Worldwide upstream investment of 228 oil and gas producers increased 45% to $401 billion in 2006, more than $1 billion per day, but the record capital spending generated a measly 2% increase in reserves volumes, according to a review by researcher John S. Herold Inc. and upstream adviser Harrison Lovegrove & Co. Ltd.

The 2007 Global Upstream Performance Review said spending lifted reserve volumes to 263 billion boe/d while reserve replacement costs jumped 33% to $13.60/boe.

“Revenue growth more than offset higher operating expenses and increased taxes, allowing the industry to report $243 billion in net income, the fourth consecutive record,” said Herold’s Robert Gillon, co-director of equity research. However, he said “rising costs are pressuring investment returns, as net income as a percentage of the book value of oil and gas assets declined in 2006 following three years of gains.”

Harrison Lovegrove CEO Martin Lovegrove said the “key challenge facing the petroleum industry continues to be replacing reserves and growing production” because of two things: maturing basins and reduced accessibility to new acreage. “With opportunities scarce, proved and unproved acquisition costs increased 85%, while the implied costs for the acquisition of proved reserves soared 55%, more than twice the increase in oil prices.”

Returns to shareholders last year were robust: dividends reached a record $83 billion (up $7 billion), while share repurchases increased 37% to $88 billion. Combined, returns to shareholders accounted for 55% of net income. In the last two years, the industry spent more to repurchase shares than to acquire proved reserves, the review noted.

The 40th annual study was based on data filed with the U.S. Securities and Exchange Commission and similar agencies worldwide. It measured industry performance in several key areas:

Among the regional findings in the review were:

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