Record Spending Adds Little To Oil and Gas Reserves
Spending on oil and gas projects rose 45% last year but resulted in only a minimal increase in reserves, according to a new study from oil and gas research firm John S. Herold, Inc (recently acquired by IHS) and advisory firm Harrison Lovegrove & Co. Ltd.
The worldwide upstream investment of 228 oil and gas companies reached $401 billion in 2006, more than $1 billion per day, according to the 2007 Global Upstream Performance Review, (abridged version available for free download here). This record capital spending generated just a 2% increase in reserve volumes to 263 billion barrels of oil equivalent (boe), while reserve replacement costs climbed 33 % to $13.60/boe.
“Revenue growth more than offset higher operating expenses and increased taxes, allowing the industry to report $243 billion in net income, the fourth consecutive record,” said Robert Gillon, Herold senior vice president and co-director of Equity Research. “But rising costs are pressuring investment returns, as net income as a percentage of the book value of oil and gas assets declined in 2006 following three years of gains.”
Harrison Lovegrove Chief Executive Martin Lovegrove commented, “The key challenge facing the petroleum industry continued to be replacing reserves and growing production due to the combination of maturing basins and reduced accessibility to new acreage. With opportunities scarce, proved and unproved acquisition costs increased 85 %, while the implied costs for the acquisition of proved reserves soared 55 %, more than twice the increase in oil prices.”
The Herold/Harrison Lovegrove study found returns to oil industry shareholders during 2006 were robust: dividends reached a record $83 billion (up $7 billion), while share repurchases increased 37% to $88 billion. Combined, these returns to shareholders accounted for 55 % of net income.
Over the last two years, the industry has laid out more to repurchase its own shares than it has to acquire proved reserves.
Key regional findings of the 2007 Global Upstream Performance Review include:
- The U.S. was the only region in which profitability declined as finding and development costs nearly tripled and reserve replacement costs soared 83%.
- Oil reserves and production in Canada continued to climb, but natural gas has languished as investment has been directed at oil sands development.
- Oil and gas reserves in Europe are dropping sharply as cash flow exceeds capital spending, but new North Sea projects should help stem the decline.
- Capital investment in the Africa & Middle East region is being redirected toward exploration and acquisitions as proved reserves continue to decline.
- Asia-Pacific is the most profitable region due to relatively lower costs and tax rates, but lower rates of reinvestment indicate opportunities are constrained.
- Oil and gas reserves in South & Central America continue to fall as production flattens, but profitability more than doubled as costs have been contained.
- Government take in the Russia & Caspian region is high and rising, limiting profitability, but the resource potential is so substantial that capital investment is growing rapidly.
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