Upstream operations generating better cash flow, returns for producers

Upstream operations of the 15 largest oil and gas producers are generating better cash flow and returns, as production costs continue to decline, according to the latest analysis by Schroder & Co. Inc., New York.

The analysis measures the upstream performance of the world's largest producing companies for nine parameters-including production costs, replacement ratios and upstream returns (see table). It also reviews overall trends in performance among the companies as a group.

Costs keep falling

Among the report's major findings is one that shows a continued decline in production, acquisition, finding, and exploration and development costs per barrel of oil equivalent (BOE).

During 1992-96, industry production costs fell about $1/BOE, or 20%.

"This trend reflects excellent expense control and the divestment of high-cost, low-production properties, particularly in the U.S.," Schroder said. It added, "Production costs have probably bottomed and should begin to exhibit the effect of higher oil field service costs."

In another measure of performance, acquisition, exploration, and development costs, on a 3-year moving basis, were $4.33/BOE in 1996. This marked the lowest 3-year average on record.

During the last 5 years, these costs averaged $4.61/BOE.

Production replacement climbs

In another key indicator, the group of companies surveyed replaced 110% of production during the last 5 years, or 107% when acquisitions net of divestments were included.

This ratio was 115% higher than the latest 3-year period, or 122% including acquisitions net of divestments.

Replacement ratios within individual companies varied greatly, from a high of 227% by France's Total during the last 5 years to a low of 77% for ARCO for the same period.

Profitability improves

Upstream operations of the 15 companies also saw improved financial performance.

Production income was $1.51/BOE, or 54% higher in 1996 than it was in 1991.

"The improvement was due to higher revenue (up $1.15/BOE) and lower operating costs (down about $1.10/ BOE), partly offset by higher taxes," Schroder said. "Much of the increase in (1996) revenue was due to much higher U.S. gas prices (up about 97¢/Mcf, or 70%). Oil prices were up 75¢/bbl, or 4%." Outside the U.S., natural gas prices were flat.

Upstream returns also climbed in 1996. The industry generated cash flow of $7.70/ BOE in 1996. This was 158% of the average cost of replacing production through acquisition, exploration, and development during the prior 5-year period of 1991-95.

Company rankings

The report also ranks performance criteria company-by-company.

Chevron Corp. led this ranking for the second year in a row.

Others with above-average overall cost and return rankings were British Petroleum Co. plc, Amoco Corp., Phillips Petroleum Co., Texaco Inc., Exxon Corp., Total SA, Conoco Inc., and Royal Dutch/Shell Group.

Trailing the group were Amerada Hess Corp., which had one of the poorest rankings in production costs, and Elf Aquitaine SA, which had among the best production cost ratings but was hampered by relatively low production replacement ratios and high acqui sition/E&D costs.