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Spending by Independents Drops in 2013 on Depressed NatGas Prices

Exploration and development (E&D) spending by independents worldwide dropped by 14% in 2013 from 2012 as depressed natural gas prices in North America took a toll on cash flows and spending ability, an annual survey by EY found.

EY's global oil and gas reserves review of 75 exploration and production (E&P) companies -- integrateds, super independents and independents -- was published Tuesday. The review looked at reserves data and spending over a five-year period from 2009 to 2013.

Worldwide last year, natural gas reserves rose 3% and oil reserves climbed 11%, while capital expenditures (capex) overall increased by 25%, the consultancy said. The move toward more oil production was highlighted by total upstream spending, which more than doubled between 2009 and 2013 from $315 billion to almost $679 billion.

"Continued strong upstream capital investment demonstrates the industry's confidence in long-term opportunities," said EY's Dale Nijoka, global oil and gas leader. "However, in light of current price volatility, we expect to see significant pressure to lower rising production costs, as well as additional investment in technologies and techniques that increase efficiencies and drive costs down."

Property acquisition costs, considered a key component of increased spending, jumped to $115.6 billion in 2013, the highest level over the five-year period. Unproved property acquisition costs increased by 24% to $63.1 billion. The United States, Africa and the Middle East were the only regions to see a decline in total property acquisition costs last year.

Exploration spending in 2013 was up 5% from 2012 to almost $88 billion, with increased capex in Brazil contributing significantly to the total. Meanwhile, development expenditures increased 8% to $411.2 billion. On a regional basis, the Asia-Pacific region saw the largest increase in development spending, up 15% to $15.2 billion.

Combined E&D spending by the integrated operators -- mostly the oil majors -- increased by 12%, versus a 5% increase by the super independents. E&D spending by independents, however, fell by 14% from 2012 on lower North American gas prices.

Worldwide after-tax profits in 2013 were down 4% year/year to $258.7 billion, with only the United States and Canada seeing increases, according to EY. Production costs rose 7% to $389 billion, primarily on increased lease operating expenses (9% higher) and production taxes (4% higher). Depreciation, depletion and amortization charges rose marginally to $249.8 billion from $248.2 billion in 2012.

"Depressed natural gas prices in the U.S. did have some impact as several large oil and gas companies recorded impairments greater than $1 billion in 2013," EY said.

Among those recording impairments for 2013 was Royal Dutch Shell plc, which wrote down more than $2.6 billion on the value of its holdings in the U.S. onshore (see Daily GPIMarch 13). BP plc earlier this year took a $521 million impairment on its Utica Shale acreage in Ohio and decided not to proceed with development (see Shale DailyApril 29).

"Production increases coupled with softening demand put pressure on pricing," said Nijoka. "As a result, 2013 production growth resulted in only a slight increase in global revenue, which was offset by rising costs, creating a worldwide fall in after-tax profits."

Worldwide, end-of-year gas reserves in 2013 increased to 643.6 Tcf.

"Not surprisingly, the U.S. saw the largest increase in gas reserves with its end-of-year reserves growing by 9%," EY said. "Extensions and discoveries were strong at 59.6 Tcf in 2013 but did decline by 8% compared to 2012." Worldwide gas production decreased "marginally" from 2012.

"As expected, due to the pricing and supply dynamics in the global market, worldwide gas reserves increased slightly while production decreased," Nijoka said. "Once again, Asia-Pacific led the way in the purchase and sale of gas reserves."

Strong acquisition activity in 2013 led global oil reserves to increase by 11% to 168.6 billion bbl by the end of 2013, according to EY. The largest oil reserves growth was recorded in Asia-Pacific and was attributed to Russia's OAO Rosneft's purchases of reserves from companies that were not included in the study. Oil reserves also notably increased in the United States and Canada from growing unconventional basins.

"Worldwide oil production showed strong growth rising by 6% to 12.3 billion bbl in 2013 and again, Asia-Pacific led the pack, recording a 17% increase" EY said. "The U.S. followed with a 12% gain in oil production. The oil production replacement rate dipped to 115%, excluding purchases and sales in 2013, compared to the five-year study period high of 149% seen in 2012."

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