Capital spending for U.S. exploration and development shot up in 1996, along with oil and gas prices, but other indicators of the industry's performance for last year were less than robust.
Reserve replacement rates were modest, adding reserves cost more than the previous year, and the U.S. still hasn't stemmed a long production decline.
These are among the key findings of an annual survey by Arthur Andersen of U.S. exploration and development trends, which was unveiled last month (OGJ, June 23, 1997, Newsletter).
The report reviews overall trends in the market and includes an in-depth look at the top 39 U.S. reserve holders, or companies with U.S. proved oil and natural gas reserves in excess of 150 million b/d of oil equivalent (boed).
The top 39 companies surveyed account for 58% of U.S. proved crude oil and natural gas liquid reserves and 61% of Lower 48 natural gas reserves.
They also account for 56% of total U.S. crude oil and natural gas liquids output and 55% of total Lower 48 natural gas production.
Prices soar
Last year brought the highest prices for oil and gas since 1985, save for 1990 during the Persian Gulf crisis.
Cold weather and low inventories combined to boost U.S. wellhead oil prices by 26% to an average of $18.46/ bbl.
Average U.S. wellhead oil prices climbed sharply to $18.46 in 1996 from $14.62 in 1995. Average U.S. wellhead natural gas prices increased 45% to $2.25/Mcf in 1996 from $1.55/Mcf the year before. This was the highest growth rate in prices since the late 1970s and early 1980s and marked a dramatic turnaround from falling prices the previous 2 years.
Demand up, production down
Colder-than-normal weather in first quarter 1996 helped boost U.S. crude oil consumption to 18.44 million b/d in 1996 from 17.95 million b/d in 1995, continuing an upward trend since 1991.
Reliance on imports also continued to increase, with the gap between U.S. oil consumption and production (including natural gas liquids) widening for the fifth consecutive year. The U.S. used 10.13 million b/d more than it produced in 1996, up from a demand/production gap of 9.63 million b/d the previous year.
Healthy demand and strong prices were not enough to stem the continued decline in U.S. oil production. Oil and natural gas liquids output totaled 8.31 million b/d last year, the latest dip in a downhill curve that started in the early 1970s.
U.S. natural gas consumption rose slightly in 1996 to a record high of 21.99 tcf from 21.58 tcf the year before. Lower 48 gas output climbed to 17.97 tcf last year from 17.57 tcf in 1995, reaching the highest level since 1981. Net imports remained at about 4 tcf in 1995-96.
Drilling accelerates
As prices rose, drilling activity increased in 1996 to a total of 21,913 wells, up from 18,655 wells the year before.
The number of oil wells drilled increased 11% to 7,645, and the number of gas wells increased 23% to 9,061.
The number of exploratory wells drilled rose 11% to 3,931, and the number of development wells drilled increased 19% to 17,982.
Despite the uptick in activity, not all indicators were good. Along with the rise in drilling came a rise in the number of dry holes, which rose 18% to 5,207. Moreover, oil well completions did not keep pace proportionately with prices. As oil prices jumped 24% (in constant 1996 dollars) in 1996, the number of exploratory and development oil well completions increased by only 11%.
However, the overall oil well success rate remained unchanged at 76%.
Gas fared somewhat better. After 11 consecutive years of declining completions, exploratory gas well completions rose for the fourth consecutive year following the all-time low of 423 completions in 1992. Development gas well completions increased 24% in 1996, following 2 consecutive years of declining completions.
Nevertheless, the overall 23% increase in total gas well completions in 1996 compared with a 42% increase in natural gas prices (in 1996 dollars) for the same period.
Spending, employment
The 39 companies that each hold more than 150 million boe in U.S. reserves boosted total capital expenditures, including acquisitions of proved properties, by $2.7 billion, or 16%, to $19.4 billion in 1996.
Since 1992, total capital expenditures by these companies have increased $6 billion, or 45%. Total exploration and development outlays, including outlays for unproved properties, increased $2.9 billion, or 21%, to $16.9 billion in 1996, continuing the recovery from the lowest capital expenditures on record in 1992.
Exploration expenditures in 1996 rose to $4.5 billion, up 32% from 1995. Thirty-three of the 39 companies increased exploration spending in 1996 from 1995's level.
The companies reporting the largest increases in U.S. exploration spending in 1996 were Texaco Inc., Shell Oil Co., and Chevron Corp. These companies increased exploration expenditures $205 million, $160 million, and $113 million, respectively, primarily on deepwater projects in the Gulf of Mexico.
Development expenditures increased 14% in 1996 to $11 billion, the highest level since 1992. Increases in development spending were also reported by 33 of the 39 companies, led by Exxon, which cited higher spending for development projects in the Gulf of Mexico and Alaska.
Unproved property acquisitions increased $533 million, or 58%, to $1.5 billion in 1996, reaching the highest level in 5 years. Union Pacific Resources Group Inc., Shell, and MCN Corp. accounted for more than half of the net increase in unproved property acquisition costs, increasing their presence in the Austin chalk, Gulf of Mexico, and Midcontinent/Appalachia regions, respectively.
Proved property acquisitions by the group dropped by 10% in 1996 to $2.5 billion from $2.8 billion in 1995. The average price paid for proved reserves was $3.31/boe in 1996, down from $3.74/boe in 1995. Significant 1996 transactions were Nuevo Energy's purchase of oil and gas properties from Unocal Corp. and Noble Affiliates Inc.'s acquisition of Energy Development Corp.
Continuing a trend that started in the early 1980s, all sectors of the U.S. oil and gas industry experienced decreased employment in 1996.
Employment in the refining, transportation, and wholesale sectors declined by 1% to 449,000. Oil field services employment declined by 2% to 158,000, while exploration and production employment declined by 5% to 141,000.
Reserves static
Total U.S. proved oil reserves remained relatively static, declining to 22.4 billion bbl in 1996 from 22.5 billion bbl in 1995.
The remaining life of U.S. proved oil reserves remained relatively flat at 9.5 years in 1996.
Following 2 consecutive years of increases, U.S. proved natural gas reserves fell 3% to 151.3 tcf in 1996, the lowest level in 5 years.
The remaining life of U.S. proved gas reserves has generally declined in recent years, reaching a new low of 8.4 years in 1996.
Group reserves flat
For the 39 companies surveyed, proved oil reserves at yearend 1996, including condensate and natural gas liquids, remained relatively flat at 17.9 billion bbl, the lowest level in 5 years.
Since the beginning of 1992, total proved oil reserves for the 39 companies decreased 2 billion bbl, or 10%. The percentage decline in proved oil reserves slowed during 1996.
Improved oil production replacement rates stemmed primarily from net purchases of $1 million in 1996, compared with the previous year's net reserve sales of $160 million.
Reserve additions from extensions and discoveries showed a slight decrease in 1996 of 6 million bbl, or 1%, to 941 million bbl-the second highest level in 5 years.
Companies with significant additions through extensions and discoveries were BP Exploration Inc. at 205 million bbl, Texaco at 82 million bbl, and Shell at 81 million bbl.
Additions from improved recovery techniques increased about 19 million bbl, or 6%, in 1996 to 342 million bbl. Shell added oil reserves of 82 million bbl through improved recovery in 1996, which represents 24% of the total 1996 additions from improved recovery for the 39 companies.
Net upward oil reserve revisions fell 19% from 1995 to about 352 million bbl. Exxon Corp. and ARCO reported the largest upward oil reserve revisions in 1996, accounting for 57% of the total oil reserve revisions for the 39 companies.
Oil production for the 39 companies remained relatively constant for the fourth consecutive year at 1.7 billion bbl. There has been a slight decline in production each of the 5 past years, resulting in an overall decrease since 1992 of 9%.
Purchases, sales
During 1992-96, the 39 companies purchased a total of 1.3 billion bbl of proved oil reserves and sold a total of 1.7 billion bbl.
In 1996, reserve sales roughly equaled purchases. Total sales in 1996 involved 371 million bbl.
Significant sales include Unocal's sale of about 120 million bbl to Nuevo Energy, which represented 31% of total oil reserve sales in 1996.
Purchases of reserves increased 54% in 1996 to 372 million bbl, led by Nuevo Energy Co.'s purchase of interests in various California properties from Unocal and Torch Energy Advisors Inc.
Gas reserves drop
In 1996, the group's proved gas reserves decreased 3% to 92.2 tcf from 94.6 tcf in 1995, reversing the upward trend of gas reserves for the previous 3 years.
The proved gas reserves held by these 39 companies represented 61% of the total Lower 48 proved reserves at yearend 1996.
Gas reserve additions fell 15% from 1995 to 8.2 tcf. The big drop in the year-to-year comparison resulted from a large increase in additions from extensions and discoveries of 1.4 tcf reported by Enron Oil & Gas Co. in 1995.
Although annual gas reserve additions have improved from 1992 levels, the companies continue to remain below the 10 tcf/year needed to replace current production and to meet expected increases in demand.
Revisions of reserve estimates changed dramatically from net upward revisions of 1.8 tcf in 1995 to net downward revisions of 353 bcf in 1996.
Companies with significant downward revisions in 1996 were Amoco Corp. with 796 bcf, Chevron 225 bcf, Unocal 164 bcf, and Mesa Inc. 109 bcf. These significant downward revisions were partially offset by upward revisions by Exxon 422 bcf, Shell 212 bcf, Conoco Inc. 112 bcf, and ARCO 103 bcf.
Gas production for the 39 companies in 1996 increased 4% to 10 tcf, which represented 55% of total U.S. natural gas production.
There have been increases in gas production each year since 1992, resulting in an overall increase in production of 13%.
From 1992 through 1996, the 39 companies purchased a total of 13.1 tcf of proved reserves and sold a total of 10 tcf. These 39 companies were net sellers of gas reserves in 1996 for the first time since 1992.
Gas reserves purchases during 1996 declined 23% from 3 tcf in 1995 to 2.3 tcf in 1996, the lowest point in 5 years.
Significant purchases in 1996 involved Noble Affiliates' acquisition of Energy Development Corp., Amoco's acquisition of reserves in the San Juan basin and Gulf of Mexico, and Devon's acquisition of onshore properties from Kerr-McGee.
Sales of gas reserves increased 32% to 2.5 tcf in 1996, the second highest point in 5 years. Companies with significant sales were Shell, Burlington Resources Inc., and TransTexas Gas Corp.
Purchases and sales of gas reserves among these 39 companies during 1992-96 totaled about 1.7 tcf, the most significant transactions being Penn-zoil/Chevron's in 1992 of 690 bcf, Louis Dreyfus/Parker & Parsley's in 1993 of 245 bcf, and Apache/Texaco's in 1995 of 205 bcf.
Revenues climb
Oil and gas production revenues for the 39 companies increased sharply to $49.4 billion in 1996 from $38 billion in 1995.
Price increases were responsible for 97% of the rise in oil and gas production revenues. Profits from oil and gas producing activities also increased dramatically to $13.6 billion in 1996, from $4.2 billion in 1995, the highest level in 5 years.
The increase is primarily attributable to substantially higher overall oil and gas prices in 1996.
In addition to historical financial statements, the Arthur Andersen report used supplemental disclosures to measure economic performance in three critical areas: reserve replacement costs, oil and gas production replacement rates and production costs per barrel of oil equivalent.
Among the findings:
- Reserve replacement costs by all three measures typically used-additions only, additions and revisions, and all sources-reversed their downward trend in 1996. Twenty-eight of the 39 companies increased their reserve replacement cost from 1995 levels.
- During the last 5 years, the 39 companies replaced only 64% of their oil production when factoring in only additions to reserves, 81% through additions and revisions only, and 87% when all sources are considered. The companies are improving their replacement rates, with the 3-year averages for all measures about 15% greater than the 5-year averages.
- During the last 5 years, the 39 companies have replaced 76% of their gas production through additions only, 91% through additions and revisions, and 98% when all sources are considered.
Meanwhile, the downward trend in production costs reversed during 1996, rising to $4.15/boe in 1996 from $4/boe in 1995.
However, production costs are down 53¢/boe, or 11%, since 1992.
The overall decrease in production costs demonstrates that investments in technology, together with new operating efficiencies, continue to pay off.
Also, natural gas production now accounts for a higher percentage of overall production-50% in 1996 versus 45% in 1992-which generally results in lower costs per barrel of oil equivalent and total production costs, because production costs for gas wells are generally lower than oil wells.
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