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Herold: Gas Producers Shed Gulf Assets, Concentrate Efforts Onshore

With more technological advances to unlock emerging natural gas plays in the U.S. onshore, gas reserve additions continued to surpass oil reserve growth last year, with the top 50 U.S. producers increasing total gas reserves by 11.8% to 127.8 Tcf, according to a survey unveiled last week by energy analyst John S. Herold.

Herold co-director of equity research Nicholas D. Cacchione and analyst Dan Pratt unveiled the results of the company's 2005 upstream performance review during a conference call on Thursday. The leading producers were determined according to their oil and gas reserve data and costs. Producers leading the list accounted for 74% of the Energy Information Administration's reported U.S. oil and natural gas reserves.

Organic reserve growth showed the most strength, with extensions and discoveries up 14%, and improved recovery gaining almost 80%. Revisions also were ahead six-fold. Gas-rich reserve purchases climbed 7.5%, while reserve sales were 500 Bcf less at 1.4 Tcf.

Most of the gas reserve sales were along the Gulf Coast and in the Gulf of Mexico, as producers shed higher risk acreage to concentrate their efforts onshore in some of the emerging and less expensive gas plays. But as those gas reserves onshore grew, total U.S. gas production from the selected group of producers fell for the second consecutive year to 9.9 Tcf, the survey found.

"Hurricane activity no doubt had an impact," said Cacchione of the production fall-off. But he said producers began to step up their investments into onshore regions with longer reserve life, such as the coalbed methane and gas shale regions of the Rockies, Texas and Midcontinent. "Consequently, for each increment of gas reserves added, there is less production than before. As that trend continues, I think we can expect to see a pick up in gas production going forward...as development continues."

Gas reserves may have overtaken oil in reserve growth because "there may not be enough reserve targets in oil" in which producers could reinvest. But Pratt said the "more likely story" is the growing trend to acquire the less expensive onshore gas reserves.

"When you look at some of the new technology, it is favored more toward gas," Pratt said. "The advancements in horizontal drilling, refracturing techniques...it's more geared toward gas reserves than oil. We've seen an acceleration in shale plays, resource plays. The technology has been more toward gas in the last couple of years, and we expect that will continue going forward."

Most of the migration onshore has not been by the majors, said Cacchione. "They have the money to operate along the coast and in the Gulf. But because of the high finding and development (F&D) costs within the Gulf of Mexico and the Gulf Coast, that has made it a very difficult operating environment for small- to mid-sized companies."

The deep offshore, said Cacchione, is "still a good potential environment," and the majors and cash-rich independents will continue to see "strong" returns there. But because they are more expensive and require a longer-term commitment, "they won't add to their reserves quite as quickly as they will on the Shelf."

BP continues to be the largest gas reserve holder and producer in the United States. The other top U.S. gas producers last year in order were ExxonMobil Corp., Chevron, ConocoPhillips Inc., Devon Corp., Chesapeake, Royal Dutch Shell, Anadarko Petroleum Corp., EnCana, XTO, Kerr-McGee Corp., Burlington Resources, Dominion, EOG Resources, Williams Cos., Apache Corp., Marathon, El Paso Corp., Occidental Petroleum and Pioneer Natural Resources. ConocoPhillips pro forma of its purchase of Burlington, made it the second-largest producer last year, about 70 Bcf behind BP.

According to the survey, total U.S. upstream spending jumped 36% in 2005 to $69.1 billion, according to the Herold survey. Chevron Corp., which purchased Unocal Corp., and Chesapeake Energy Corp., which acquired several companies and acreage, were the top U.S. upstream spenders in 2005. Chevron spent nearly $7.5 billion overall, while Chesapeake spent $7 billion-plus.

Rounding out the top spenders last year were Noble Energy, which spent $4.75 billion, BP plc with $3.75 billion, and XTO Energy, which spent almost $3.5 billion.

Exploration spending rose 45% to $14.5 billion in 2005, while development spending jumped 35% to $32 billion, "continuing its strong and steady pace." Proved acquisition spending, led by Chevron's purchase of Unocal and ConocoPhillips' acquisition of Burlington Resources, rose 27% to $20.5 billion. Exploration and production companies spent about $45 billion for acquisitions; the integrateds spent $25 billion.

Reserve replacement costs (RRC) grew only 2.5% last year to $10.70/boe. Finding and develop(F&D) costs fell 5% to $11.21/boe. Excluding reserves revisions, RRC climbed 14% to $12.15/boe, while F&D rose 12% to $13.63/boe.

Ultra Petroleum Corp., which concentrates on low-cost drilling in the Rocky Mountains, led the RRC category, spending only $2.78/boe. Equitable Resources, focusing its abilities in the Appalachian region, was the F&D leader at $2.14/boe. Chesapeake was the biggest F&D spender, shelling out more than $20/boe, followed by Hess Corp., Pogo Producing Co. and Noble, according to Herold.

Overall, the reserve replacement rate (RRR) was 216% of production, while F&D replacement reached 145%. Excluding revisions, 119% of production was replaced organically through the drill bit. On the natural gas side, total RRR jumped 252%, with 176% through the drill bit. Excluding revisions, RRR reached 147%. The total oil RRR reached 172% of production, with 107% via the drill bit and 85% excluding revisions. Paris-based Total SA was the RRR leader at 1,137%, while Ultra led in F&D replacement at 889%.

Wellhead revenues increased $10/boe to $42.45/boe, nearly $20/boe higher than in 2001. Net income grew about $4.60/boe to $15.90, up almost $10/boe from 2001. The survey noted that about 50% of incremental revenue appears to be falling to the bottom line.

Total production costs in 2005 shot up nearly 30%, or about $2/boe to $8.42/boe. Production taxes showed the sharpest increase, up 40% over 2004. The median cost for total boe was $26.70.

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