FINDING COSTS REFLECT INDUSTRY IMPROVED EFFICIENCY

Robert J. Beck Economics Editor Driven by hard times, the U.S industry continues to improve the efficiency of its exploration and development program. The proof lies in oil and gas finding costs. The 5 year moving average for finding costs slipped again in 1991, the latest year for which all data are available, dropping to $3.50/bbl of oil equivalent (BOE) from $3.55/BOE in 1990, both in current dollars. The average has been falling steadily since hitting a peak in 1985.

July 26, 1993

4 min read

Robert J. Beck
Economics Editor

Driven by hard times, the U.S industry continues to improve the efficiency of its exploration and development program.

The proof lies in oil and gas finding costs.

The 5 year moving average for finding costs slipped again in 1991, the latest year for which all data are available, dropping to $3.50/bbl of oil equivalent (BOE) from $3.55/BOE in 1990, both in current dollars. The average has been falling steadily since hitting a peak in 1985.

If costs for acquisition of undeveloped leases are included, the 5 year moving average slipped to $3.83/BOE in 1991 from $3.88/BOE in 1990.

The average is a more meaningful measure of finding costs because outlays for exploration and development often do not fall in the same year reserves are booked. Without the smoothing of a 5 year average, cost per barrel figures would gyrate wildly.

Oil & Gas journal examined this trend in finding costs last year with a report on E&D spending, reserve additions, and average cost per barrel during 1977-90 (OGJ, June 22, 1992, p. 58).

Cost control has been a major objective for U.S. E&D for several years. Sharp price declines for crude oil and natural gas starting in 1986 reduced funds available for upstream spending. That forced the industry to do more with fewer rigs, fewer wells, and less money.

Producers adjusted by drilling only the best prospects and doing more sophisticated analysis before, during, and after drilling. They now use technology such as 3D seismic surveys and remote sensing to reduce risk-and thus costs.

During the last half of the 1980s and into the early 1990s, U.S. reserves additions and volume of production didn't fall as fast as drilling activity and upstream spending. This resulted in a declining cost per barrel for reserve additions and production during the past several years.

DATA BREAKOUT

Even though the 5 year moving average is more meaningful, data for 1991 may signal the start of a trend as industry continues to tighten the reins on spending.

Reserve additions in 1991 dropped sharply, falling to 4.009 billion BOE from an average 5.716 billion BOE for the previous 5 years.

As a result, the cost jumped to $4.89/BOE based on exploration and development expenditures in 1991 and to $5.35/BOE if acquisitions of undeveloped leases are included.

Exploration and development spending fell sharply from a high of $44 billion in 1982 to $18.1 billion in 1987. Spending moved up to $20.9 billion in 1988 but then began to trend downward again and slipped to $19.2 billion in 1990. Outlays moved up to $20.3 billion in 1991.

The 5 year moving average for E&D spending didn't hit a peak until 1985 at $41.1 billion. Although oil prices were slipping in 1982-85 they remained high enough to encourage substantial upstream investment. Outlays in 1985 were down only 10% from the 1982 peak. The 5 year average continued to slide in 1991, falling to $19.7 billion.

Total outlays, which add spending for acquisition of undeveloped leases to E&D, followed a similar pattern. Total spending peaked in 1981 at $54.7 billion, then plunged to $21 billion in 1990 before rebounding slightly to $21.5 billion in 1991.

The 5 year moving average for total spending reached a $49 billion high in 1985, then dropped by 56% to $21.5 billion in 1991. The moving average did not show an upturn in 1991.

Reserve additions, which tend to fluctuate more than spending from year to year, haven't fallen as much as spending. However, they did fall sharply in 1991, dipping 34% from the year before to the lowest level since 1977.

The 5 year moving average for reserve additions peaked in 1984 at 6.3 billion BOE. In 1991, the moving average fell 11.5% to 5.6 billion BOE. During the same period the 5 year moving average for total spending was down 54.9%.