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Proven Reserves, SkyHigh Market Send Profits Soaring

Proven Reserves, SkyHigh Market Send Profits Soaring

Conservative exploration and development strategies and acquisitions, coupled with a growing demand for energy, enabled the world's largest oil and gas companies to reduce reserve replacement costs 14% from a year ago, and dramatically increase net profits - by as much as 900%, according to an analysis by energy research firm John S. Herold Inc.

In fact, the John S. Herold 33rd Reserves Replacement Cost Analysis - Advance Report found that the 150 largest worldwide oil and gas companies actually increased net profits mostly because of rising crude oil and natural gas prices and lower production costs. There were no incredible discoveries in the past year; nearly all of the profits were tied to proven reserves and the skyrocketing market.

Capital spending worldwide declined 20% ($19 billion) for the first time since 1996, while reserve levels climbed 3.5% to 144.2 billion BOE. After-tax cash flow was also more than the investment dollars spent. "Reserve replacement costs (RRC) and finding and development costs declined mightily, while production costs continue to fall," said the study.

Data showed that reserve levels climbed 3.5% to 144.2 billion BOE, despite a "dramatic" 20% ($19 billion) decline in capital spending. Year-end 1999 proved reserves climbed 4% to 82.5 billion barrels, and natural gas reserves rose to 371 Tcf.

Calling 1999 a "banner year" for the upstream oil and gas industry, the study found that the strong upstream performance resulted from a "confluence of rising oil prices and the reluctance of petroleum companies to jettison their cost containment approach developed during the last oil price crash."

But the companies are spending money and obtaining acquisitions in several ways, including buying proved reserves.

"Another conservative way to replace production is buying proved reserves, and our analysis showed that acquisition spending rose 11% in 1999," said Herold Chairman Arthur Smith.

However, while the analysis predicts that this year's results will even show a "much, much better year," it did offer warnings, based on past history.

"This relative affluence is precisely what worries us," said the report. "The upstream sector of the oil and gas industry does not deal well with prosperity." Smith said that while the revenue forecasts for 2000 "remain extremely rosy," he said that "recent rises in rig counts and rig utilization rates indicate that capital spending increases may exceed our forecasts of 20% to 25%."

Smith said companies are currently succeeding because they took cautionary steps following the oil price crash of 1998, which "forced upstream companies to rein in spending by deferring more speculative exploration and development." He added that worldwide, these expenditures declined more than 26%, or by $22 billion.

The 1998 oil crash "caused an eschewing of the riskier E&D endeavors in favor of purchasing proved reserves," said the report. Oil reserve replacement actually increased in 1999 to 128% of production, and natural gas replacement dropped to 142% of production and only 119% through the drill bit.

Although the analysis does not specifically separate oil reserves from gas reserves, data show that worldwide, proved natural gas reserves grew 2.9% in 1999, and have jumped 23% since 1995, to 371 TCF. Gas reserves in Latin America increased the most --- 500% since 1995, when reserves were 539 Bcf. However, most of the Latin American reserves are undeveloped, and the current reserve base is 44%, compared with 95% in 1995.

Other regions, including the U.S., showed "modest" growth in gas reserves, but Canada's reserves actually declined by nearly 2% to 26.6 Tcf.

Royal Dutch Shell is still the world's largest holder of gas reserves, with nearly 59 Tcf, and ExxonMobil is not far behind, with 57 Tcf. Rounding out the top five were BP Amoco, 45 Tcf, PetroChina, 24 Tcf and Total Fina Elf, 19 Tcf.

Of the 150 companies studied, Shell Canada Ltd. was the best performing company overall in the oil and gas reserves area, coming in first in reserve replacement costs for the three-year ($10.5/BOE) and five-year ($1.37/BOE) measurement periods. In the past five years, Shell Canada has invested nearly $1.4 billion in the upstream market, almost entirely in the drill-bit area - a good move, according to analysts.

"Wise spending made Shell Canada the top performer," said the report, which also called the company "impressive, since Shell achieved this success in Canada, a 'quasi-mature region,' showing that a skilled workforce and sound planning can overcome geological roadblocks to success."

"Perennial premier achievers" round out the top five performing companies in the five-year reserve replacement cost report: Evergreen Resources ($1.52/BOE), Tipperary Corp. ($1.70/BOE), Caltex Energy ($2.07/BOE) and Petroglyph Energy ($2.11/BOE). "Virtually all of this success was achieved through the drill-bit."

The "frontier" or less developed oil and gas producing regions of the world hold the best cost advantages for adding reserves - defined as Africa/Middle East ($2.19/BOE), Latin America ($2.43/BOE) and Asia Pacific ($3.47/BOE). In these regions, the posted reserve replacement costs were below the worldwide average of $4.28/BOE. Herold defines Canada as a "quasi-mature" region with many E&P opportunities remaining, and the United States and Europe as "mature" regions.

"Over the past five years, there has been a nearly $4.00/BOE difference in finding and development costs between the frontier oil and gas producing basins and the mature basins of Europe and the U.S," said the study. The figures also highlight the rationale for U.S. E&P companies' interest in Canada: since 1995, finding and development costs there have been about $1.50/BOE lower than in the U.S.

Top spenders worldwide included many of the "usual suspects," ExxonMobil ($7.9 billion), Royal Dutch Shell ($5.1 billion), Chevron ($4.8 billion) and BP Amoco ($4.4 billion). The second biggest spender in 1999 was a surprise - Norsk Hydro, which spent $6.2 billion in upstream projects. Devon Energy was the largest spending independent, and ranked 10th by spending $2.3 billion in 1999.

"Spending in 1999 only increased in Latin America, where cap-ex rose 5% to $1.6 billion," said Herold. "A moderate spending decline of 15% was seen in Canada, where proved acquisition spending was down slightly more than drill-bit expenditures, in contrast to the worldwide trend. Capital outlays in the U.S., Asia Pacific and Africa/Middle East were down approximately 30% each in 1999."

The analysis is based upon a compilation of operating and financial data of publicly traded oil and gas companies with the world's largest inventories of proved oil and gas reserves. Based in Stamford, CT, John S. Herold specializes in research and consulting on the petroleum industry. For a copy of the report or more information, contact Tom Biracree at (203) 359-4339.

Carolyn Davis, Houston

©Copyright 2000 Intelligence Press, Inc. All rights reserved. The preceding news report may not be republished or redistributed in whole or in part without prior written consent of Intelligence Press, Inc.

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