Worldwide upstream investment fell 23% in 2009 from the previous year, but total hydrocarbon reserves increased 3%, with both oil and natural gas reserves up for the first time in five years, IHS Herold reported on Monday.

IHS Herold's "2010 Global Upstream Performance Review" this year was comprised of 224 global oil and gas companies. Total spending in the upstream in 2009 was reported at $378 billion.

Even though reserves were higher, development spending fell nearly 20%, the first decline in a decade, the survey noted. Production also increased 1%, driven by a 2.2% increase in natural gas output.

"We were very surprised at the strength of reserve additions given the weak economic conditions and tightness in credit markets during 2009," said IHS Herold Director Nicholas D. Cacchione, who authored the report. "As an industry, we spent fewer dollars, but they went further in terms of purchasing power."

Natural gas reserves climbed 3.7% despite a record 11.4 Tcf in negative reserve revisions, as development of unconventional plays in North America and liquefied natural gas (LNG) resources in Asia accelerated.

Oil reserves reversed a two-year decline, rising 3% to 164 billion bbl. For oil, the main driver was 8.6 billion bbl in positive reserve additions, but extensions and discoveries in the Canadian oilsands and South and Central America also added a record 7.9 billion bbl.

The decline in capital spending was led by a 40% reduction by exploration and production (E&P) companies, while the integrated oil companies cut investment by just 9%. "Exploration spending was most resilient, dropping just 12% to $62.7 billion," the survey found.

"In contrast, unproved acquisition costs were down 71%, and a 2% dip in proved acquisition outlays would have fallen 50% were it not for the $20 billion Suncor/Petro-Canada merger" (see Daily GPI, March 24, 2009).

"With the recession and ongoing uncertainty in the market last year, companies put acreage acquisition on hold and seemed to focus on their in-house development opportunities," said Cacchione. "This decision, I think, reflected their desires to monetize known holdings that can be brought into production much more rapidly than something with a less certain payout several years down the road."

Lower capital spending and higher reserves cut costs by half from 2008, with reserve replacement costs at $11.41/boe, and finding and development costs at $12.23/boe.

"Strong natural gas reserve additions led reserve replacement rates to the highest levels in five years," the survey noted.

However, "even with the strong performance metrics, upstream profits declined almost by half (47%) because a 13% decline in pre-tax expenses did not offset a 30% reduction in revenues," said the survey.

"The integrated oil companies accounted for 85% of the universe's profit with the E&P companies accounting for the balance. Reserve writedowns slashed net income for the large E&P companies and drove the mid-sized and small E&P companies to a loss. However, the industry generated free cash flow due to the steep decline in capital investment."

Dividends rose "modestly" in 2009 to another record level, which "is remarkable given the turmoil in the financial markets and the generally miserable results in the industry's downstream operations," said IHS Herold. Dividends were above $100 billion, but common share repurchases were 23% lower year/year, falling for the first time since 2004.

"Capital constraints brought about by reduced revenue and rising costs have almost completely eliminated share buybacks as a viable use of funds," the report found.

Among the regional findings in the report, IHS Herold said drillbit additions lifted improving results for reserve replacement costs and rates in the United States. Unit profitability declined for the fourth consecutive year. In Canada mineable bitumen reserve additions offset weak natural gas reserve additions. Profits were down sharply.

This year IHS Herold expects to report a "modest global rebound" in upstream capital spending.

"In North America, E&P investment increased 30% in the first half of 2010, which was higher than expected" (see Daily GPI, June 16). "We think this should drive a global investment increase of more than 20% for the year," said Cacchione.

"Outside of North America, where spending declines were less severe, we foresee upstream investment rising about 10%. Ultimately, we expect upstream revenue will recover nicely in 2010, possibly by more than 15%."

Revenue should recover because of realizations for liquids production, and cash flow also is expected to be higher.

"As a whole, the industry has sufficient capital to replace its reserves, and margins are at acceptable levels as long as oilfield service costs can be kept under control."

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