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Oil sands to the rescue Northern Alberta resource props up growth in world oil reserves, despite 45% hike in upstream spending; Asia-Pacific gas gains Gary Park For Petroleum News
Take the Alberta oil sands out of the mix and a bleak year of global additions to oil reserves in 2006 would have been much worse, according to the 40th annual Global Upstream Performance Review by the research firm of John S. Herold and upstream corporate advisor Harrison Lovegrove & Co.
Covering 228 companies, the study reported that reserves rose by just 1 percent or 1.9 billion barrels, the bulk coming from the oil sands.
Natural gas reserves were up by 2.7 percent, propelled by a 9 percent hike in Asia-Pacific reserves and 4.3 percent in the United States, while Canada “languished” because of the investment push in the oil sands.
World-wide upstream spending rose 45 percent to US$401 billion, but this record spending level yielded only a 2 percent increase in combined oil and gas reserves to 263 million boe, while reserve replacement costs surged 33 percent to $13.60 per boe.
Herold Senior Vice President Robert Gillon said revenue growth “more than offset higher operating expenses and increased taxes, allowing the industry to report $243 billion in net income (or $13 per barrel of oil equivalent), the fourth consecutive record.”
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 Chief Executive Officer Martin Lovegrove and Herold Chairman Arthur Smith said the “key challenge facing the petroleum industry continued to be replacing reserves and growing production due to the combination of maturing basins and reduced accessibility to new acreage.”
“With opportunities scarce, proved and unproved acquisition costs increased 85 percent, while the implied costs for the acquisition of proved reserves soared 55 percent, more than twice the increase in oil prices.”
The study calculated the dividends paid to industry shareholders climbed $7 billion last year to $83 billion and share repurchases increased 37 percent to $88 billion.
The combination of the two meant that shareholders claimed 55 percent of net income.
Over the past two years, share purchases have exceeded the cost of acquiring proved reserves.
The study said capital spending in Canada and the United States grew rapidly due to increased acquisitions, with spending in Canada up almost 75 percent over 2005.
Canadian investments up As a result, Canada accounted for 16 percent of global investments compared with 13 percent in 2005, while the United States portion rose to 34 percent from 31 percent. Europe, South and Central America all went into retreat.
“With many prospective region still off-limits, oil reserve and production growth remains infinitesimal,” the study said. “In fact, the gain in Canadian heavy oil and bitumen reserves since 2002 is about equal to the change in total world reserves.”
Growth in natural gas reserves and production was in line with the 3 percent rate of the past four years with “resource” type plays rejuvenating U.S. output which has contributed close to half the gas reserve growth of the past two years.
The fast expansion of liquefied natural gas operations in the Asia-Pacific region accounts for the remainder.
A surge in capital spending in 2006 yielded only marginal improvement in worldwide drill-bit replacement rates and “acceptable” results in Canada and the Russia-Caspian and Asia-Pacific regions.
Natural gas reserves up 2.7% Natural gas reserves gained 2.7 percent, powered by a 9 percent rise in the Asia-Pacific region and U.S. resources rose 4.3 percent, despite negative revisions of 4.5 trillion cubic feet.
Finding and development costs in Canada climbed from to $12 per boe from $10, but the Russia-Caspian area dropped marginally to $5.
In sharp contrast, F&D costs in the U.S. rocketed to $30 from just over $15.
The study said inflation in oilfield service costs “remains a serious challenge, evidenced by a 50 percent increase in the average cost per well drilled in the last four years,” but technological gains have allowed the industry to drill better wells, with reserves added per well increasing in each of the past two years.
Upstream net income divided by upstream cumulative capital costs declined in 2006 for the first time in several years, with the ratio down to 22.6 percent from 23.4 percent, with Canada trailing the field at 12 percent and the U.S. next at 15 percent.
“Rising commodity prices are masking the fact that investment returns are under pressure,” the study said.
“Net income as a percentage of book value of oil and gas assets declined in 2006 following three years of gains. Barring a drop in drilling rates and oilfield service costs or an increase in commodity prices, we expect that profitability will slip again during 2007.”
The study also said that if the “peak oil theory is correct and a decline in world production is imminent, a company must choose among four alternatives — try to become a dominant participant, find a niche operational talent, harvest assets or liquidate quickly.”
Editor’s note: Also see story on report in Sept. 2 issue.
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