2007 could be frustrating year

April 1, 2007
Several new studies have shed some light on trends in the upstream energy sector.

Several new studies have shed some light on trends in the upstream energy sector. For example, upstream M&A transactions have reached their highest point in nearly a decade as worldwide per barrel deal pricing has soared to new highs. Unfortunately, the cost of major oil and gas production projects has risen even faster.

John S. Herold Inc. and Harrison Lovegrove & Co. recently released their 2007 Global Upstream M&A Review in which the two firms provide a comprehensive analysis of more than 280 upstream transactions valued at $166 billion that were announced in 2006.

Key conclusions of the review are:

  • Record cash flows and earnings, buoyed by strong commodity prices, have pushed worldwide proved reserve pricing up 34% to $12.86/boe in 2006. In North America, proved reserve pricing was up almost 20% to $17.89/boe, while outside North America, proved reserve pricing grew more than 50% to $8.94/boe.
  • Asset deal value increased for the fifth straight year, rising 55% in 2006 to a record high of more than $60 billion.
  • Despite a year-over-year decline in natural gas prices, gas comprised 53% of the total transacted proved reserves, a 10-year high.
  • State-owned or controlled oil and gas companies (NOCs) accounted for one-third of global upstream M&A spending in 2006.
  • North American transactions accounted for more than 55% of total global transaction value in 2006, higher than both the 2005 figure and the 3- and 5-year averages.
  • On the minus side of the balance sheet, the costs of major production projects have risen more than 53% in the past 2 years and no significant slowing is in sight, according to a recent study by IHS and Cambridge Energy Research Associates (CERA).

    The IHS/CERA Upstream Capital Costs Index (UCCI), which tracks 9 key costs areas for offshore and land-based projects, climbed 13% during the 6 months ending Oct. 31, 2006. This compares with a 17% increase the previous 6 months. Since 2000, the UCCI has risen a whopping 67% -- with most of the increase in the last 2 years.

    “If current trends continue, 2007 is shaping up to be a year of further increases,” commented Richard Ward, CERA senior director and UCCI project manager. “We expect project capital costs to continue reaching new levels in 2007. With high oil prices driving new development projects, capacity constraints continue to support increases in the cost of equipment and services.”

    Deepwater projects have had the largest cost increases, according to the UCCI data, rising 15% during the 6-month period due mainly to high drill rig rates, technology limits, and skills requirements. Onshore projects have increased at a slower rate, but are only slightly behind overall averages.

    If oil prices stay above $55/bbl, CERA expects confidence to remain, but should prices slip below $50/bbl, the industry should expect some expansion projects to be cancelled or delayed, said Ward.

    Don Stowers