Drawing on findings from a benchmarking study of the largest U.S.- and Europe-based oil and natural gas companies, a study by UK-based consultant Wood Mackenzie has found that development expenditures for upstream projects reached record levels over a five-year period ending in 2003 at $49.5 billion compared with $34.6 billion in 1998.

The rise in costs were driven by expenditures on projects in the U.S. Gulf of Mexico, deepwater West Africa and the Caspian, areas that saw significant exploration success in the 1990s, said Derek Butter, chief of corporate analysis for Wood Mackenzie. “We expect these high levels to be sustained over the period 2004-2006 on the basis of currently planned projects before dipping in 2007-2008.”

Butter said the study showed that the increased spending “will translate into an upturn in production.” Production from the largest companies, which account for 20% of the world’s oil and gas output, are expected to average 3.5% a year growth between 2003 and 2008, an increase of 4.5 MMboe/d over five years.

However, the research found that the upturn in development spending has not been matched by an increase in exploration spending by the same companies. Instead, exploration spending at the top companies fell from more than $11 billion in 1998 to about $8 billion in 2003.

In relative terms, the drop in exploration spending has been high, with the average annual exploration spend per unit of production falling from $1.70/boe to $1.00/boe between 1998 and 2003, according to Wood Mackenzie. The fall is “at a much lower level” than the mid-cap peer group, where the consultant found relative spending falling to $2.50/boe from $2.80.

“The relative decline in exploration expenditure has coincided with a recent downturn in new discoveries,” according to the survey. The average level of discoveries between 2001-2003 was “significantly lower” than between 1997-2000.

“There are several reasons for the fall in exploration spend over this period,” said Butter. “The impact of the mega-mergers has delivered ‘cost synergies’ by cutting exploration budgets. The rise in development spending has squeezed out exploration dollars as companies sought to reassure on financial discipline.”

Butter noted that there has been a decrease in spending in traditional mature areas, such as the North Sea, where “results have been disappointing and not of a material scale for the larger companies.” Also, companies have switched their strategic focus to increase the importance of business development in areas, such as unconventional oil and global gas as a source of replacing reserves, he said.

Going forward Wood Mackenzie sees some evidence that exploration expenditures may rise, and in general, deepwater areas continue to deliver good results. However, for largest oil and gas companies, reserve replacement through exploration “will continue to prove a challenge.”

For more information on the survey, visit the web site at www.woodmac.com.

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