E&Y: US E&P spending reaches new heights

US oil and gas producers boosted exploration, development, and acquisition spending in 2012 despite a steep decline in aftertax profits driven largely by low natural gas prices, Ernst & Young reported June 4 in the latest issue of its US oil and gas reserves study.

The study analyzes US upstream spending and performance data for the largest 50 companies based on yearend 2012 oil and gas reserves estimates.

Total capital expenditures for the 50 companies reached $185.6 billion—up 20% from 2011—and marking the highest in the study’s history.

Total 2012 exploration spending climbed 20% from the previous year to a total of $26.3 billion, which E&Y attributed to increased tight oil and liquids activity. Development spending last year soared to $103.4 billion, up 21% compared with 2011.

“The increased exploration and development spend we’re seeing in this year’s study speaks to the incredible opportunity unfolding in tight oil from shale formations and the high cost of developing these unconventional resources,” said Marcela Donadio, E&Y Americas oil and gas leader. “Everyone wants in, and they are paying a premium to play.”

Capital expenditures

Study results showed companies spent 17% more to acquire properties compared with 2011. Spending for proved properties rose to $21.6 billion in 2012 from nearly $14 billion in 2011, while spending for unproved properties reached $33.8 billion in 2012.

The cost to find and develop new reserves surged to $45.03/boe in 2012, reflecting not only increased spending, but also downward revisions of gas reserves. Total gas reserves reported by the companies were down 10% by yearend 2012 compared with yearend 2011. Despite production curtailments throughout much of 2012, gas production increased 4%.

The study also examines the companies’ US operations during 2008-12 (OGJ Online, June 25, 2008).

Tight oil developments and an increased focus on natural gas liquids contributed to a 45% surge in US liquids reserves over a 5-year study period. In 2012, oil reserves for the 50 companies rose to 23.3 billion bbl while production increased by 13% to 1.6 billion bbl.

Extensions of existing reserves and discoveries of new reserves reached 3.8 billion bbl in 2012. These strong additions helped fuel an oil production replacement rate of 258% in 2012.

“For years, people said the industry would struggle to replace US oil reserves,” Donadio said. “The steady rise in extensions and discoveries as well as oil production replacement rates changes that story.”

Although total oil and gas production increased 7% in 2012, it could not compensate for the $26.4 billion in property impairments recorded due to low gas prices. These impairments, paired with a price-driven 3% decrease in revenues and increases in other costs, contributed to a 58% fall in after-tax profits for study companies.

The reserves study is a compilation and analysis of certain oil and gas reserve disclosure information reported to the US Securities and Exchange Commission.

Contact Paula Dittrick @paulad@ogjonline.com.

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