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Worldwide Gas Reserves Growing, but Not at Spending Pace

Natural gas reserves and production worldwide rose 3% again last year, following the same growth rate of the last five years, according to IHS Herold Inc. and Harrison Lovegrove & Co. Ltd.'s 2008 Global Upstream Performance Review.

The review, now in its 41st year, looked at data from 232 producers worldwide. The researchers found that overall, upstream development spending jumped 20% in 2007 from 2006, but the boost in capital spending only generated a 0.3% increase to oil and gas reserves. Combined, the producers spent around $402 billion on upstream operations last year, which resulted in 264 billion boe in reserve volumes. Acquisition spending, still at a historically high level last year, was down 30% from 2006 to $90 billion.

Regionally, finding and development (F&D) costs for U.S. producers reportedly fell by half from 2006 levels following a surge in positive reserve revisions. In Canada, conventional oil and gas spending plunged nearly $30 billion as gas reserves and production continued to fall. However, Canadian oilsands outlays doubled year/year, which propelled strong oil reserve growth.

"Higher prices drove a 10% increase in revenue to $931 billion" in 2007, said IHS Senior Vice President Robert Gillon. "But cost pressures have been unrelenting, with lifting costs rising by 17% and government take up 5% to $253 billion, or 51% of pre-tax profit. As a result, net income edged up 2% to $246 billion, which is a record result but is far from the heady advances of the prior three years."

The 41st annual review is based on publicly available data filed with the U.S. Securities and Exchange Commission and similar agencies worldwide. The researchers measure industry performance in several areas.

According to the review, exploration and development spending accounted for 62% of investment by producers worldwide last year, which was up from 52% in 2006. Exploration spending rose 19% and was more than double the 2003 total. Proved acquisition spending fell 34%, and unproved acquisitions were down 36% after spiking in 2006. Implied proved acquisition costs dipped 21% to $8.93/boe. Replacement costs worldwide climbed 4% in 2007, albeit at a slower rate than the previous four years. Worldwide F&D costs increased 7% to $15.42/boe; the industry replaced 113% of production through the drillbit.

Although gas reserves rose 3% worldwide, oil reserves last year reversed course, falling 1.5%. Researchers blamed the oil reserves decline partly on the nationalization of oilfields in Venezuela, but global oil production also was flat year/year. Net income per boe also was flat at $12.98 after nearly doubling since 2003. Margins were lower for the third consecutive year.

Returns to energy industry shareholders last year remained robust, said researchers. Worldwide oil and gas company dividends rose 11% from 2006 to $92 billion, and common share repurchases totaled $94 billion, 5% more than the previous year. Combined, these payouts amounted to more than 50% of corporate net income; the payout ratio has been virtually unchanged over the past five years, the study found.

Worldwide oil and gas company revenues rose by $86 billion last year, which implies an average realized price of $47.53/bbl, or 9% more than in 2006. Cash flow per boe increased 8% to $21.99, slowing significantly after rising 75% in the 2003-2006 period. Cash flow also exceeded investment, reversing the 2006 result.

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