U.S. upstream seen as healthiest in years

Lower costs and increased capital spending tied to brighter prospects for oil and gas markets are fueling a confident outlook for the U.S. petroleum industry.

Measures of significance-double digit percentage increases in U.S. and non-U.S. capital spending, lower reserve replacement costs, and continuing cuts in production replacement rates-show the U.S. petroleum industry is in its healthiest shape in more than 15 years.

These signs indicate the U.S. industry has launched a period of strong U.S. and international growth, reports Arthur Andersen LLP, Houston, in its most recent survey of oil and gas reserves data from publicly traded U.S. petroleum companies. The survey was unveiled last month (OGJ, Sept. 2, Newsletter).

The 1996 survey reports worldwide capital spending by these companies increased 12% in 1995 to $57.8 billion, a turnaround from the 5 year low in 1994. During 1995, U.S. capital spending increased 11% to $22.3 billion, an 8 year high, while non-U.S. capital spending increased 12% to $35.5 billion.

"The pattern of increasing exploration and development spending from the Gulf of Mexico to the Gulf of Thailand is evidence of a notable strengthening in companies' expectations that they can find and develop oil and gas cost effectively and sell into a growing worldwide market for the forseeable future," said Victor A Burk, Arthur Andersen's managing director of energy industry services.

This trend, he said, is led by majors and independents that are improving operating efficiencies, cutting costs, and effectively using constantly improving technologies to create value.

Arthur Andersen's latest survey covers 1991-95 and is compiled from reserves, operating, and financial information that 231 companies filed with the U.S. Securities & Exchange Commission. The list includes 26 companies with headquarters outside the U.S.

E&D spending

Worldwide exploration and development spending by companies in Arthur Andersen's survey, excluding purchases of proved properties, increased 10% to $50.4 billion in 1995.

In the U.S., spending increased 8% to $17.3 billion, the highest level since 1991. All of that increase came via majors, whose spending increased 14% to $9.8 billion, the highest level since 1991. The independent sector held level at $7.5 billion.

Since the low point in spending in 1992, majors have increased their U.S. spending in those categories by 21% and independents by 47%, the survey notes.

Majors with significant U.S. spending during 1995 were Royal Dutch/ Shell Group at $1.5 billion, Amoco Corp. at $1.1 billion, and Texaco Inc. at $1 billion. Leading the independents were Union Pacific Resources Group Inc. at $498 million and Burlington Resources Inc. at $443 million.

Non-U.S. spending-66% of the surveyed companies' worldwide spending-recovered from the 5 year low in 1994, increasing 11% in 1995 to $33.1 billion. Non-U.S. spending by majors increased 12% to $27.6 billion, one third of it attributable to Royal Dutch/Shell, Exxon Corp., and YPF SA.

Independents' non-U.S. spending increased 5% to $5.5 billion. Sixty percent of their 1995 spending was incurred by seven companies: Canadian Pacific Ltd., Lasmo plc, Union Texas Petroleum Holdings Inc., Renaissance Energy, Enterprise Oil plc, Gulf Canada Resources Ltd., and Petro-Canada.

Total non-U.S. capital spending, including proved and unproved properties acquisitions, increased for the first time in 5 years, increasing 12% to $35.5 billion.

Reserve replacement costs

Replacement costs for exploration, development, and acquisition per barrel of oil equivalent (BOE) of reserves added improved across the board in the U.S. during 1995, the survey shows.

Replacement costs for all sources-additions, revisions, and purchases-decreased 6% to $4.22/BOE, the lowest since 1987 and 30% below 1991's $6.04 level. Independents reported cost reductions of 13% to $4.43/BOE, while the majors' $4.03/BOE cost was a 2% year-to-year increase.

During the past 3 years, the group replaced U.S. reserves at an average cost for all sources of $4.44/BOE-$4.05 for majors, $4.85 for independents. Based on 3 year, all-source averages, the top performing companies with U.S. capital spending of more than $50 million in 1995 are Plains Resources Inc. $2.39/BOE, Exxon $2.70/BOE, and British Petroleum Co. plc $2.78/BOE.

Non-U.S. replacement costs for all sources decreased slightly in 1995 to $4.79/BOE from $4.85/BOE, 27% below the $6.58/BOE level of 1992. In 1995, the majors' costs for all sources increased to $4.84/BOE, while that of independents decreased 7% to $4.57/BOE.

Production replacement rates

The rate at which the surveyed companies replaced production of oil and gas from all sources increased in U.S. and non-U.S. operations during 1995.

The replacement rate for all sources of U.S. oil production increased to 99% in 1995. Majors and independents performed at different levels, the survey shows.

Majors' all-source replacement rate increased to a 5 year high of 79%, partially held down by an increase in reserve sales of 171 million bbl, and independents' replacement rate reached 185%, also a 5 year high, reflecting in part increased net reserve purchases of 81 million bbl. During the past 3 years, surveyed companies replaced 85% of their U.S. oil production from all sources-68% for majors and 157% for independents.

The non-U.S. all-sources oil production replacement rate reached 127% in 1995 compared with 116% in 1994. In the last 3 years, surveyed companies replaced 115% of their non-U.S. oil production from all sources, 114% for majors and 128% for independents.

The all-sources U.S. gas production replacement rate increased to 132% in 1995, reflecting higher net reserve purchases by the group. The majors' all-sources replacement rate was flat at 102%, while the independents' measure increased to 172% from 141% in 1994.

During the last 3 years, the group replaced 118% of its U.S. gas production from all sources, 92% for majors and 154% for independents.

Outside the U.S., gas production replacement from all sources increased to 113% in 1995, including an increase by the majors to 118% in 1995 from 89% in 1994 and a marked decrease among independents to 85% in 1995 from 142% the year before, reflecting net sales of 762 bcf during 1995. During the last 3 years, the group replaced 101% of its non-U.S. gas production from all sources, 99% for majors and 114% for independents.

Production costs

Production costs in the U.S. declined 5% in 1995 to $4/BOE, 19% below the 5 year high of $4.96 in 1991.

Independents' production costs averaged $3.71/BOE, compared with the majors' $4.13 average, mainly because a larger share of independents' production last year was gas, 70% vs. 42% for the majors.

The downward trend in U.S. production costs indicates that investments in technology, together with operating efficiencies, are paying off for U.S. companies, the survey reveals. In the last 3 years, companies with U.S. production of more than 25 million BOE during that period with the lowest U.S. production costs were Enron Oil & Gas Co. $1.86/BOE, Consolidated Natural Gas Co. $1.97/BOE, and Sonat Inc. $2.27/BOE.

Non-U.S. production costs increased 2¢ to $4.75/BOE in 1995. As in the U.S., independents achieved a lower cost-$4.05/BOE-than the majors-$4.79/BOE-because a larger share of their production is gas, 39% vs. 33% for majors.

In the last 3 years, companies with non-U.S. production of more than 25 million BOE during that period with the lowest non-U.S. production costs were Unimar Co. $1.24/BOE, Unocal Corp. $2.17/BOE, and Enron $2.22/ BOE.

Reserves

The group's U.S. proved oil reserves, 83% held by majors, fell slightly to 19.2 billion bbl in 1995, the lowest level in 5 years.

Since 1991, U.S. proved oil reserves have fallen 1.7 billion bbl, or 8%, reflecting the age of the reserve base. U.S. oil production also declined for the fifth consecutive year to 1.8 billion bbl, 10% below the recent high in 1991.

Sales of U.S. oil reserves increased 50% in 1995, as companies continued to sharpen their focus on core areas and to dispose of marginal and nonstrategic properties. The companies most active during 1995 in disposing of properties from U.S. portfolios included Texaco, Apache Corp., and Conoco Inc.

Non-U.S. proved oil reserves, 89% held by majors, increased to 32.6 million bbl in 1995, continuing the slight increase in reserves each year since 1992. Production of proved oil reserves increased slightly to 3.5 billion bbl. Sales increased to 627 million bbl in 1995, led by Maxus Energy Corp., Royal Dutch/Shell, and Oryx Energy Co.

U.S. proved gas reserves, 59% held by majors, increased 3% in 1995 to 109.6 tcf, and production increased slightly to 11.3 tcf, the highest in the 5 year survey period.

Royal Dutch/Shell reported the largest gas production increase, 74 bcf, while Chevron Corp. reported the largest decrease, 79 bcf.

Sales of U.S. proved gas reserves increased for the first time since 1992, reaching 3.3 tcf. The largest sales were by Maxus, Texaco, and Burlington Resources, with a combined total of more than 975 bcf.

Non-U.S. gas reserves, 90% held by majors, increased slightly to 167.3 tcf during 1995, while production increased to 10.9 tcf. Royal Dutch/ Shell and Mobil Corp. were the only two survey companies whose non-U.S. production exceeded 1 tcf in 1995. Purchases of non-U.S. gas reserves decreased 39% to 1.2 tcf, and sales decreased 27% to 1.7 tcf.