By one count, some 3 billion barrels of crude oil valued at about $840 billion have gone missing since the end of 2014. Adding in oil-equivalent barrels of natural gas, the number of barrels that have disappeared is about 11 billion from 125 oil and gas companies around the world.
The barrels have not really evaporated, they remain tucked away underground but are no longer counted as “proved” reserves in the oil companies’ calculations. In order to be counted as a proved reserve, a barrel of oil must be both technically recoverable with current technology and economically recoverable at current prices.
Beginning in 2009, the U.S. Securities and Exchange Commission requires U.S. producers to use a formula that values a barrel at the average price a company receives on the first day of each of the 12 preceding months. At the end of 2014, that figure was right around $95 a barrel. At the end of 2015 the figure had fallen to less than $50.
Because the barrels could not be economically recovered at a price below $50 a barrel, they moved from the proved reserves category to either “probable” or “possible” reserves. It doesn’t matter which because the value of a company’s assets is based on its proved reserves only.
Royal Dutch Shell PLC (NYSE: RDS-A), for example, lost 827 million barrels of proved reserves in 2015. Occidental Petroleum Corp. (NYSE: OXY) lost 461 million barrels, Hess Corp. (NYSE: HES) lost 246 million barrels, Apache Corp. (NYSE: APA) dropped 225 million barrels and Anadarko Petroleum Corp. (NYSE: APC) lost 216 million barrels, according to industry observer Robert Rapier. At a loss of $45 for each barrel, Shell’s value dropped by more than $39 billion.
The falling price has hit smaller producers hardest. Bloomberg News published a story Wednesday about Ultra Petroleum Corp. (NYSE: UPL), a company that reached a value of more than $12 billion at its peak in 2012 and filed for bankruptcy protection at the end of April 2016.
In the years between 2011 and 2015, producers were able to borrow large sums when crude prices were high and rising to more than $100. Once the price started collapsing in August of 2014, some companies could not generate enough cash to pay the interest on the loans they had accumulated.
According to law firm Haynes and Boone, 42 energy producers filed for bankruptcy in 2015 on total debt of more than $17.2 billion. Through the end of May 2016, another 39 companies have filed on total debt of more than $36.3 billion.
The oil is still in the ground and will rejoin the ranks of proved reserves once the price rises enough to make extracting the barrels profitable. But that could take longer than many investors are willing to wait, given the difficulty crude has had holding about $50 a barrel this year.