HEROLD PINPOINTS RESERVES REPLACEMENT COST

Reserves replacement cost at an average of $5/bbl or less may be about the best industry can do, says a spokesman for John S. Herold Inc., Greenwich, Conn. Herold's annual reserve replacement cost analysis (OGJ, June 10, Newsletter) assesses the finding cost performance of a group of 76 companies representing 47.1 billion bbl of proved oil reserves and 228 tcf of gas reserves. Key results of the analysis include:

June 17, 1991

3 min read

Reserves replacement cost at an average of $5/bbl or less may be about the best industry can do, says a spokesman for John S. Herold Inc., Greenwich, Conn.

Herold's annual reserve replacement cost analysis (OGJ, June 10, Newsletter) assesses the finding cost performance of a group of 76 companies representing 47.1 billion bbl of proved oil reserves and 228 tcf of gas reserves.

Key results of the analysis include:

Worldwide replacement costs reported by the group fell 4% to $4.35/bbl of oil equivalent (BOE) in 1990, compared with the previous year. U.S. costs were little changed at $4.99/BOE. Outside the U.S., costs dropped 8% to less than $4/BOE.
Upstream spending by the group increased 13% worldwide compared with 1989, totaling $45.3 billion.
Additions to reserves booked by the group were 6.1 billion bbl of oil and 26.1 tcf of gas.

Spending for exploration, development, and property acquisitions-proved and unproved-is used to calculate the finding cost.

COST TRENDS

Finding costs are the key to successful performance, says a Herold spokesman.

And during the past 10 years, the replacement cost trend "demonstrates a progressive improvement in industry's ability to replace reserves at lower cost."

A series of 3 year worldwide replacement cost shows a drop from $8.81 /BOE 198082 to $4.32/BOE for 1987-89. The 1988-90 period was slightly higher at $4.53/BOE.

The study also calculates a 5 year total. For 1986-90 worldwide reserve replacement cost was $4.49/BOE.

In the U.S., the average reserve replacement cost in 1990 for the group studied reached a 17 year low, adjusted for inflation, at $4.99/BOE. U.S. reserve replacement costs in 1990 dollars stood at $3.80/BOE in 1973 and climbed to $17/BOE in 1990 dollars in the early 1980s.

One year costs can be skewed by a major discovery, a major acquisition, or an especially expensive drilling program. That's why 3 year and 5 year periods are used.

CAPITAL SPENDING

The Herold study shows a continued flow of upstream capital out of the U.S. For the third year in a row, non-U.S. spending exceeded U.S. spending, and there appears to be no sign that this trend will reverse.

In 1990, the group studied by Herold spent 57% of its funds outside the U.S., and 62% of the reserves found were outside the U.S.

Herold expects 1991 upstream capital spending to be less than companies budgeted earlier in the year, especially in the U.S. Drilling activity there is below 1990 levels, due in part to weak natural gas prices.

But companies will continue to spend to develop large projects that will contribute reserves in the mid-1990s and beyond, Herold said.