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
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
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
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
"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