E&P operators' $218 billion in U.S. capital spending from 1998-2002 net them 3% fewer U.S. oil reserves-after production and revisions-and 13.4% more gas reserves, according to Connecticut-based research and consulting firm John S. Herold Inc. and London-based finance advisory firm Harrison Lovegrove & Co. Ltd. The firms looked at spending and results for more than 200 public companies with E&P operations for 1998-2002. The results were released recently in their "2003 Global Upstream Performance Review." The E&P operators began 1998 with more than 20 billion barrels of U.S. oil reserves and more than 106 trillion cubic feet (Tcf) of U.S. gas reserves. They finished 2002 with just under 20 billion barrels of oil reserves and more than 121 Tcf of gas reserves. Their U.S. oil production declined 2.6% and-despite growth in gas reserves-their U.S. gas production declined 3%. Of note, some of the gas reserve additions during the past few years have been in the deepwater Gulf of Mexico and in the Rockies, where they are waiting for construction of transportation infrastructure to get to market. U.S. costs increased as well. Acquisitions of proved U.S. reserves carried an average price of $4.42 per barrel of oil equivalent (BOE) in 1998; in 2002, the average was $5.48. Finding and development costs (F&D) decreased, however: they averaged $12.14 per BOE in 1998 and $9.70 in 2002. Reserve-replacement costs averaged $8.02 per BOE in 2002, slightly lower than in 2001 but higher than the three-year ($6.73) and five-year ($6.71) averages. "Reserve-replacement rates continued to deteriorate, as only acquisitions have kept 2002...rates above 100%," the researchers report. "Drillbit additions for both oil and gas averaged 94% in 2002, well below their respective three-year averages of 113%. Longer term, drillbit additions have barely kept pace with production, as the five-year averages for oil and gas replacement rates are 100% and 102%, respectively." London-based BP Plc (NYSE: BP) stood out in several U.S. rankings: it was the No. 1 spender ($4.1 billion) on the drillbit in the U.S. in 2002, and it was the largest oil reserve-holder (3.6 billion barrels), gas reserve-holder (14.3 Tcf), oil producer (254 million barrels) and gas producer (1.3 Tcf) in the U.S. in 2002. BP's position could potentially change in its year-end 2003 numbers, as the major sold several U.S. assets this year. As for profitability, Dorchester Minerals LP (Nasdaq: DMLP), which owns net profits interests, was the most profitable public company in the U.S. last year, reporting earnings of $12.39 per BOE. The average earned by U.S. operators in the study group was $4.56 per BOE. Numbers of acquisitions of U.S. reserves fell in 2002 to the lowest level in five years, while the price averaged a five-year high. "Implied reserve costs in the U.S. were near historically high levels in 2002, or approximately $1 per thousand cubic feet of gas equivalent, buoyed by strong oil and gas prices and poor reserve replacement through the drillbit," the researchers report. Popular acquisitions in 2002 were of unconventional gas, such as coalbed methane in the Rockies. "Deal activity remained steady in the Midcontinent and Gulf Coast onshore regions-focused on gas-weighted properties-but only a handful of transactions were recorded in the offshore Gulf of Mexico." There were no deals for U.S. assets or companies in 2002 greater than $1 billion. That dry spell ended early this year with Devon Energy Corp.'s (Amex: DVN) successful $5.3-billion bid for Ocean Energy Inc., but no deal since has been greater than $1 billion. Triana Energy Holdings Inc.'s purchase of Columbia Energy Resources Inc. and its 1.1 Tcf of Appalachian reserves would have cost about $1 billion but a good bit of Columbia's future production was presold, so Triana paid $330 million for the balance of the assets' potential. Having the lowest three-year (2000-02) reserve-replacement costs were Ultra Petroleum Corp. (Amex: UPL) at $1.16 per BOE; Greka Energy Corp. (no longer publicly held), $2.15; and Daugherty Resources Inc. (Nasdaq: NGAS), $2.78. Having the highest were Miller Exploration Co. (Nasdaq: MEXP), $24.19; National Fuel Gas Co. (NYSE: NFG), $22.71; and Noble Energy Inc. (NYSE: NBL), $18.51. After Dorchester Minerals, having the highest 2002 net income per BOE were Greka Energy, $9.98, and The Williams Cos. (NYSE: WMB), $9.15. Having the lowest net income per BOE in 2002 but still profitable were Evergreen Resources Inc. (NYSE: EVG), 47 cents; Total SA (NYSE: TOT), 50 cents; and Unocal Corp. (NYSE: UCL), 62 cents. The researchers also reported results on exploration, production and financial performances in Canada, Europe, Africa and the Middle East, the Asia-Pacific region, and Latin America. "2002 drove home the realization that many E&P companies would again fail to meet self-imposed production-growth targets," the researchers report. Generally, there was less reinvestment in 1998-2002 in the U.S. and the North Sea, and increased investment in the Asia-Pacific region, including Russia. "Surprisingly, since 1998 the region has produced the most robust profitability while enjoying a steadily climbing production profile, an increasing reserves-to-production (R/P) ratio and extremely competitive reserve-replacement costs." As for purchases of reserves and production, they expect continued divestments by producers, as a result of the new emphasis on value versus growth. -Nissa Darbonne
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