Analysis: O&G Reserves Rise Despite Decline in Investment

Total hydrocarbon reserves worldwide increased for the first time since 2005 despite a decline in worldwide upstream investment and development spending.

Oil Stream

Worldwide upstream investment declined by 23 percent to $378 billion in 2009 among 224 oil and gas companies surveyed, but total worldwide total hydrocarbon reserves grew three percent, according to IHS Herold's report 2010 Global Upstream Performance Review. Production also increased one percent, driven by a 2.2 percent increase in natural gas output. Development spending declined by nearly 20 percent, the first decline in a decade.

"We were very surprised at the strength of reserve additions given the weak economic conditions and tightness in credit markets during 2009," said Nicholas D. Cacchione, director of IHS Herold and author of the report.

Credit Market Crunch

Oil reserves reversed a two-year decline, rising three percent to 164 billion barrels, mostly due to extensions and discoveries in the Canadian oil sands that added 8.6 billion barrels in positive reserve additions. A record 7.9 billion barrels also was added in the South and Central American regions also added a record 7.9 billion barrels.

Natural gas reserves climbed 3.7 percent despite a record 11.4 Tcf in negative reserve revisions, as development of unconventional plays in North America and liquefied natural gas resources in Asia accelerated.

Natural Gas

The decline in capital spending resulted from a 40 percent reduction by exploration and production companies, while the integrated oil companies cut investment by just nine percent. Exploration spending was most resilient, dropping just 12 percent to $62.7 billion. Unproved acquisition costs were down 71 percent, and a two percent dip in proved acquisition outlays would have fallen 50 percent were it not for the $20 billion Suncor/Petro-Canada merger.

Lower capital spending and higher reserves resulted in a near 50 percent decrease in reserve replacement costs -- to $11.41/barrel of oil equivalent (BOE) -- and lowered finding and development costs to $12.23/BOE. Strong natural gas reserve additions led reserve replacement rates to the highest levels in five years.

Despite the strong performance metrics, upstream profits plunged 47 percent as a 13 percent decline in pre-tax expenses did not offset a 30 percent reduction in revenues. The integrated oil companies accounted for 85 percent of the universe's profit with the E&P companies accounting for the balance. Reserve write-downs slashed net income for the large E&P companies and drove the mid-sized and small E&P companies to a loss. However, the industry generated free cash flow due to the steep decline in capital investment.

The IHS Herold report found dividends rose modestly to another record level, which it noted "is remarkable" given the turmoil in the financial markets and the generally miserable results in the industry's downstream operations. Dividends exceeded $100 billion, but common share repurchases were 23 percent lower, falling for the first time since 2004. Capital constraints brought about by reduced revenue and rising costs have almost completely eliminated share buybacks as a viable use of funds.

Regional Spending

"With the recession and ongoing uncertainty in the market last year, companies put acreage acquisition on hold and seemed to focus on their in-house development opportunities," said Cacchione.

IHS also found that strong drill-bit additions aided improving results for reserve replacement costs and rates in the U.S.; however, unit profitability declined for the fourth consecutive year. Mineable bitumen reserve additions in Canada offset weak natural gas reserve additions. Profits were down sharply in Canada as well.

Drill Bit

Oil and gas reserves in Europe continued to decline as companies redirect cash flows to other regions. The reserve replacement rate reached a five-year high through improving reserve additions, but the region was still below full reserve replacement figures.


Capital spending in the Africa and Middle East regions was down 14 percent, which was much less than the worldwide average. This drop in spending is due to regional dominance by the integrated oil companies, which tend to spend thorough the commodity cycles.

Africa and Middle East

Asia-Pacific reserves gained three percent as natural gas extensions and discoveries surged. Reserve replacement rates in the region were well above full replacement levels.

Capital spending in South and Central America increased since regional players have strong development portfolios to exploit. Total reserves in the region increased three percent, the first gain in several years.

An uptick in proved acquisition spending limited total capital spending decline to 17 percent in the Russia/Caspian region, while drill-bit spending outlays fell 22 percent. Production in the region increased 18 percent, with strong results from both oil and gas output.

IHS Herold anticipates a modest global rebound in upstream capital spending in 2010. "In North America," Cacchione said, "E&P investment increased 30 percent in the first half of 2010, which was higher than expected. We think this should drive a global investment increase of more than 20 percent for the year. Outside of North America, where spending declines were less severe, we foresee upstream investment rising about 10 percent. Ultimately, we expect upstream revenue will recover nicely in 2010, possibly by more than 15 percent."


Generated by readers, the comments included herein do not reflect the views and opinions of Rigzone. All comments are subject to editorial review. Off-topic, inappropriate or insulting comments will be removed.