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U.S. E&P Spending Higher in 2008 Despite Setbacks, Study Finds

The U.S. exploration and production (E&P) industry last year faced increased costs, a decline in year-end reserves and ultimately lower profits, but capital spending still was more than a third higher than in 2007 and natural gas reserves were up 4%, Ernst & Young LLP reported Thursday.

The consultant's annual E&P benchmark study examined the results of 40 producers over a five-year period. The study analyzed select reserve disclosure information reported by publicly traded companies in their annual reports filed with the Securities and Exchange Commission. The companies surveyed account for around 70% of total domestic oil reserves and 61% of the gas reserves.

"Despite rising production costs, the oil and gas industry continues to be positioned for an economic upturn as it makes significant investments in exploration and production activities," said Marcela Donadio, the firm's Americas director of oil and gas. "It's critical for the industry to continue its investments in domestic opportunities since we expect that energy demand in the long term will continue to increase."

Ernst & Young's latest benchmark study found that:

"E&P companies have been making significant investments in their oil and gas operations, with a plowback percentage of 102% during 2006-2008 and 91% over the five-year period," said Ernst & Young's Charles Swanson, , the Houston office managing partner. "Since 2004 gas reserves and production have grown at 56% and 29%, respectively."

The U.S. oil and gas industry has made some "painful adjustments to last year's reversal of fortunes," the report found. Upstream investments have been scaled back this year and some proposed developments have been postponed. However, "much of the upward cost pressure has eased with the weakened industry and general economic conditions. As the recovery in oil and gas markets gathers steam in the second half of 2009, the U.S. oil and gas industry appears poised to resume its growth and be a key contributor to the U.S. and global economic recovery," said the firm.

"When the commodity prices stabilize, the industry should be in a good position," said Swanson. "Compared to the recovery of the last major collapse in the 1980s, today's oil and gas industry is much leaner, more efficient and better positioned to take advantage of opportunities during an economic recovery."

The report is available at www.ey.com/us/oilandgas/

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