?A key industry survey shows that in 2007, spending was hefty, yet it failed to generate much in the way of increased reserves. Companies also fought rising costs that in part offset the benefits of the rise in oil and gas prices.


The worldwide upstream investment made by 232 oil and gas companies surveyed was unchanged at $402 billion in 2007, according to the 2008 Global Upstream Performance Review, conducted annually by research firm IHS Herold Inc. and London-based upstream corporate advisor Harrison Lovegrove & Co. Ltd., a unit of Standard Chartered Bank.


Operators reported record development spending, up 20% from 2006 levels—but that outlay generated only a 0.3% increase in reserve volumes, to 264 billion barrels of oil equivalent (BOE), says IHS senior vice president Robert A. Gillon.


Development spending accounted for 62% of total investment, up from 52% in 2006. Exploration spending increased 19% and was in fact more than double the 2003 total.


Operators continued in 2007 to weigh the balance between higher commodity prices, and thus cash flows, and increasing costs of drilling and production. Profits as measured by net income per BOE were flat at $12.98 after nearly doubling since 2003. Margins were lower for the third consecutive year.


“Higher prices drove a 10% increase in revenue to $931 billion,” Gillon says. “But cost pressures have been unrelenting, with lifting costs rising by 17% and government take up 5% to $253 billion, or 51% of pre-tax profit. As a result, net income edged up 2% to $246 billion, which is a record result but is far from the heady advances of the prior three years.”


Standard Chartered Bank managing director Rodney Schmidt says, “A positive result is that oil and gas producing operations generated cash flow of $430 billion in 2007, up 10% from 2006, which is larger than capital outlays by about 7%. However, emerging issues, such as potential structural changes to demand and the impact of waning prices while cost pressures remain, will undoubtedly impact the industry’s performance going forward.”


Cash flow exceeded capital spending, reversing the 2006 trend. Cash flow per BOE increased 8% to $21.99, after rising 75% in the 2003-2006 period.


The Herold-Lovegrove study found returns to oil industry shareholders during 2007 remained robust. Dividends increased 11% to $92 billion, and common share repurchases totaled $94 billion, 5% higher than in 2006. Combined, these payouts amounted to a bit more than 50% of corporate net income.


The payout ratio has been virtually unchanged over the past five years.


The 41st annual study of 232 oil and gas companies based on publicly available data filed with the U.S. Securities and Exchange Commission and other similar agencies worldwide measured industry performance in a number of key areas.


Other findings revealed that worldwide revenues increased by $86 billion, implying an average realized price of $47.53 per barrel, a 9% increase from 2006.


Although acquisition spending fell 30% from 2006 record levels to $90 billion, it remained at a historically high level. Proved acquisition spending dropped 34% and unproved acquisitions were down 36% after spiking in 2006, but remained at historically elevated levels. Implied proved acquisition cost dipped 21% to $8.93 per BOE.


Oil reserves reversed course, falling 1.5%, partly as a result of the nationalization of oil fields in Venezuela, while oil production was flat globally. Natural gas reserves and production continued at the 3% growth rate of the last five years.


Reserve replacement costs advanced a modest 3% in 2007, a much lower rate than the preceding four years. Finding and development costs increased 7% to $15.42 per BOE as the industry replaced just 113% of production through the drill-bit.


Key regional findings of the 2008 Global Upstream Performance Review include:


• Finding and development costs in the U.S. were cut in half on a surge in positive reserve revisions in 2007. But unit profitability declined for the second consecutive year.
•?Conventional oil and gas spending in Canada plunged nearly $30 billion and gas reserves and production continued to fall. Oil-sands outlays doubled, however, driving strong oil reserve growth.
•?Oil and gas reserves in Europe are dropping sharply as cash flow exceeds capital spending, and production fell on operational problems on major new projects.
• Development spending in the Africa and Middle East region is continuing to rise, although reserve replacement and finding and development costs were very high.
• Asia-Pacific remained the most profitable region in the world due to its relatively lower costs and tax rates, but lower rates of reinvestment indicate opportunities are constrained.
• Oil and gas reserves in South and Central America continue to fall, but light is at the end of the tunnel due to Petrobras’ recently announced, world-class subsalt discoveries.
• The government take in Russia and the Caspian region is high and rising, limiting profitability, but the resource potential is so substantial that capital investment grew in these regions 58%.

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