Posted by Heidi Schwartz
Worldwide capital expenditures among oil and gas companies increased 13% in 2012 despite relatively flat upstream revenues and a decline in upstream profits. Worldwide oil reserves increased 3%, while worldwide gas reserves decreased 2% due to the recording of downward reserve revisions attributable to low natural gas prices in North America, according to EY’s annual Global Oil And Gas Reserves Study. This study analyzes the worldwide and regional exploration and production (E&P) results for 75 companies for a five-year period from 2008 to 2012.
The report also finds that the growth in spending was a result of strong exploration and development activity, as exploration spending increased 14% and development spending was up 22% in 2012.
Dale Nijoka, EY’s Global Oil & Gas Sector Leader says: “Strong capital spending has resulted in the discovery of substantial new reserves. However, profits suffered in 2012 as an oversupply of gas reserves has kept prices low in North America. However, with increases in global demand, these new additional reserves will likely pay off over time.”
Total worldwide capital expenditures for the companies in the study were US$541.0b in 2012. The strong growth in exploration spending and development spending was somewhat offset by declines in property acquisition costs. Combined exploration and development spending increased 20% in 2012 and grew 48% from 2008 to 2012.
All regions in the study showed increases in total spending in 2012, but the level of reinvestment in oil and gas operations has varied widely by region over the five-year study period. The companies’ worldwide plowback percentage was 54% during 2008-12 while the US recorded the highest level at 123% and Europe the lowest at 31%. The plowback percentage represents total capital expenditures as a percentage of revenues less production costs.
“Many years of underinvestment in oil and gas operations will take a toll on future production and reserve growth. Recent increases in spending in Africa, the Middle East and Europe will need to be sustained or even further increased in the coming years to see a turnaround in these regions,” said Nijoka.
The per barrel of oil equivalent (boe) cost to find and develop new reserves increased from US$16.90 per boe in 2011 to US$21.83 per boe in 2012 as spending increased while associated gas reserve additions decreased due to the downward revisions that were recorded in 2012.
Revenues and profits
Worldwide after-tax profits for the study companies were US$268.4b in 2012, representing a 16% decline from 2011. Combined oil and gas production increased 2% in 2012 and revenues saw a slight 1% increase. Production costs rose 6% in 2012 primarily due to higher costs for labor, services and other lease operating expenses. Depreciation, depletion and amortization charges increased significantly in 2012 as many natural gas producers in Canada and the US recorded property impairments due to low natural gas prices.
Worldwide end-of-year oil reserves for the study companies increased 3% in 2012, with Canada and the US reporting the largest increases. After decreasing in 2011, worldwide oil production rose 2% in 2012 as all regions except Europe saw increases. Oil production in Europe decreased as recent capital expenditures have not been sufficient enough to maintain the reserve base. Oil production replacement rates have been strong in recent years with a finding and development (or excluding purchases and sales) rate of 148% in 2012 and a five-year (2008-2012) average of 122%.
Worldwide end-of-year gas reserves for the study companies decreased 2% in 2012. Reserve additions of 64.8 trillion cubic feet (Tcf) were reported as extensions and discoveries. These new reserves were somewhat offset by downward revisions of 28.3 Tcf which were primarily due to low natural gas prices in the US and Canada. Natural gas production increased 3% in 2012 with the US posting the largest increase. The increase in US gas production occurred despite production curtailments due to low prices underscoring how much potential growth could be seen in the future, if prices increase.
The decline in gas reserves in 2012 led to a finding and development (or excluding purchases and sales) gas production replacement rate of 84%. The five-year (2008-12) average was still a healthy 125%.
This report presents the worldwide and regional exploration and production (E&P) results for 75 companies for the five-year period from 2008 through 2012. The results for these companies are generally representative of the E&P industry as a whole, with the exception that many national oil companies do not publicly disclose financial and operational data and their performance trends may vary significantly.