Domestic capital spending soared in 2005 for John S. Herold Inc.'s Top 50 U.S. producers, climbing 36% to $69.1 billion, yet the surge in E&P capex wasn't coupled with spiking reserve-replacement and finding and development (F&D) costs, report analysts Nicholas Cacchione and Kathryn Berger. As investment spending increased, unfortunately, so did production costs. According to the analysts, per-unit production costs climbed 29% to $8.42 per barrel of oil equivalent (BOE). Field production expenses climbed 26%; production taxes, 42%; and shipping and transportation expenses, 22%. Total SA continued to be the lowest-cost major producer in the group at $3.92 per BOE. Reserve-replacement costs climbed less than 3%, while F&D dipped about 5%, they say. Discounting the benefits of reserve volumes added from upward reserve revisions, reserve-replacement and F&D costs would have weighed in about $2.40 per barrel of oil equivalent (BOE) higher, they add. "The integrated oils achieved a near $2 per BOE cost advantage in reserve replacement during 2005, posting results of $9.59 per BOE compared with $11.43 per BOE for the E&Ps. The majors' margin of efficiency narrowed in finding costs to about $1.50 per BOE," Cacchione and Berger report. Ultra Petroleum reigned as a U.S. reserve-replacement cost leader, adding barrels at $2.78 per BOE. Appalachian producer Equitable Resources held the top spot in ultra-low F&D costs at $2.14 per BOE in 2005. Last year was the first in which the Herold Top 50 more than replaced its U.S. production organically since 2001, the analysts add. The group replaced 216% of production from all sources, while organic replacement was 145%. Gas-reserve replacement averaged 252% in 2005, of which 176% was organic. Oil-reserve replacement from all sources was 172% of which 107% was from the drillbit. Overall, oil reserves in the U.S. grew 4% for the group at year-end 2005, while gas reserves increased 11.8%. The independents led the charge in domestic investments, shelling out a hefty $44.6 billion in 2005-about $20 billion more than the integrateds, which funneled about 63% of their domestic cash flow back into upstream investments while the "pure producers" invested nearly 135%. Where did the money go? While all categories of domestic upstream capex increased dramatically during 2005, the most remarkable gains were in funds marked for exploration, up 45%, the analysts report. Also, on the heels of several years of declining investments in unproved property, this amount grew 32.7%. Development spending grew 35% and proved acquisitions, the weakest of the group, still grew 27%. Investments in organic-growth projects surged 40%. "Chevron Corp. and Chesapeake Energy Corp. were the most aggressive players in domestic upstream during 2005 with outlays of $7.6 billion and $7.2 billion, respectively. For both the San Francisco-based major and the Oklahoma-based independent, some 50% of 2005 capital investments were devoted to proved acquisitions. Viewed together, the Chevron/Chesapeake duo accounted for more than one-fifth of domestic capital outlays." Noble Energy Inc., BP Plc and XTO Energy Inc. were also upstream-spending leaders in 2005 at $4.6 billion, $3.6 billion and $3.4 billion, respectively. Noble, Occidental Petroleum Co. and XTO Energy Inc. rounded out the list of proved-acquisition spending leaders with $2.6 billion, $1.74 billion and $1.71 billion, respectively. The Herold Top 50 producers are the largest SEC-reporting U.S. producers by reserve size, owning almost 74% of 2004 U.S oil and gas reserves and outputting 61% of U.S. production based on Energy Information Administration figures on total oil and gas reserves and output.

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