Worldwide E&P spending reaches record, study finds

Upstream investments worldwide increased 45% to $401 billion in 2006 compared with 2005, according to a recent review from John S. Herold and Harrison Lovegrove & Co.

Paula Dittrick
Senior Staff Writer

HOUSTON, Aug. 29 -- Upstream investments worldwide increased 45% to $401 billion in 2006 compared with 2005, according to the 2007 Global Upstream Performance Review released Aug. 29 by John S. Herold Inc. and Harrison Lovegrove & Co. Ltd.

The record capital spending generated a 2% increase in proved reserves volumes to 263 billion boe, while reserves replacement costs climbed 33% to $13.60/boe, the annual report said.

"Revenue growth more than offset higher operating expenses and increased taxes, allowing the industry to report $243 billion in net income, the fourth consecutive record," said Robert Gillon, Herold senior vice-president and a director of equity research.

Gillon noted that rising costs are pressuring investment returns. Net income as a percentage of the book value of oil and gas assets declined in 2006 following 3 years of gains.

Harrison Lovegrove Chief Executive Martin Lovegrove said, "The key challenge facing the petroleum industry continued to be replacing reserves and growing production due to the combination of maturing basins and reduced accessibility to new acreage. With opportunities scarce, proved and unproved acquisition costs increased 85%, while the implied costs for the acquisition of proved reserves soared 55%—more than twice the increase in oil prices."

The Herold-Lovegrove study noted that industry has spent more on repurchasing its own shares than it has acquiring proved reserves during the last 2 years.

The review is based on information that 228 oil and gas companies filed with the US Securities Exchange Commission and similar agencies worldwide.

Revenues, costs climbing
Worldwide revenues increased by $134 billion, implying an average realized price of $43.62/bbl—a 16% increase from 2005.

Development spending increased 29% and accounted for 52% of total investment, down from the 5-year development investment average of 58%. Exploration spending increased 39%, the largest jump in 5 years.

A nearly 80% increase in proved acquisition spending produced a 15% increase in purchased reserves. Investment in unproved acquisitions almost doubled to $47 billion in 2006 compared with 2005.

Reserve replacement rates increased modestly in 2006 despite the growth in upstream investment. Finding and development costs surged 29% to $14.42/boe, and industry replaced 111% of production through drilling.
A 31% rise in lifting costs consumed one-third of the increase in realized prices, while income taxes were up 12%. As a result, cash flow advanced 18% during 2006 compared with 2005. That compared with an average cash flow gain of 26% for 2002-05.
Net income was up 17% in 2006 compared with 2005. Net income had jumped 46% in 2005 compared with 2004.

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