Last year marked the first year in several decades that large oil companies produced more oil and gas than they added to their reserves. It’s a trend that needs to reverse course or else producers run the risk of running their wells dry at some point in the future. That being said, it’s not a concern at Suncor Energy Inc. (TSX:SU)(NYSE:SU) given that its reserve life index is 35 years. Three steps forward, four steps back Weak oil prices in 2015 caused oil producers big and small to cut back investments in new wells. Because of that, a growing number…
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Last year marked the first year in several decades that large oil companies produced more oil and gas than they added to their reserves. It’s a trend that needs to reverse course or else producers run the risk of running their wells dry at some point in the future. That being said, it’s not a concern at Suncor Energy Inc. (TSX:SU)(NYSE:SU) given that its reserve life index is 35 years.
Three steps forward, four steps back
Weak oil prices in 2015 caused oil producers big and small to cut back investments in new wells. Because of that, a growing number of oil companies were not able to fully replace their production, meaning they produced more of their reserves than they added, either through discoveries or extensions.
In fact, the seven-largest oil companies in the world only replaced three-quarters of their production last year; oil behemoth Exxon Mobil Corporation (NYSE:XOM) only replaced 67% of its output.
Exxon Mobil only has enough proved reserves to last the next 16 years at its current production rate. That’s assuming, of course, it doesn’t find another drop of oil for the next decade and a half, which is highly unlikely.
Further, its proved reserves of 24.8 billion barrels of oil equivalent (BOE) are only a fraction of its total captured resources of 91 billion BOE. Having said that, it does highlight something important at Suncor Energy, and that’s the fact that it has enormous proved and probable reserves that suggest it won’t run out of oil anytime soon.
As mentioned, given its current production pace, Suncor Energy’s reserves will last 35 years at its current production pace. Even if we strip out its probable reserves, which are only 37% of total reserves, the company still won’t run out of oil for decades.
Location, location, location
One other important item worth noting about Suncor Energy is the fact that the bulk of its reserves are oil sands.
In fact, it has the largest oil sands reserves in the industry. That’s important because the production from these reserves doesn’t decline as quickly as other assets. Instead, the production is actually fairly steady for decades. We can see that in the chart below, which notes that production and cash flow from Suncor Energy’s Fort Hills oil sands project is expected to steadily rise for 50 years.
Source: Suncor Energy Corp Investor Presentation
That’s quite the opposite production profile for offshore projects or tight oil wells, which are two areas where Exxon Mobil has focused much if its attention. As such, it will have a much harder time maintaining its production and adding reserves than Suncor Energy will have in the years ahead. That is assuming, of course, that oil sands assets remain profitable, which is a big unknown given oil price volatility, pipeline constraints, and climate change worries.
Assuming none of those concerns derail Suncor Energy’s production nor leads to the removal of any of its reserves, the company has the potential to be a remarkably steady producer for the next several decades, even if it doesn’t invest all that much in additional exploration and production. That’s a pretty big competitive advantage over its peers, who are constantly investing to overcome declining and depleting oil reservoirs.
Given its vast oil sands reserves, Suncor Energy’s production won’t run dry anytime soon. In fact, the company has the potential to produce rather steady production, at least from its oil sands mines, for decades without seeing any declines. It’s a unique competitive advantage that should suit the company well over the long term, just as long as there are no drastic changes to oil prices or Canada’s energy laws.
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Fool contributor Matt DiLallo has no position in any stocks mentioned. The Motley Fool owns shares of ExxonMobil.