|
Survey: Energy companies report ‘alarming’ surge in North American finding costs John. S. Herold survey suggests U.S. and Canada becoming ‘uncompetitive,’ recommends E&P companies shift focus to international upstream activities Gary Park PNA Canadian Correspondent
The ever-spiraling costs of replacing oil and natural gas reserves in the United States and Canada are pushing the industry into an uncompetitive realm and forcing companies to pay greater attention to overseas opportunities, according to a survey of 200 leading global energy companies.
Energy research firm John S. Herold Inc. reported that worldwide reserve replacement costs or “RRC” jumped by an “alarming” 36 percent in 2001 to $5.31 per barrel of oil equivalent, while drill-bit costs rose 60 percent to $6.33.
Capital outlays by the 200 companies rose 14 percent to $157.5 billion.
The most troubling increases were recorded in North America, with reserve replacement costs at $8.41 per barrel in the United States and $8.44 a barrel in Canada during a year when those two countries accounted for 51.4 percent of global upstream investment — 33.6 percent in the United States and 17.8 percent in Canada.
In contrast, reserve replacement costs averaged $2.48 a barrel in Asia and $2.99 a barrel in Central and South America.
The message, said Herold chairman and chief executive officer Arthur L. Smith in a Dec. 23 statement, was that “investment results for the upstream are a cause for concern.
“Energy investors and industry executives are troubled that billions ($605 billion over the past five years) have been plowed back into acquiring companies, securing leases, drilling wells and producing hydrocarbons.
“All said, these reinvestment outlays for the upstream appear equivalent to ‘spinning wheels’ for the average public energy company,” Smith said.
International finding costs lower Herold, which has been tracking replacement and findings costs for 40 years, found that companies with significant international E&P operations were better positioned to enjoy both stronger profitability and higher production growth due to both relatively lower finding costs and more attractive RRC rates.
Smith suggested that producers may be “well-served to focus on growth outside of traditional areas as evidenced by the skyrocketing costs of reserve additions in the mature North American and North Sea regions coupled with anemic reserve replacement rates.”
Finding and development costs up The study said growth through the drill bit became increasingly difficult in 2001, with worldwide finding and development costs of $6.33 per barrel of oil equivalent, nearly 20 percent higher than adding reserves through drilling and acquisitions.
That trend was most glaring in Canada, where finding and development costs showed a whopping 56 percent increase to $12.12 a barrel from a three-year average, while the United States rate was $9.59 a barrel.
Herold said that despite a “torrential flow of capital” from the United States to Canada it questions whether the Canadian upstream will be able to continue to attract significant capital “considering these sub-pay investment returns.”
However, Herold said it expected industry-wide finding costs to ease back in 2002, with strong crude oil and natural gas prices helping companies to book additional reserves that were previously uneconomic at lower prices.
In addition, drilling costs have been brought under better control and executives are focusing on “high-grading of upstream assets, in turn enhancing drilling efficiency.”
Smith said a moderating factor will be a “new conservatism” among reservoir engineers in their recognition of proved reserves.
Profitability remains strong Leaders in worldwide upstream investment were Royal Dutch/Shell, BP PLC, Italy’s Eni S.p.A, ConocoPhillips and ExxonMobil Corp., all between $8 billion and $9 billion; ChevronTexaco Corp. $6.7 billion; Devon Energy Corp. $5.9 billion; Amerada Hess Corp. $5.1 billion; PetroChina $4.8 billion and TotalFinaElf $4.7 billion.
Nicholas D. Cacchione, Herald senior vice president and director of research, said the 2001 upstream spending fell short of the results of previous years, with worldwide oil and gas reserve replacement rates dropping to 173 percent of production from 203 percent in 2000 and a five-year average of 187 percent. Replacement rates through the drill bit fell to 118 percent, the lowest level in five years.
He said it could be that some North American companies are growing nervous about the localities they are in and, with finding costs less competitive that they are elsewhere in the world, have decided to reallocate capital.
Herold reported that industry profitability remained strong, as realized energy prices dipped about 10 percent to $19.29 per barrel of oil equivalent. Worldwide net income was $89.2 billion, 25 percent below 2000 levels.
| 