Imperial Oil Ltd. and its U.S. parent, Exxon Mobil Corp., could be forced to write down billions of barrels of oil sands reserves at a major Alberta project if crude prices remain at a low level.
The major oil companies said they may have to drop the bitumen reserves at their Kearl development from the "proved" category on their books under U.S. securities regulations by the end of the year.
"Proved" represents bitumen reserves that can be economically produced in the short term.
Imperial and Exxon Mobil have spent $21.8-billion developing Kearl, which produced 169,000 barrels a day during the first nine months of this year.
Imperial said it may also have to downgrade reserves at another project.
In total, the writedowns would represent as much as 71 per cent of the company's proved oil and gas reserves at the end of 2015.
The stark warning shows the toll being taken by major industry players as a result of the oil-price downturn that is now into its third year and the high cost of oil sands production at the recently expanded Kearl project and similar developments. In this case, it is also tied to U.S. accounting standards, under which reserves are evaluated using 12 months of trailing crude prices, rather than price forecasts.
Indeed, other Canadian oil sands developers such as Suncor Energy Inc. and Cenovus Energy Inc. have not issued similar warnings about reserve writedowns despite being hit with the same pressures.
"I think it's because of the Exxon connection that this is getting attention with Imperial," said Michael Dunn, an analyst at GMP FirstEnergy. "Investors that understand the value of these assets at various oil prices would understand that the economics are not great at current oil prices. It's no secret that Kearl's margins at low oil prices are not that great."
Calgary-based Imperial issued the warning about its reserves as it reported that its third-quarter profit more than doubled, driven largely by a hefty gain from the sale of its service station network.
It said 2.6 billion barrels at Kearl could be downgraded from the proved reserve category.
It said an additional 400 million barrels could be written down at another of its big oil sands projects, Cold Lake, should benchmark oil prices not improve from the current level of just under $50 (U.S.) a barrel.
Exxon Mobil, which owns 69.6 per cent of Imperial and 29 per cent of the Kearl project, said 3.6 billion barrels at Kearl could be "de-booked" as proved reserves in its accounts and an additional one billion barrels at other North American projects could also be written down.
Both companies said the reserves could return to the proved category if prices recover or there is a technological breakthrough at Kearl resulting in sharply lower operating costs.
The writedowns would not affect the operations at the project, which is located north of Fort McMurray, Imperial and Exxon Mobil said.
In the third quarter, Imperial earned $1-billion (Canadian), or $1.13 a share, up 109 per cent from $479-million a year earlier, or 56 cents a share.
Overall production averaged 373,000 barrels of oil equivalent a day, up 7,000 from the same period in 2015, the increase helped by a quick recovery at the Syncrude Canada oil-sands project after the shutdown in the spring due to the northern Alberta wildfires.
Imperial said the $2.8-billion sale of its gas station chain, announced earlier this year, should be complete by the end of 2016.