By OGJ editors
HOUSTON, Sept. 28 -- Oil and gas companies' revenue growth continued to advance ahead of exploration and development outlays during 2004, said the latest annual global review of upstream performance by John S. Herold Inc. and Harrison Lovegrove & Co. Ltd.
Worldwide upstream operating cash flow increased 20% from the 2003 level to a record $240.7 billion in 2004. Upstream spending increased 17.8% to $195 billion, the study said.
"Strong wellhead pricing and a sea of black ink is sparking a renaissance in North America and European upstream investment activity," analysts said during a Sept. 26 conference call. Capital flowed into mature regions last year, and the US, Canada, and Europe each showed gains of 20% or more compared with 2003 investment levels.
In recent years, the industry had diverted funds toward lower cost, less mature regions, aiming to add reserves and earn higher returns.
"While that remains true for the major oils, the smaller companies have dramatically boosted investment in North America in an effort to maximize production during a period of high natural gas prices," said Martin Lovegrove, chief executive of Harrison Lovegrove, London.
Most incremental spending in the mature regions went toward proved property assets, said analysts involved in the study. They expect that future cash flows will gravitate again toward less mature, lower-cost regions.
Investment growth continued in Africa, the Middle East, and the Asia-Pacific region during 2004 although at a reduced pace from 2003, the study showed. Upstream investment in South America and Central America fell during 2004.
Among the surveyed companies, global reserves additions and production growth were modest. Their worldwide oil and liquids reserves held essentially unchanged at 143.4 billion bbl. High oil and gas prices led to downward reserve revisions under international production sharing contracts.
"We see indications that the industry has become more conservative in its booking practices as well," said the report's executive summary. "Gas reserves continue to grow at a healthy pace, allowing massive LNG projects to proceed in Asia and the Atlantic Basin."
Gas reserves were up 5% to 562.8 tcf. Gas reserves have increased by nearly 100 tcf, or 21.2%, since 2000, and gas production is up 17.6% during that same period.
Finding costs
Finding and development costs continue to escalate. A 15% increase worldwide in drilling spending in 2004 resulted in minimal reserve additions.
"Not only were strong increases seen in the mature areas, where finding costs reached $20/boe in Europe and nearly $13/boe in the US, but also in Africa and the Middle East, where finding costs increased by nearly 80% to $14.40/boe," the study said. The Asia-Pacific region saw its finding costs increase 17% over 2003 levels.
Analysts expect world finding and development costs will see double-digit increases again during 2005.
Previously, they forecast an increase in exploration and mergers-and-acquisition (M&A) outlays as a share of total upstream spending. Upstream M&A activity surged 50% in 2004 from 2003, while the worldwide deal count rose to a 5-year high.
"While the change is not yet apparent in exploration, merger-and-acquisition spending did draw a greater share of the funds, nearly all at the expense of development outlays," said Arthur L. Smith, Herold chairman and chief executive officer.
Total proved acquisition outlays jumped 30.8% to $38.3 billion during 2004. Spending for unproved property acreage climbed nearly 75% to $9.9 billion
Meanwhile, development outlays were up 14% to $117.4 billion, or 60.2% of the total upstream spending. Spending on exploration, excluding acreage, was relatively stagnant at $27 billion, or 13.8% of total upstream spending, the report said.
"Industry has got to maintain its discipline," said Lovegrove. "The industry needs to avoid complacency that can arise in times of plenty and avoid the value destruction that can stem from overly aggressive or irrational capital investment."
