U.S. E&P key indicators up sharply in 1997

The upswing in the U.S. exploration and production sector continued to register strongly in 1997, as shown by a number of key indicators.

Total U.S. upstream expenditures of the top 49 U.S. oil and gas companies, including acquisitions of proved properties, jumped 43% to $30.4 billion in 1997, according to a joint study by John S. Herold Inc. and Arthur Andersen.

U.S. proved oil reserves of the largest companies, including condensate and natural gas liquids, climbed almost 5% to 19.1 billion bbl in 1997, the highest level since yearend 1992.

Looking to track upstream performance of oil and gas companies in the U.S., the consulting groups obtained data over 5 years from the top 49 U.S. oil and gas E&P companies with proved oil and natural gas reserves in excess of 100 million boe and U.S. upstream capital expenditures of more than $100 million for 1997.

The top 49 companies clearly earned their position by accounting for 61% of total U.S. proved crude oil and natural gas liquids reserves, 55% of total U.S. natural gas reserves, and 54% of total U.S. crude oil, NGL, and natural gas production.

The joint study is an outgrowth of Arthur Andersen's annual U.S. E&P trends and oil and gas reserve disclosures, and John S. Herold's annual reserve replacement cost analysis report.

Tracking expenditures

The joint study revealed that U.S. expenditures for these 49 companies were responsible for more than $100 billion in outlays for a 5-year period.

A significant $9.1 billion increase last year came on the heels of a solid 21% percent hike in U.S. E&P spending by the group in 1996. Capital expenditures in 1997 in the U.S. by the top 49 companies nearly doubled the 1993 level of $15.7 billion.

While all categories of upstream spending-exploration, development, and proved and unproved property purchases-climbed briskly among these companies, the rise in aggregate outlays was propelled by a 70% climb in acquisitions of proved properties to $6.1 billion. Moreover, because the Burlington Resources Inc. consolidation with Louisiana Land & Exploration Co. was treated as a merger and results were restated on a pooling-of-interests basis, actual 1997 acquisition activity was $3.1 billion higher than was generally reported, Herold and Andersen said.

Andersen and Herold found that U.S. exploration expenditures by the 49 companies increased to $5.7 billion in 1997, up 24% from 1996. Thirty-three of them increased exploration spending in 1997 compared with 1996. Shell Oil Co. was by far the nation's top explorer, in money terms, with $638 million in exploration outlays, while companies reporting the largest increases in U.S. exploration spending in 1997 were Forcenergy Inc., Texaco Inc., and Union Pacific Resources Corp. (UPR). These three companies increased exploration expenditures by $134 million, $124 million, and $122 million, respectively.

U.S. development expenditures by the companies in the study surged 32% in 1997 to $15.1 billion, a record amount for the 1990s. Increases in development spending were led by Shell, Texaco, and Exxon Corp. Shell boosted spending for development projects by 22% to $1.4 billion, primarily for its acreage in the deepwater Gulf of Mexico. Exxon and Texaco each raised already impressive development spending commitments to $1.1 billion and $1.2 billion, respectively.

Acquisitions

Driven by renewed interest in exploratory drilling, the 49 largest U.S. E&P companies more than doubled unproved property acquisitions to $3.5 billion in 1997.

Only 4 years earlier, the top 49 devoted $600 million to unproved property investments. Spending for leases accounted for more than 11% of total U.S. E&P outlays last year, compared with less than 4% in 1993. Exploration-minded Conoco Inc., Texaco, UPR, and Shell were the leading spenders.

Rivaling the megamerger years in the oil sector of the mid-1980s, 1997 was extremely active for proved reserve buyers and sellers as well. The value of proved property acquisitions of the 49 companies rocketed 70% in 1997 to $6.1 billion from $3.6 billion in 1996, excluding Burlington Resources' $3.1 billion merger with LL&E.

The implied average price paid for proved reserves in these transactions was $4.23/boe in 1997, a significant turnaround from the 5-year low of $3.50/boe established just 1 year earlier. Significant 1997 transactions included Texaco's purchase of Monterey Resources ($1.389 billion); Burlington Resources' merger with LL&E ($3.075 billion); Conoco's purchase of South Texas gas properties from TransTexas Gas Corp. ($1.073 billion); and Parker & Parsley Petroleum Co.'s merger with Mesa Inc. ($2.154 billion)-which had earlier acquired Greenhill Petroleum Corp. ($260 million)-and its purchase of Electrafina's East Texas Pinnacle reef trend assets ($131 million).

The 1997 transactions do not include three acquisitions exceeding $1 billion each: Occidental Petroleum Corp.'s purchase of the Elk Hills Naval Petroleum Reserve from the U.S. government ($3.65 billion); Sonat Inc.'s purchase of Gulf of Mexico producer Zilkha Energy Co. ($1.264 billion); and Ocean Energy Inc.'s merger with United Meridian Corp. ($1.447 billion). All three of those transactions closed in first quarter 1998.

Oil reserves

Oil reserves held by the 49 biggest U.S. E&P companies account for 61% of the total U.S. proved crude oil and natural gas liquids reserves base.

Since the beginning of 1993, total proved oil reserves for the 49 companies have declined 100 million bbl, after production during the 5-year period of more than 8.6 billion bbl of liquids. The gain in U.S. proved oil reserves last year reflected a banner year in most categories of reserve replacement.

Oil reserve additions from extensions and discoveries were very strong at 1.4 billion bbl, continuing a positive trend that has been building momentum since 1992. Companies with stellar additions through extensions and discoveries in 1997 were the U.S. unit of British Petroleum Co. plc (292 million bbl), Shell (237 million bbl), and Texaco (107 million bbl).

Additions from improved recovery techniques increased to 430 million bbl. Two giant integrated firms, Chevron Corp. (139 million bbl) and Mobil Corp. (92 million bbl), accounted for more than 50% of 1997 additions from improved recovery.

Notwithstanding the late-1997 plunge in crude oil wellhead prices, net upward oil reserve revisions climbed to their highest level in the past 5 years-474 million bbl. As was the case in 1996, Exxon and ARCO reported the largest upward oil reserve revisions in 1997, booking 190 million bbl and 115 million bbl, respectively.

Production, divestment

Petroleum liquids production for the 49 companies declined slightly to 1.7 billion bbl in 1997.

This tracks a trend that has persisted throughout the study period. Total liquids output of the largest U.S. E&P companies has fallen 4% since 1993's level. The combined 1997 liquids production for the Andersen and Herold study group accounted for about 54% of total U.S. crude oil and natural gas liquids production last year.

From 1993 through 1997, the 49 companies purchased a total of 2.1 billion bbl of proved reserves and sold a total of 1.9 billion bbl. In 1997, liquids reserves acquisitions exceeded divestitures by 126 million bbl. Divestitures of proved oil reserves in 1997 amounted to 631 million bbl.

Amoco Corp. was especially active in U.S. property dispositions last year with 185 million bbl of oil sales to multiple purchasers.

The study group's purchases of oil reserves doubled in 1997 to 757 million bbl, spearheaded by Texaco's purchase of Monterey Resources for its heavy crude assets in California. Texaco acquired 420 million boe of proved reserves last year at a cost of $1.6 billion, followed by Pioneer with 121 million bbl of oil reserves purchased.

Natural gas reserves

Although U.S. drilling activity increased last year, it is surprising that the reported U.S. proved gas reserves of the top 49 companies remained relatively flat at 95.7 tcf, according to Andersen and Herold's report.

The proved gas reserves held by these 49 companies represent 55% of the total U.S. proved gas reserve base at yearend 1997.

While drill bit natural gas reserve additions were ahead at an encouraging pace and were at the highest level for the 5-year survey period, a downward revision to estimated proved natural gas reserves of 1 tcf held back overall group performance.

Andersen and Herold are concerned that U.S. gas reserve additions may not be adequate for the industry to meet continuing increases in U.S. demand for natural gas.

Gas production

Natural gas production for the 49 companies in 1997 moved up slightly in line with a modest 0.9% gain in total U.S. dry gas production.

Gas output of 10.3 tcf for the group represented 54% of total U.S. natural gas production last year. Until 1997's essentially flat performance, the largest 49 firms had notched solid gains in natural gas production, resulting in an overall increase in production of 14% since 1993.

Portfolio management of natural gas reserves was an active front for the largest producers last year. During 1993-97, the 49 companies purchased a total of 16.6 tcf of proved reserves and sold a total of 10.6 tcf. Purchases during 1997 increased 20%, from 3.4 tcf in 1996 to 4.1 tcf in 1997, the high point in the 5-year period. Significant natural gas acquirers in 1997 were Pioneer (1.1 tcf), Coastal Corp. (252 bcf), and Conoco (264 bcf).

Sales of gas reserves increased 30% to 3.2 tcf in 1997, also the highest point in the 5-year period. Companies with significant divestitures of gas reserves were Amoco (1.2 tcf), Burlington Resources (538 bcf), Cabot Oil & Gas Corp. (138 bcf), and Equitable Resources Inc. (107 bcf).

Operating results

After a stellar 31% leap in oil and gas production revenues for the 49 companies in 1996, 1997 U.S. wellhead revenues slipped less than 1% to $49.8 billion.

Gas production was ahead slightly in 1997; however, oil production declined, and wellhead oil prices eroded late in the year. Natural gas remained a positive factor as the 1997 average wellhead gas price increased to $2.40/ Mcf from $2.06/Mcf in 1996, according to the Energy Information Administration.

It appears that price gains for gas virtually offset the weakness in crude prices, and natural gas and petroleum liquids wellhead revenues converged at $25 billion each for the 49 company survey group, the analysts said.

U.S. pretax profits from oil and gas producing activities moderated in 1997, falling $2.4 billion to $18 billion-a 12% drop.

Last year's profit level was still quite solid when measured against 1995's $6.6 billion.

Performance measures

Andersen and Herold calculated two measures of upstream investment performance: reserve replacement costs (RRC) and finding and development costs (FDC).

FDC equates to Arthur Andersen's historical calculation of "additions and revisions" in determining reserve replacement costs.

The average U.S. RRC for the 49 largest firms continued an upward trend in 1997, rising 12% to $5.74/boe from $5.13/boe in 1996. At the 1997 level, the average U.S. RRC is 44% higher than the highly competitive $3.98/boe level recorded in 1995. The sharp increases in the implied cost of reserve additions stem from the significant ramp-up in U.S. industry capital investment and attendant increases in oil field service and equipment costs. Nearly 34 of the 49 companies logged an increase in average RRC from 1996 levels, Andersen and Herold data show.

The average FDC for the 49 firms jumped 11% in 1997 to $6.30/boe from $5.66/boe in 1996. Like RRC, finding and development costs had jumped sharply in 1996-by 40%-in response to heightened upstream activity. Also adding to FDC cost pressures has been the push by many companies to devote more of their capital budgets to unproved property acquisitions and to exploration spending. Similarly, two-thirds of the 49 companies experienced an increase in U.S. finding and development costs from 1996 levels.

Based on the 3-year average RRC, the top performing companies were acquisition-oriented Plains Resources Inc., Columbia Energy Group, and Exxon with 1995-97 RRCs of $2.28/ boe, $2.37/boe, and $2.68/boe, respectively. As for a 3-year FDC average, Exxon, Cross Timbers Oil Co., and Columbia Energy topped the list at $2.69/boe, $2.86/boe, and $3.07/boe, respectively.

Replacement rates

U.S. company overall oil production replacement rates continued an encouraging trend, increasing from the 1993 low of 68% to 144%, the highest level in the survey period.

Drillbit additions excluding proved property acquisitions followed a similar pattern, reaching 136% in 1997 vs. 67% in 1993. During the past 5 years, the top companies replaced 97% of their oil production through drilling and 99% when purchases and sales of reserves are considered. The top performing companies, based on 3-year RRC oil production replacement rates, were Energen Corp., Nuevo Energy Co., MCN Energy Group Inc., and Plains Resources Inc.

RRC natural gas production replacement rates came in at 100% in 1997 vs. 92% in 1996. The 1997 results for gas reserve replenishment were consistent with the 3- and 5-year rates for RRC and FDC categories. While natural gas reserve drillbit additions moved up in 1997 from the 1996 level of 83%, these FDC additions still fell short of complete replacement levels. The top performing companies in natural gas production replacement based on 3-year RRC additions were Energen, HS Resources Inc., and Cross Timbers.