Global E&D expenditures surged in 1997

Global Capital Expenditures [63,701 bytes] Exploration and Development Costs [37,335 bytes] Finding and Development Costs [75,612 bytes] Reserve Replacement Costs [74,676 bytes] Exploration and development expenditures by the largest upstream petroleum firms rose 30% in 1997 to more than $91 billion. Of this total, 40% was spent on projects in the U.S.-the highest proportion in at least 5 years.

July 20, 1998

8 min read

Exploration and development expenditures by the largest upstream petroleum firms rose 30% in 1997 to more than $91 billion. Of this total, 40% was spent on projects in the U.S.-the highest proportion in at least 5 years.

These are the conclusions of a study by Arthur Andersen and John S. Herold Inc., in which 131 publicly traded companies with proved reserves of more than 20 million boe each were surveyed. The survey included U.S. and non-U.S. companies, classified as: majors (integrated firms with reserves of more than 1 billion boe), large independents (reserves of 0.1-1 billion boe), and medium-sized independents (reserves of 20-100 million boe).

Despite a record year for E&D spending in 1997, said Victor A. Burk, Arthur Andersen's managing director of energy industry services, the upward trend in upstream spending is not expected to continue: "Oil prices have plummeted, natural gas prices have weakened, and 1998 could see the first decline in capital spending since 1992.

"Companies are responding in different ways. Some have already announced reductions in capital spending, a few have announced increases, but most are still holding the line and taking either a long-term view or a wait-and-see attitude."

E&D spending

U.S. E&D spending for all 131 companies rose 38% to $28.8 billion last year, while non-U.S. spending was up 20% to $45.8 billion.

Brian J. Lidsky, executive vice-president of John S. Herold, said, "The industry's 1997 U.S. spending increase is particularly impressive given the common perception that the international arena offers better opportunities. While the U.S. lags most regionsellipsein finding and development and reserve replacement cost performance measures, the increased level of (U.S.) spending suggests that the stability, infrastructure, and market size in the U.S. remain highly attractive to the world's oil companies.

"The ramp-up in 1997 spending is partially attributable to increasing investments in the deepwater Gulf of Mexico, which is shaping up to be one of the world's highest-potential oil and gas basins," said Lidsky. "Herold expects this higher level of spending in the gulf to bear fruit in the form of at least 25% average annual gains in production from the deepwater Gulf of Mexico over the next 5 years."

U.S. exploration spending, including unproved property acquisitions, increased 48% to $11.5 billion in 1997, while development outlays increased 32% to $17.3 billion. Drilling and completion costs were higher last year, explained Andersen and Herold.

Independents increased their combined U.S. exploration spending by 53% to $3.9 billion, while the majors' exploration outlays were up only 6% to $3.2 billion. The majors compensated, however, by accelerating their unproved and proved property acquisitions by 210% and 149%, respectively, to $2.1 billion and $1.4 billion.

Non-U.S. exploration spending was up 19% to $14.5 billion, while non-U.S. development spending rose 20% to $31.3 billion.

Capital spending for exploration and production firms increased 42% in 1997 to $37.1 billion. This rise was led by a nearly 60% increase in proved reserves acquisitions, to $8.3 billion.

For the first time in the 5-year history of the survey, the total U.S. capital expenditures of the large independents exceeded the majors'. Large independents spent $16.6 billion vs. $15.8 for majors.

"This was primarily due to an increase of $2.8 billion in the large independents' proved property acquisitions to $5.7 billion," said Andersen and Herold, "compared with a rise of $860 million in the majors' proved property acquisitions to $1.4 billion."

Proved property acquisitions increased 59% in the U.S., to $8.3 billion, and 40% outside the U.S., to $8.7 billion. Property acquisitions in Canada were up 150% to $4 billion; in Latin America, they rose 200% to $1.5 billion.

Pioneer Natural Resources Co. was the largest acquirer of U.S. proved reserves last year at $2.6 billion. Texaco Inc. was second largest with $1.1 billion, followed by Lomak Petroleum Inc. with $448.8 million.

The large independents boosted spending on non-U.S. proved properties by 135% to $5.2 billion, while the majors reduced theirs 12% to $3.3 billion.

Top acquirers of non-U.S. proved properties last year included Canadian Occidental Petroleum with $1.3 billion, Amoco Corp. with $872 million, and Pioneer Natural Resources with $718 million.

Since 1993, non-U.S. proved property acquisitions have almost tripled, said Andersen and Herold.

Reserves

The companies surveyed increased U.S. oil reserves by 1 billion bbl to 20 billion bbl in 1997. Their drillbit additions increased by 38% to 2 billion bbl in 1997, and property acquisitions added 1 billion bbl to reserves-71% more than in 1996.

The largest holder of U.S. oil reserves is British Petroleum Co. plc with 2.8 billion bbl.

The companies maintained their U.S. oil production in 1997 at about 1.8 billion bbl for the fifth consecutive year.

U.S. gas reserves increased less than 1% to 106.7 tcf last year. This is primarily due to huge net downward revisions totaling 1 tcf, said Andersen and Herold. The most prominent of these was EEX Corp.'s 623 bcf downgrade of its East Texas properties' reserves.

Drillbit gas reserves additions increased 25% in 1997 to 12.3 tcf. Leading this category were Burlington Resources Inc. with 1 tcf and Texaco with 927 bcf.

Purchases of proved gas reserves rose 4% to 5.2 tcf but were largely counterbalanced by 3.9 tcf in reserves sales. Pioneer led the buyers with 1.1 tcf of purchases, and Amoco led the sellers with 1.2 tcf of sales.

U.S. gas production continued its long-term rise by increasing 2% to 11.6 tcf-half the annual average growth rate during 1993-96.

Outside the U.S., the firms surveyed increased oil reserves by 4.1 billion bbl, or 10%, to 45.7 billion bbl. This is the largest annual increase in 5 years. Non-U.S. drillbit additions to oil reserves were up 17% to 4.3 billion bbl, while purchases rose 41% to 1.9 billion bbl.

Non-U.S. oil production among these companies increased 4% to 4.1 billion bbl.

Gas reserves increased almost 5% outside the U.S., to 221.3 tcf. This includes an 80% increased in gas reserves purchases to 8.5 tcf, which was partially offset by sales of 4.2 tcf-a 122% increase from the previous year. Amoco led gas reserves purchases by buying more than 2.4 tcf.

Non-U.S. additions to gas reserves with the drillbit were 17 tcf, a 7% increase from 1996.

Performance measures

Arthur Andersen and John S. Herold tracked five key measures of upstream performance:

• Reserve replacement costs. U.S. reserve replacement costs rose 16% to $6.10/boe. Exxon Corp. led the majors with a 3-year average replacement cost of $2.68/boe. Union Texas Petroleum Holdings Inc. led the large independents at $1.44/boe, and Evergreen Resources Inc. led the medium-sized independents with $1.48/boe. Non-U.S. replacement costs declined slightly to $3.77 boe. Here, Amoco led the majors with a 3-year average of $2.47/boe, and Nuevo Energy Co. led the large independents with $1.42/ boe. The medium independents were led by Tesoro Petroleum Corp. with $0.80/boe.

• Finding and development costs. U.S. finding and development costs increased 16% to $6.83/boe, while non-U.S. costs rose 3% to $4.12/boe. Among U.S. majors, Exxon led 3-year average finding and development costs with $2.69/boe. Union Texas was the top large independent with $1.44/boe. And Evergreen was the leading medium independent with $1.56/boe. Canadian finding and development costs for the group fell 26% to $4.41/boe, and costs in the Asia/Pacific region declined 23% to $3.13/boe. European costs climbed 35% to $7.41/boe. Outside the U.S., Royal Dutch/Shell led majors with $2.34/boe, and Noble Affiliates led large independents with $1.38/boe.

• Proved reserve acquisition costs. The cost of acquiring proved reserves in the U.S. rose 21% in 1997 to $4.45/boe. Transactions were valued at $8.3 billion. Pioneer was responsible for 32% of U.S. acquisition spending, and Texaco for 13%. Low-cost U.S. acquirers were Plains Resources Inc. ($0.65/boe), Coastal Corp. ($1.08/ boe), and Howell Corp. ($2.12/boe). Outside the U.S., proved property acquisition costs declined about 10% in 1997 to $2.61/boe, said the two firms. If the acquisition of Ampolex Ltd. by Mobil Corp. is excluded, however, reserve acquisition costs increased 14% last year. Canada accounted for 46% of non-U.S. acquisition activity; costs there increased 35% to $4.25/boe. Latin American acquisitions doubled to $1.5 billion last year, with unit costs rising 51% to $3.45/boe.

• Production costs. U.S. production costs declined in 1997 by $0.07/boe to $3.96/boe. U.S. costs were $0.48/boe lower than in 1993. Non-U.S. production costs fell 1% last year to $4.34/boe, a decline of $0.39/boe since 1993.

• Production replacement ratios. U.S. liquids production replacement from all sources was 156% in 1997, up from 67% in 1993. Non-U.S. liquids production replacement was 199% vs. 142% in 1993. "The turnaround in oil production was not due solely to acquisitions," said Andersen and Herold. "U.S. drillbit additions climbed to 135% of production, up from 66% in 1993."

Outside the U.S., the survey companies replaced 173% of oil production on an F&D (finding and development) basis, compared with 98% in 1993.

All-sources natural gas production replacement was 106% in the U.S. last year, continuing a downward trend from a 5-year high of 136% in 1995. Downward gas reserve revisions of more than 100 bcf each by EEX, Amoco, Unocal Corp., Mobil, TransTexas Gas Corp., and Pioneer Natural Resources were largely responsible for the decline. Non-U.S. gas replacement from all sources rose slightly to 208%. U.S. gas production replacement through F&D only was 94% in 1997, up from 89% in 1996. Outside the U.S., F&D gas production replacement was 175%, continuing a steady climb since 1993.