond, considering  the average of the IPCC Lower 2°C scenarios' oil and natural gas growth rates.2

Proved reserves

ExxonMobil believes that over the long term, proved reserves are one of the main drivers of intrinsic value of an integrated oil and natural gas company's upstream operations.3 At the end of 2020,  ExxonMobil's proved reserves totaled about 15 billion oil-equivalent barrels, comprised of 60 percent oil and 40 percent natural gas4. These proved reserves are assessed annually and reported  in the Company's annual  report on Form 10-K in accordance with rules of the U.S. Securities and Exchange Commission. Based on currently anticipated  production schedules, a substantial  majority of ExxonMobil's year-end 2020 proved reserves are expected to have been produced by 2040. Since the average of the IPCC Lower 2°C scenarios implies significant use of oil and natural gas through  the middle of the century, these reserves face little risk from declining demand.

Significant investment still needed in 2°C scenarios

Considering the IPCC Lower 2°C scenarios average, global  liquids demand is projected to decline from 98 million barrels per day in 2019 (note that 2020 demand of 88 million barrels per day was significantly impacted by COVID-19 restrictions) to about 75 million barrels per day in 2040. Without future investment and due to natural field decline, world  liquids production would  be expected to drop to about 22 million barrels per day in 2040, greatly exceeding the potential demand reduction.  Natural gas field decline rates are generally similar to liquids.

With the potential 2040 imbalance (absent future investment), the substantial majority of ExxonMobil's proved reserves that are projected to be produced by 2040 are supported by ample demand, and therefore face little risk related to the average of the IPCC Lower 2°C scenarios. Considering the IEA's SDS  (a well  below 2°C scenario), the IEA estimated that almost $12 trillion of investment will  be needed for oil and natural gas supply for 2020-2040.5 Additionally, the IEA has reported that current industry investment levels are well  below what is needed in these IEA scenarios, indicating  a critical need for increased oil and natural gas investment versus 2020 levels.6

For the remaining year-end 2020 proved reserves that are projected to be produced  beyond 2040, the reserves are generally associated with assets where the majority of development costs are incurred before 2040. While these proved reserves may be subject to more stringent climate-related  policies in the future, technology advancements and targeted  investments could mitigate production-related emissions and associated costs. In addition, these assets have generally lower risk given the technical knowledge  accumulated over many decades of production. Accordingly, the production of these reserves will likely remain economic even considering the average oil  and natural gas demand  under the IPCC Lower 2°C scenarios.

Resources

ExxonMobil  maintains a large and diverse portfolio of undeveloped resources that provide considerable flexibility to develop new supplies to meet future energy demand and replenish the Company's proved reserves. The Company also continues to enhance the quality of this resource base through successful exploration, acquisitions, divestments, and ongoing  development planning and appraisal activities.

Under the IPCC Lower 2°C scenarios, the world will continue to require significant investment in both liquids and natural gas. Based on these scenarios, and assuming ExxonMobil retains its current share of global production,7 the Company would need to replenish its existing proved reserves entirely by 2040 under the IPCC Lower 2°C scenarios average.

For ExxonMobil, the underlying economics of commercializing resources are dependent on a number of factors, including evolving government regulations, that are assessed annually using a dynamic resource development process. The best resource opportunities are advanced and assets with lower potential are monetized or exited. All investments are tested over a wide range of commodity price assumptions and market conditions. Notably, the IEA's estimates of future prices under its 2°C pathway fall within the range used to test investments.8

Reducing costs using technology to improve competitive position

The Yastreb drilling rig, Sakhalin Island, Russia

Trillions of dollars of investment in oil  and natural  gas will  be needed, even in  2°C scenarios.  By leveraging  high-impact  technologies from ExxonMobil's research organization, costs and environmental  impacts are reduced,  positioning the Company's portfolio to compete successfully.

Examples of technology-enabled cost and environmental footprint reductions:

  • Record-setting extended-reach wells in  Sakhalin to significantly reduce drilling costs and environmental footprints.
  • Full-physics modeling and next-generation completion designs for unconventional  developments to reduce drilling and improve recovery.
  • Combination of horizontal drilling with hydraulic fracturing to significantly reduce land surface footprint and cost.

In light of the multiple and dynamic factors that influence governments' diverse approaches to regulate resources and decisions by industry to commercialize undeveloped resources, it is not possible to identify which specific assets will ultimately be developed.

However, the Company is confident that the size, diversity and continued upgrading of resources will enable the ongoing replenishment of proved reserves under a range of potential future demand scenarios and regional policy differences. Regional policies that constrain supply in one area could enhance returns in others.

Dynamic resource development planning

This process considers a wide range of variables over time, including as appropriate: the extent and quality of the resource, development concepts, fiscal terms, regulatory requirements, proximity to existing infrastructure, market conditions, enabling technologies, and policy developments, including climate-related policy.

ExxonMobil optimizes resource development plans in line with these variables and prioritizes developments that are competitively advantaged in delivering long-term shareholder value. A rigorous Decision Quality Framework is employed to inform development decisions ranging from developing the resource (which eventually moves to proved reserves), monetizing the resource by selling it to others, or exiting the asset.

With a very large resource base, this process can take decades as technologies are developed, market conditions change and competition evolves. Two examples illustrate this:

Liza phase 1 development

The Liza field was discovered in May 2015 offshore Guyana. ExxonMobil's approach to development planning enabled an industry leading start-up in less than five years following discovery.

Norway sale

In contrast, the Company monetized its Norway upstream assets through a December 2019 sale. After an evaluation of the Company's portfolio, the asset was divested to enable ExxonMobil to focus on investments with higher long-term strategic value. 

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1 For the purposes of this report, proved reserves are year-end 2020 proved oil and gas reserves for consolidated subsidiaries and equity companies as reported in the Corporation’s Annual Report on Form 10-K. Proved oil and gas reserves are determined in accordance with Securities and Exchange Commission (SEC) requirements. Proved reserves are those quantities of oil and gas which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible under existing economic and operating conditions and government regulations. Proved reserves are determined using the average of first-of-month oil and natural gas prices during the reporting year.
For the purposes of this disclosure, resources are total remaining estimated quantities of discovered quantities of oil and gas that are expected to be ultimately recoverable. The resource base includes proved reserves and quantities of oil and gas that are not yet classified as proved reserves.

2 To estimate global demand in 2040 for oil and natural gas, the average of the IPCC Lower 2°C scenarios’ growth rates for oil and natural gas covering the period 2010-2040 have been applied to standard baseline estimates of oil and natural gas demand in 2010. In addition, the IEA STEPS and SDS scenarios for oil demand and natural gas demand were added.

3 IHS, 2017: Climate-Related Financial Risk and the Oil and Gas Sector, page 23.

4 Proved reserves are determined in accordance with SEC requirements using the average of first-of-month oil and natural gas prices during the reporting year (see footnote 1 for added detail). Although near-term changes in prices and capital expenditures can have an impact on reserve quantities from year to year, many factors can result in quantities being recognized again as proved reserves at some future point, such as a recovery in the SEC price basis, cost reductions, operating efficiencies, and increases in planned capital spend. This can result in proved reserves fluctuating across market cycles.

5 IEA, World Energy Outlook 2020 Annex 5, investment data.

6 IEA, Energy Investment Report, p.15.

7 Hypothetical cumulative production determined by proportioning ExxonMobil’s 2020 average daily production (Form 10-K, page 9) and 2020 average daily global oil and gas production to estimated 2040 average daily production (assuming ExxonMobil’s current market share and 100 percent proved reserves replacement to maintain its proved reserves consistent with its production ratio at the end of 2020) and implied oil and gas demand from the IPCC Lower 2°C scenarios average. Assumed linear decline of estimated average daily production through 2040.

8 IEA, World Energy Outlook 2020, table 2.2. Fossil fuel prices by scenario.

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