abarrelfull wrote on 05 Oct 2010 08:52
Tags: ihs-herold reserves
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The worldwide upstream investment of 224 oil and gas companies decreased 23 percent to $378 billion in 2009, according to the 2010 Global Upstream Performance Review, released by oil and gas research firm IHS Herold. Although development spending fell nearly 20 percent, the first decline in a decade, total hydrocarbon reserves increased three percent as both oil and gas reserves grew for the first time since 2005. Production also increased one percent, driven by a 2.2 percent 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 Nicholas D. Cacchione, director of IHS Herold and author of the report. “As an industry, we spent fewer dollars, but they went further in terms of purchasing power.”
Oil reserves reversed a two-year decline, rising three percent to 164 billion barrels. The main driver was 8.6 billion barrels in positive reserve additions, but extensions and discoveries in the Canadian oil sands and South and Central America also added a record 7.9 billion barrels. Natural gas reserves climbed 3.7 percent despite a record 11.4 trillion cubic feet (TCF) in negative reserve revisions, as development of unconventional plays in North America and liquefied natural gas (LNG) resources in Asia accelerated.
The decline in capital spending was led by a 40 percent reduction by exploration and production (E&P) companies, while the integrated oil companies cut investment by just nine percent. Exploration spending was most resilient, dropping just 12 percent to $62.7 billion. In contrast, unproved acquisition costs were down 71 percent, and a two percent dip in proved acquisition outlays would have fallen 50 percent were it not for the $20 billion Suncor/Petro-Canada merger. “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 resulted in a near 50 percent decrease in reserve replacement costs — to $11.41/barrel of oil equivalent (BOE) — and lowered finding and development costs to $12.23/BOE. Strong natural gas reserve additions led reserve replacement rates to the highest levels in five years.
Despite the strong performance metrics, upstream profits plunged 47 percent as a 13 percent decline in pre-tax expenses did not offset a 30 percent reduction in revenues. The integrated oil companies accounted for 85 percent of the universe’s profit with the E&P companies accounting for the balance. Reserve write-downs 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.
The IHS Herold report found dividends rose modestly to another record level, which it noted “is remarkable” given the turmoil in the financial markets and the generally miserable results in the industry’s downstream operations. Dividends exceeded $100 billion, but common share repurchases were 23 percent lower, 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.
Key regional findings of the 2010 IHS Herold Global Upstream Performance Review include:
•Strong drill-bit additions aided improving results for reserve replacement costs and rates in the U.S. Unit profitability declined for the fourth consecutive year. Mineable bitumen reserve additions in Canada offset weak natural gas reserve additions. Profits were down sharply in Canada as well.
•Oil and gas reserves in Europe continued to decline as companies redirect cash flows to other regions. The reserve replacement rate reached a five-year high through improving reserve additions, but the region was still below full reserve replacement figures.
•Capital spending in the Africa and Middle East regions was down 14 percent, which was much less than the worldwide average. This drop in spending is due to regional dominance by the integrated oil companies, which tend to spend thorough the commodity cycles.
•Asia-Pacific reserves gained three percent as natural gas extensions and discoveries surged. Reserve replacement rates in the region were well above full replacement levels.
•Capital spending in South and Central America increased since regional players have strong development portfolios to exploit. Total reserves in the region increased three percent, the first gain in several years.
•An uptick in proved acquisition spending limited total capital spending decline to 17 percent in the Russia/Caspian region, while drill-bit spending outlays fell 22 percent. Production in the region increased 18 percent, with strong results from both oil and gas output.
IHS Herold anticipates a modest global rebound in upstream capital spending in 2010.
“In North America,” Cacchione said, “E&P investment increased 30 percent in the first half of 2010, which was higher than expected. We think this should drive a global investment increase of more than 20 percent for the year. Outside of North America, where spending declines were less severe, we foresee upstream investment rising about 10 percent. Ultimately, we expect upstream revenue will recover nicely in 2010, possibly by more than 15 percent.”
Cacchione added that this mostly was due to realizations for liquids production, and that he expected cash flow to rise almost proportionately. “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.”
IHS Herold is part of IHS Inc. (NYSE: IHS).
About IHS (www.ihs.com)
IHS (NYSE: IHS) is a leading source of information and insight in pivotal areas that shape today’s business landscape: energy, economics, geopolitical risk, sustainability and supply chain management. Businesses and governments around the globe rely on the comprehensive content, expert independent analysis and flexible delivery methods of IHS to make high-impact decisions and develop strategies with speed and confidence. IHS has been in business since 1959 and became a publicly traded company on the New York Stock Exchange in 2005. Headquartered in Englewood, Colorado, USA, IHS employs more than 4,200 people in more than 30 countries around the world.