Report: US independents' finding costs rose nearly 35% in 2000


Paula Dittrick
OGJ Online

HOUSTON, May 29 -- Finding and development costs among 55 independents rose nearly 35% last year because of higher oil field service costs and higher acquisition prices, Salomon Smith Barney Inc. reported Tuesday.

Analysts Robert Morris and Michael Schmitz said independents' finding and development costs were $6.05/boe last year, up from $4.53/boe in 1999 and contributing to a 5-year average of $5.86/boe.

Meanwhile, finding and development costs for the majors declined nearly 30% in 2000, Salomon Smith Barney said. Majors posted finding and development costs of $3.64/boe compared with $5.12/boe in 1999 and a 5-year average of $3.92/boe.

Gas status
Domestic natural gas reserve replacement for the independents and majors combined totaled 140% in 2000 compared with less than 100% during the previous 5 years.

"Our study group represents nearly two-thirds of total domestic gas production," Morris said. "This really reflected an increased focus on gas last year by both the independents and the majors."

The majors clearly have shifted their focus to gas, he said, pointing to recent acquisitions including Shell Oil Co.'s recent attempt to buy Barrett Resources Corp. and Conoco Inc.'s announcement that it is buying Gulf Canada Resources Ltd., Calgary.

Williams, Tulsa, bought Barrett in a deal that will more than double Williams' natural gas reserves (OGJ Online, May 7, 2001).

Morris said he expects to see continued consolidation within the industry both between the majors and independents and also among the independents.

"The majors will still look to make acquisitions of independents in North America to increase their exposure to natural gas," he said.

Independents continued to strongly outpace the majors in gas reserve replacement, Salomon Smith Barney said.

Reserve replacement of domestic gas by independents last year was 164%, excluding revisions, while the US gas reserve replacement rate was 69% for the majors, excluding revisions. In 1999, independents replaced 117%, excluding revisions, while the majors replaced 52%, excluding revisions.

"Although the majors continue to lag the independents in terms of domestic natural gas reserve replacement, the majors appear to have stepped up their efforts in this area with both the drillbit and the check book," the report said.

However, reserves added per well drilled in 2000 dropped 9% for the independents and 6% for the majors despite a slight drop for the independents and a strong rise for the majors on exploration success.

Service costs
"We are starting to see the escalation in service costs level out here," Morris said, adding independents are telling him that rigs are being put to work at flat or slightly lower rates compared with previously spiraling day rates.

Per unit production costs for the independents increased nearly 17% in 2000 compared with 1999, driven by higher production taxes, rising oil field service costs, higher fuel costs, and an acceleration of workover and production enhancement activities given the strong commodity price environment, Salomon Smith Barney said.

Per unit overhead or G&A costs for the independents rose 13% in 2000 versus 1999, the report said, adding a shortage of technical personnel put upward pressure on salary levels.

Capital spending
Total capital spending by independents rose nearly 50% in 2000 compared with 1999. Exploration and development spending was up 60%, while acquisition outlays of both proved and unproved properties are up roughly 40%.

"This was a dramatic turnaround from 1999 when total capital expenditures declined 5% and exploration and development spending dropped 3% compared with 1998," the report said.

Meanwhile, the majors increased spending by 90% in 2000. Acquisition outlays of both proved and unproved properties increased nearly fivefold.

Much of that spending came from three transactions: BP PLC acquiring Atlantic Richfield Co., Occidental Petroleum Corp. acquiring Altura Energy, and Phillips Petroleum Co. acquiring ARCO's Alaska properties.

The majors' exploration and development spending rose 8% in 2000, the report said.

Contact Paula Dittrick at paulad@ogjonline.com

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