Ernst & Young: Finding, development costs spiked in 2008

The US oil and gas industry’s finding and development (F&D) costs jumped last year while oil prices and profits declined, reported Ernst & Young LLP.

Paula Dittrick
OGJ Senior Staff Writer

HOUSTON, June 19 -- The US oil and gas industry’s finding and development (F&D) costs jumped last year while oil prices and profits declined, reported Ernst & Young LLP.

In its second annual benchmark study, E&Y analyzed annual reports 40 companies filed with the US Securities and Exchange Commission. The group represents 70% of the nation’s oil reserves and 60% of natural gas reserves.

F&D costs from all sources were $39.58/boe in 2008 compared with $14.51/boe during 2007. The 3-year average was $21.62/boe for all sources.

The study defined all sources as including acquisition costs, exploration costs, development costs, and reserve changes from extensions and discoveries, improved recovery, and revisions.

Upstream capital expenditures for the 40 companies increased to $132.1 billion, up 35% from 2007.

Revenues grew to $183.3 billion in 2008, up 35% from the previous year. But increases in production costs and depreciation, depletion and amortization led to lower after-tax profits, which were $39.3 billion in 2008 compared with $42.8 billion in 2007.

Production costs were $14.72/boe in 2008, a 25% increase from 2007. These costs have more than doubled from $6.55/boe in 2004.

Reserves estimates reduced
Low yearend crude prices forced several companies to reduce or revise their estimated reserves reports, said Charles Swanson, E&Y Houston office managing partner.

For estimated proved oil reserves, the study reported negative revisions of 1.2 billion bbl last year. The E&Y study showed US 2008 yearend reserves at 15 billion bbl.

Under SEC reporting rules, companies book reserves that can be produced economically at the commodity price on the year’s final trading day. The 2008 price was $44.60/bbl compared with $95/bbl for 2007.

The same SEC rule prompted industry to reduce its booked gas reserves by 6.7 tcf in 2008, yet even with the writedowns, overall US gas reserves grew.

Ending reserves were 145.2 tcf in 2008 compared with 139.9 tcf in 2007. E&Y attributed the increase to increased gas production from shale plays.

Because of changing SEC regulations, companies will make their final 2009 reserve reports based upon an average annual price instead of a yearend trading day price.

Swanson said industry appears to be in a good financial position when commodity prices stabilize and the economy improves.

“Compared to the recovery of the last major collapse in the 1980s, today's oil and gas industry is much leaner, more efficient, and better positioned to take advantage of opportunities during an economic recovery," Swanson said.

Contact Paula Dittrick at paulad@ogjonline.com.

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