?Despite continued strong production by the U.S. energy industry, oil production has not changed in the past four years at 1.2 billion barrels. That is one of the findings of Ernst & Young LLP’s first global E&P benchmark study.
Released in Houston, the study results show net upstream profits increased 4% while revenues increased 12% in 2007, says Rob Jessen, global leader for Ernst & Young’s oil and gas industry sector. The study is an analysis of publicly available information on 40 E&P companies’ U.S. operations. The international portion of the study will be released before the end of the summer.
The 40 companies in the study group hold about 74% of U.S. oil reserves and 68% of gas reserves based on information from the U.S. Energy Information Administration. Ernst & Young looked at E&P trends on capital spending, revenues, oil and gas reserves, and performance measures.
“E&P companies are willing to make major investments to bring new domestic supplies of oil and gas to market, but are facing challenges in finding ample investment and production opportunity,” Jessen says. According to the findings, exploration costs increased 165% during the past five years from $4.8 billion in 2003. There was a 15% increase during the past year, from $11.1 billion in 2006 to $12.8 billion in 2007.
Development costs have increased 180% from $18.4 billion in 2003. There was a 28% increase in the past year to $52.2 billion.
Jessen says that while exploration and development costs increased in 2007, proved and unproved property acquisition opportunities and costs decreased, resulting in a 16% decline in 2007?of total capital spending among the 40 companies surveyed. Total capital spending in 2006 was $115.1 billion and $96.6 billion in 2007.
Other findings:
Performance measures: Finding and development (F&D) costs per barrel of oil equivalent (BOE), along with proved reserve acquisition costs per BOE, had double-digit decreases in 2007 compared with the five-year high experienced in 2006. Production costs continue to climb, showing a 15% increase in 2007, reaching $11.71/BOE.
Results of operations: Revenues from oil and gas producing activities increased 12% in 2007 to $141.5 billion. However, results of operations increased only 4% in 2007, mainly due to rising production costs and increases in depletion, depreciation and amortization (DD&A). The plowback percentage during the five-year period was 83%.
Oil reserves: Oil production remained flat during the past four years at 1.2 billion barrels. The oil replacement rate from all sources was 100% in 2007. The organic production-replacement rate, excluding acquisitions and sales (inorganic), was 119%.
Gas reserves: Gas production grew 7% in 2007, while year-end gas reserves increased 7% to 138.6 trillion cubic feet. The gas production-replacement rate in 2007 exceeded that of oil—the all-sources rate was 190% and the rate excluding acquisitions and sales was 206%.
There are trends to look for now that will carry through this year and into 2009, says Marcela Donadio, Americas oil and gas sector leader at Ernst & Young’s Houston office.
“I think you will see the talent void continue to be a major problem and I don’t see this issue being resolved very quickly,” Donadio says.
Jessen says, “At the CEO level, this lack of talent is one of the top five issues. This isn’t just a U.S. issue, but a global challenge.”
Donadio says that another issue the energy industry will continue to face will be a tight rig market.
“I think this will cause limitations to the extent on just how quickly the industry can ramp up for new drilling projects,” Donadio says.
Jessen says, “Over the course of the five years examined in our study, the oil and gas industry has experienced significant changes and developments, and with those, increasingly higher demand for energy. Despite continued strong levels of investment in E&P activities, these external factors will continue to drive unprecedented price volatility, with far-reaching effects on the state of the global economy as well as costs for consumers.”
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