Herold: Lower Gas Prices Could Slow E&P Spending Growth

Global upstream investments climbed 31% between 2004 and 2005, but the oil and natural gas industry continues to have problems growing production and reserves, and any further downturn in natural gas prices could stifle near-term spending in North America, according to a review by John S. Herold Inc. and Harrison Lovegrove & Co. Ltd.

The energy consultants' 39th annual research study reviewed 203 energy companies, compiling data from public disclosures to the U.S. Securities and Exchange Commission, as well as similar disclosures for reporting companies headquartered outside the United States.

According to the study, worldwide natural gas reserves in 2005 increased by 3.2%, with the United States and Asia-Pacific regions contributing more than half the gains. Natural gas reserve growth was smaller than in the early part of the decade, but extensions and discoveries continued to exceed production by a 14% margin, according to the "2006 Global Upstream Performance Review."

"Gas reserve replacement has been consistently above full replacement, outstripping oil replacement, while oil reserve replacement has been steadily below 100%," said Herold CEO Arthur L. Smith Wednesday. Smith presided over a conference call to discuss the report. "Companies are finding more gas, but we are not able to develop it and get it to market as quickly as we might like."

The United States, said Smith, "remains the largest natural gas producing country by a wide margin in the study universe, but output slipped for the second straight year. In aggregate, the other five regions [worldwide] enjoyed a 5% gain in gas production." The other four regions reviewed were Asia-Pacific, Africa and the Middle East, Europe and Canada.

In the United States, commercial exploitation of unconventional reservoirs increased last year, while growing demand for liquefied natural gas in Europe and North America focused more attention on previously stranded fields overseas. The study also found opportunities for exploration are growing in North America, especially offshore in the Gulf of Mexico and in Canada's oil sands, said Smith.

"The super giants that were leaving North America for overseas now are reevaluating their position and coming back to be more aggressive competitors," Smith said. The majors are muscling back in through small and large acquisitions, including ConocoPhillips' purchase of Burlington Resources Inc. and Chevron Corp.'s merger with Unocal Corp. That trend is expected to continue, he said.

U.S. oil and natural gas reserves grew in 2005 after stagnating for several years, but total production declined 6%, according to the study. The United States was the most profitable region for upstream producers, with earnings of nearly $15/boe. Canadian oil reserves jumped 30% on oil sands bookings, but its acquisition costs remained the highest in the world. The study also noted that Canada's developed reserves actually fell slightly to 101.8 billion boe.

Even with growing opportunities in North America, there may be trouble on the horizon, said Smith.

"The potential for stormy seas looms. Despite a 32% rise in wellhead petroleum prices [worldwide], margins inched up only slightly to 29%, and the industry continued to labor to grow production and reserves. Costs continued to march upward, with lifting costs gaining 35% while production volumes inched up only 1%. Finding and development spending surged 36%, but for the second straight year, proved and proved developed petroleum liquids reserves were essentially unchanged."

Bob Gillon, Herold's co-director of equity research, said in the conference call that North American gas production may soon take a hit if gas prices continue to fall. On Tuesday, October natural gas closed at $5.006, up 6.4 cents from Monday (see Daily GPI, Sept. 20) but down $5.359 from the $10.365 settlement price one year ago on Sept. 19, 2005 -- the near-month contract on that day closed at $12.663.

"Where North American natural gas prices are currently, there are a large number of operators with some of the wells planned for drilling this fall and winter that see a marginal to poor to zero return on economics...," said Gillon. "What we expect to see currently is a decline in drilling activity, especially by smaller companies, if prices maintain or stay at this level. We might possibly see some have to curtail drilling because they are financially constrained. This could easily happen within some months."

Globally, oil and gas production in 2005 grew by 3.8%, to 18.8 billion boe, with oil up 4.7% and gas by 2.2%. However, the study noted that the oil statistics are skewed by Russian-based Rosneft, which added 500 million boe that were not in the 2004 study. Without the Rosneft barrels, oil output grew less than 1% in 2005. Investments rose to $277 billion in 2005, $66 billion higher than in 2004. Net income jumped 44%, pushing the industry's bottom line above the $200 billion threshold.

Chevron, which spent $25.5 billion, ranked first among corporate upstream investors in 2005, followed by Royal Dutch Shell ($13.6 billion), ExxonMobil Corp. ($12.4 billion), PetroChina ($12.2 billion) and ConocoPhillips ($10.5 billion). At the other end of the spectrum was last-place Blue Dolphin Energy, which ranked 205 with only $202,000 of upstream capital investment.

Copyright 2006 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.


Our Privacy Pledge

Most Popular Articles

Brent Crude Oil : $51.78/BBL 0.77%
Light Crude Oil : $50.85/BBL 0.83%
Natural Gas : $2.99/MMBtu 4.77%
Updated in last 24 hours