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U.S. Producers Seen Spending More for E&P

More money is coming in for U.S. oil and gas producers, but a lot is going out the door to pay for exploration and production (E&P), according to a study by Ernst & Young. The consultant reported that revenue for U.S. oil and natural gas producers jumped 12% last year from 2006 levels but profits only rose 4%.

The review of 40 U.S. producers, which ranged from majors to independents, found that production costs rose 20% last year to $33.7 billion, while depletion, depreciation and amortization costs jumped 25% to $30.7 billion.

For gas producers, the payoff was a 7% increase in reserves to 138.7 Tcf and in production to 10.2 Tcf. U.S. oil production was reported to be 1.2 billion bbl in 2007; it has been flat for four straight years. Proved oil reserves at the end of 2007 were reported to be 16.1 billion bbl, which was flat from 2006.

Global demand for oilfield services and equipment hurt the bottom line, the study showed. Costs to find and develop (F&D) new reserves averaged $15.28/boe in 2007, which was 47% more than in 2003. Meanwhile, production costs more than doubled last year to $11.71/bbl.

F&D costs were actually higher in 2006 than in 2007 because of a lack of major deals last year. Costs incurred by the companies reviewed dropped 16.5% to $96.6 billion in 2007. The 2006 U.S. megadeals included ConocoPhillips' purchase of Burlington Resources Inc. for $36 billion -- which was announced at the end of 2005 (see NGI, Dec. 19, 2005) -- and Anadarko Petroleum Corp.'s acquisitions of Kerr-McGee Corp. and Western Gas Resources Inc. for a combined $21 billion (see NGI, June 26, 2006).

According to the study, the "plow-back" rate, which measures how much producers reinvested in their operations, averaged 93% from 2005 through 2007. That rate exceeded the five-year average of 83%, the study noted.

Producers reviewed in the study represented 68% of U.S. natural gas reserves and 74% of U.S. oil reserves, according to Ernst & Young. Globally, the companies reviewed represented only 2% of total gas reserves and 1% of oil reserves.

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