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No Surprise: Domestic Gas, Oil Reserves Soaring

U.S. natural gas reserves jumped 12% and oil reserves rose 11% in 2010, the "strongest combined annual growth" posted over the five-year period, according to a study by Ernst & Young LLP of domestic exploration and production (E&P) companies.

Ernst & Young's 2010 U.S. E&P benchmark study, an annual compilation, reviewed the 50 largest publicly traded explorers based on end-of-year reserves disclosures filed with the Securities and Exchange Commission (SEC).

The U.S. E&P industry "recovered significantly from the economic downturn in 2008-2009, benefiting from new shale discoveries and technology advances, higher commodity prices and price stability," the report said. "With strong revenue and net income gains in 2010, the companies examined invested heavily to develop supplies to meet expected demand growth from economic recovery."

The companies profiled accounted for an estimated 71% of U.S. gas reserves and 93% of domestic oil reserves based on Jan. 1, 2011 reserves estimates. Activity by XTO Energy Inc., which was acquired last year by ExxonMobil Corp., is included.

In perhaps the least surprising of the findings, Ernst & Young researchers reported that "strong" shale development lifted U.S. gas reserves to 174.3 Tcf at the end of 2010. Ending oil reserves reached 17.8 billion bbl.

"Technological advances enabled increased shale oil and gas development and significant increases in reserve or production replacement rates," said the authors. The gas production replacement rate from all sources -- extensions and discoveries, improved recovery, revisions, purchases and sales of proved reserves -- was 252% in 2010. The all-sources oil production replacement rate was 234%.

More important, they said, "production replacement rates, excluding purchases and sales, were also very strong in 2010 at 205% for oil, 249% for gas, and 232% on a combined boe basis."

Reserve replacement costs on a total basis, including proved property acquisitions, jumped year/year to $15.26/boe from $12.78. Reserve replacement costs on a finding and development basis, excluding proved property acquisitions, increased to $17.84/boe from $13.01 a year earlier.

"Oil prices generally traded in the $70 to $80/bbl range for most of 2010," said Marcela Donadio, the firm's Americas oil and gas leader. "And while natural gas prices were weak, they were stable in 2010. This created a healthy environment for investing in finding reserves and the technology for producing them. Stability in price -- in spite of an uncertain regulatory environment -- made reserve replacement and growth possible."

Total upstream spending in 2010, which included not only exploration and development spending but also acquisitions of proved and unproved properties, more than doubled to $177.9 billion from $72.8 billion in 2009.

E&P companies' strong desire to acquire onshore property in the United States last year is told in the numbers: proved properties acquired increased year/year by 984% to $42.2 billion from $3.9 billion, while unproved properties acquired jumped 519% to $59.3 billion from $9.6 billion.

One transaction topped all others last year: ExxonMobil's acquisition of XTO, which accounted for more than half (51%) of 2010's proved property acquisition costs and 40% of unproved property acquisition costs.

Also significant were Apache Corp.'s acquisitions last year of Mariner Energy Inc., as well as properties from Devon Energy Corp. and BP plc. Notable purchases also were made by Denbury Resources Inc. and Chesapeake Energy Corp., the report said.

Capital spending in 2010 for exploration in the United States jumped 8%, while development spending increased 36%, "primarily due to shale development, both for gas and oil. On a combined basis, the increase in exploration and development spending was primarily driven by ExxonMobil, Chesapeake Energy and EOG Resources." Only four of the companies analyzed reported decreases in their combined exploration and development spending.

"It is clear that oil and gas producers are accumulating and developing shale properties," said Donadio. "Key to capitalizing on these prospects, in addition to consistently strong commodity prices, will be resolution of [hydraulic fracturing] concerns, which the industry is acting aggressively to address."

Upstream revenues in total were up 19% from 2009 because of higher oil and gas prices. Upstream revenues averaged $43.82/boe in 2010 from $37.09 a year earlier. Production costs rose 10%, averaging $11.90/boe versus $10.91 in 2009. Lease operating expenses increased 5% in 2010 and production taxes jumped 27%.

The companies' plowback percentage, which is total upstream spending as a percentage of netback (revenues less production costs), climbed to 170% in 2010, "the highest of the five-year period," the authors noted. In 2006 the plowback percentage was up 121% "as a result of an increase of investment activity driven by a relatively high priced commodity environment."

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