RESERVE REPLACEMENT COSTS COMPETITIVE IN U.S. AND CANADA

Contrarians take notice, says John S. Herold Inc. The Greenwich, Conn., analyst's study of 1992 results for 128 oil found that U.S. and Canadian reserve replacement costs (RRCS) were among the world's most competitive. The studied firms account for more than 95% of capital spending and reserve additions among all public oil companies. "Apparently the recent draconian cost reduction efforts implemented by the oil industry for the North American upstream sector are paying off," Herold

May 24, 1993

4 min read

Contrarians take notice, says John S. Herold Inc.

The Greenwich, Conn., analyst's study of 1992 results for 128 oil found that U.S. and Canadian reserve replacement costs (RRCS) were among the world's most competitive. The studied firms account for more than 95% of capital spending and reserve additions among all public oil companies.

"Apparently the recent draconian cost reduction efforts implemented by the oil industry for the North American upstream sector are paying off," Herold said.

"After years of hearing the mantra that oil company spending must emigrate to more hospitable international climes, it is refreshing to observe that the oil industry's renewed commitment to cost containment and efficiency and focus of operations is paying dividends.

What's more, Herold believes 1992 could well represent the low water mark of oil industry activity in North America for the rest of this decade.

"With oil industry fundamentals on the mend and a bull market in oil and gas shares under way in 1993, we expect a solid recovery in upstream capital commitments to become increasingly evident."

COST COMPARISONS

Herold's figures show U.S. and Canadian RRCs in 1992 averaged $4.82/bbl of oil equivalent (BOE) and $4.54/BOE added, respectively, vs. $5.95/BOE for the rest of the world.

Worldwide RRCs for 1992 came in at $5.41/BOE of reserve additions, a significant improvement over the dismal industry performance of 1991 when U.S. RRCs surged 20% to $6/BOE and international RRCs jumped "an astonishing" 54% to $6.12/BOE.

Reserves added exclusively from exploration and development outlays showed similar trends. Those finding and development costs for the U.S. and Canada amounted to $5.29/BOE and $7.37/BOE, respectively, against year earlier levels of $6.88/BOE and $15.65/BOE.

CAPITAL SPENDING

Oil companies slashed upstream capital spending by more than 15.4% in 1992.

Responding to tough industry operating fundamentals and low natural gas price realizations that prevailed during first quarter 1992, total expenditures fell to $43.4 billion from $51.4 billion in 1991.

Not surprisingly, Herold said, most of the 1992 spending cuts took place in North America. U.S. spending shrank $4.1 billion, or 21.4%, to $14.9 billion. Canadian outlays plunged by an even more dramatic $1.3 billion, or down 32.5%, to $2.8 billion.

The dollar exodus from the U. S. continued to gain speed. For the sixth straight year, spending outside the U.S. at $28.6 billion outpaced U.S. outlays of $14.9 billion. That means 66% of the total upstream dollar was spent outside the U.S.

Herold said, "It is significant to note that 10 years ago the geographic spending weights were the exact opposite with two thirds of 1982's $48.4 billion capital program occurring in the U.S.

"It is noteworthy that 1992 RRC expenditures in North America of $17.7 billion were roughly half the $35.7 billion average expenditure level of the first half of the 1980s. Moreover, last year's outlays were below the previous low point-$18.7 billion-that occurred in 1987 in reaction to the world oil price crash of 1986."

RESERVE ADDITIONS

Companies covered by Herold's study booked 1992 reserve additions of 6.6 billion BOE excluding acquired reserves and 8 billion BOE including acquired reserves-by either measure the lowest level of net additions in 5 years.

Reserve additions from exploration and development efforts alone did not replace 1992 production. The replacement rate of 85% from finding efforts climbed to a "barely acceptable" 104% when reserves added from acquisitions were included.

The 1992 replacement ratios compared poorly with the 5 year record of 102% replacement from finding and development efforts and 132% including acquisitions.

RESERVE ACQUISITIONS

The dollar volume of reserves changing hands via merger and acquisition (M&A) and the implied cost of proved reserve acquisitions declined sharply in 1992. Worldwide, about 1.5 billion BOE changed hands-essentially level with 1991-but the dollar volume slumped from $7.1 billion in 1991 to $4.5 billion. Acquisition values fell from $4.53/BOE in 1991 to a 5 year low of $3.12/BOE.

By comparison, the Herold M&A Transaction Review Yearbook tallied 1.3 billion BOE of reserve transactions in 1992. The universe of transactions in the M&A research report were those in which there were adequate disclosures to permit analysis. The yearbook counted $5.4 billion in oil and gas reserve trades value at an implied $4.15/BOE.

Canada, where reserve acquisitions roughly doubled in 1992, afforded the world's lowest cost M&A theater. Canadian acquisitions came in at a rock bottom $2.12/BOE, less than half the 1991 level of $4.45/BOE.