Independents' finding, developing costs soar

As major integrated oil and gas companies registered little change in finding and development costs for 1997 vs. 1996, independent producers posted their largest year-to-year increase for the decade, according to New York-based Paine Webber's energy research group. "The fully loaded finding and development cost for our study group of 65 independent E&P companies increased 36% in 1997 to $5.77/boe compared with $4.24/boe in 1996," said Paine Webber analyst Robert Morris.

June 15, 1998

3 min read

"The fully loaded finding and development cost for our study group of 65 independent E&P companies increased 36% in 1997 to $5.77/boe compared with $4.24/boe in 1996," said Paine Webber analyst Robert Morris.

Behind this dramatic jump was an equal increase in the cost to add reserves from both the drill bit and through acquisitions. Finding and development drilling costs increased 38% to $5.86/boe from $4.26/boe, while the cost of proved property acquisitions jumped 34% to $5.65/boe vs. $4.22/boe in 1996, he said.

Paine Webber's analysis of 16 major integrated oil companies, however, revealed finding and development costs for that group increased only 2%, to $3.75/boe in 1997 from $3.69/boe in 1996. The analysts attributed the lower increase to a historical trend in which major oil companies have garnered a large portion of reserve additions in every category from revisions to their prior estimates-35% in this case, compared to only 1% for independent producers.

Paine Webber also discovered that, for independents, cost increases were about equal, whether a company was spending through the drill bit or acquiring unproven properties for future exploration.

In terms of development drilling, domestic exploration and development drilling costs rose 47% to $7.38/boe from $5.01/boe in 1996. The firm believes the lion's share of this increase can be accounted for in higher oil service costs combined worth fewer reserves added per successful well drilled.

Acquisitions

Higher costs per well drilled could also explain why independents turned to more property acquisitions than in the past.

Paine Webber said total capital expenditures were close to historical standards as a percentage of discretionary cash flow, but the allocation of funds to unproved property acquisitions rose to 11% of total capital dollars, compared with 9% in 1996, 6% in 1995 and 1994, and 4% in 1993 and 1992.

Morris also believes that, because unproved properties do not reflect any current proved reserves, independents are paying more for unproved properties to increase their inventory of future potential prospects and production "in an increasingly competitive environment."

The upside to what can be thin margins alongside tougher competition from bigger guns is an economic sophistication that is helping independents gain efficiencies in their reserve replacement costs-a measure of profitability and relative propensity for growth. Morris gives independents high marks for what he terms as "solid reinvestment economics."

Drill bit activity

The number of net wells drilled by independents increased 34% in 1997 vs. 1996. For majors, the number of net wells drilled increased 10%-the smallest year-to-year gain since 1994.

Exploration wells represented 16% of total wells drilled by independents, the same as in 1996. For majors, however, exploration wells accounted for only 11% of total wells drilled, compared with 17-19% in each of the four prior years.

Exploration success in 1997 for independents was 57%, vs. 55% for majors. These figures represent a slight increase over 1996 for both groups.

Total reserves booked by independents per net successful well were 320,000 boe in 1997, down 2% from 1996. Majors booked 819,000 boe per net successful well in 1997, their highest level recorded this decade.

Exploration and development expenditures per net well drilled by independents in 1997 were $1.73 million, a 12% increase over 1996. For the majors, this figure was $4.49 million, up 6% compared with 1996.