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US Oil reserves rise 45%

The Bakken petroleum system and other tight, unconventional plays were largely responsible for a 45 percent rise in U.S. oil reserves over the past five years, according to a recent study by accounting firm Ernst & Young.

Investments in the U.S. oil and gas sector also reached their highest level in almost a decade, the study revealed.

The Ernst & Young study does not provide reserve and capital spending totals for specific tight oil plays. Rather, reserves and spending were gleaned from year-end reports submitted to the U.S. Securities and Exchange Commission by the country’s 50 largest publicly traded companies. The study covers both onshore and offshore.

Nor does the study break down company reserves and capital spending by field or region. But the Bakken’s two biggest players are listed among the top 50 in both categories. Continental Resources is ranked 16th in capital spending and 13th in oil reserves, while Whiting Petroleum is ranked 22nd in capital spending and 19th in oil reserves.

Bakken’s reserve potential

However, unrelated studies leave no doubt that the Bakken has contributed significantly to overall U.S. oil reserve and production growth. Earlier this year the U.S. Geological Survey doubled recoverable oil estimates in the Bakken system to 7.38 billion barrels, while Bakken exploration pioneer Continental is likely to push its long-term recoverable estimate beyond the company’s current 24 billion barrels.

Moreover, state and federal tracking reports show the Bakken has elevated North Dakota to the second largest oil producing state behind Texas, whose production also is being fueled by a large tight oil formation, the Eagle Ford.

On a peer-group basis, the large independents accounted for the biggest increase in oil reserves in 2012, with their year-end reserves increasing 1.6 billion barrels (17 percent), while the smaller independents’ year-end reserves grew 1 billion barrels (24 percent) and the integrateds’ share remained flat.

Oil production up 13 percent

U.S. oil production rose from 1.4 billion barrels in 2011 to 1.6 billion barrels in 2012, a 13 percent increase. The largest gains were reported by EOG Resources (22.4 million barrels), Chesapeake Energy (17.2 million barrels) and ConocoPhillips and Marathon Oil (12 million barrels each). For the second consecutive year, the largest declines in production were seen by integrates BP, ExxonMobil and Chevron.

Ernst & Young said that in addition to tight oil developments, an increased focus on natural gas liquids that generated “higher, more stable prices compared with natural gas,” contributed to the 45 percent surge in oil-liquids reserves during the 2008-12 study period.

Year-over-year oil reserves increased 13 percent, rising from 20.7 billion barrels in 2011 to 23.3 billion barrels in 2012.

Unfortunately, depressed U.S. natural gas prices resulted in substantial downward revisions to these reserves and drove them down 10 percent from 2011 to 2012. However, despite production curtailments throughout much of 2012, gas production actually increased 4 percent.

Oil replacement at 258 percent

Extensions of existing oil reserves and discoveries of new reserves, which increased every year of the five-year study time period, reached 3.8 billion barrels in 2012. These strong additions helped fuel an oil production replacement rate of 258 percent in 2012. Only BP, Quicksilver Resources and Ultra Petroleum reported negative oil production replacement rates in 2012, excluding purchases and sales. On a peer-group basis, the large independents reported sharply higher reserve replacement rates than either the smaller independents or integrated companies.

“For years, people said the industry would struggle to replace U.S. oil reserves,” Marcela Donadio of Ernst & Young said in a statement.

Companies managed to forge ahead despite periods of extreme price volatility. With the near-collapse of the global financial system and the subsequent recession, volatility was most extreme in 2008 and 2009 before stabilizing in 2010. Oil prices were “relatively strong” in 2011 and 2012, while gas prices began to decline in 2011 but did not begin to recover until the latter part of 2012, the study noted.

Capex rises to $185.6 billion

Total capital expenditures for the 50 companies reached $185.6 billion in 2012, a 20 percent increase over the previous year and the most in the study’s history.

Large independents led the pack in capital spending during 2012, accounting for 48 percent of the pie, compared with 29 percent for the smaller independents and 23 percent for the integrateds.

Large independents also accounted for the biggest increase in combined exploration and development spending during the year, increasing 36 percent compared with 20 percent for the integrateds and just 1 percent for the smaller independents. As the smaller independents’ reserves are generally more weighted toward natural gas, the low gas prices throughout 2012 had a substantial impact on their cash flows and spending ability, according to the study.

The cost to find and develop new reserves for the entire group jumped to $45.03 per barrel of oil equivalent in 2012, reflecting not only the increased spending, but also the substantial downward revisions of natural gas reserves due to the low prices.

“The increased exploration and development spending we’re seeing in this year’s study speaks to the incredible opportunity unfolding in tight oil from shale formations and the high cost of developing these unconventional resources,” Donadio said. “Everyone wants in and they are paying a premium to play.”

Acquisitions climb to $55.4 billion

Property acquisition costs were strong in 2012 at $21.6 billion for proved and $33.8 billion for unproved reserve, for a total of $54.4 billion. Acquisition costs increased 17 percent in 2012 compared to the prior year.

BHP Billiton was the leader in both proved ($4.8 billion) and unproved ($10.4 billion) property acquisition costs due to its acquisition of Petrohawk Energy. This deal provided BHP with company-operated resources in the Eagle Ford, Haynesville and Permian fields.

Plains Exploration & Production posted property acquisition costs of $4.1 billion (proved) and $2.1 billion (unproved) in 2012, as the company acquired interests in various Gulf of Mexico fields from BP and Royal Dutch Shell.

Linn Energy’s proved property acquisition costs of $2.5 billion in 2012 were primarily related to the purchases of properties in Kansas and Wyoming from BP.

Exploration costs were $26.3 billion in 2012, a 20 percent increase from $22 billion in 2011, while development costs increased 21 percent from $85.7 billion in 2011 to $103.4 billion in 2012.

BHP leads pack in spending

The largest increases in combined exploration and development spending in 2012 were reported by BHP ($4.5 billion), Shell ($2.7 billion), Apache ($2.6 billion) and Marathon ($2.4 billion).

Although combined U.S. oil and gas production increased 7 percent 2012, it could not compensate for the $26.4 billion in property impairments recorded due to the low natural gas prices. The largest impairments were recorded by Chesapeake Energy ($3.3 billion), Ultra Petroleum ($3 billion) and EnCana ($2.8 billion).

These impairments, paired with a price-driven 3 percent decrease in revenues and increases in other costs, contributed to an average 58 percent drop in after-tax profits for companies included in the study.

Revenues slipped from $185.7 billion in 2011 to $180.7 billion in 2012. On a per boe of production basis, revenues declined 9 percent from $51.41 per boe in 2011 to $46.56 billion per boe in 2012.

Production costs up 10 percent

Production costs rose 10 percent to $57.1 billion in 2012. Lease operating costs accounted for most of the increase, rising $5.1 billion in 2012. Production taxes decreased slightly in connection with lower revenues. Depreciation, depletion and amortization, DD&A, amounted to $59.3 billion in 2012, representing a 26 percent increase from 2011 that was largely due to increased production volumes.

Companies made strong investments in their oil and gas operations in recent years, plowing back 150 percent in 2012, representing the third consecutive year this measure was over 100 percent, according to the study. The three-year average for plowback from the beginning of 2010 through 2012 was $141 percent. The plowback percentage represents total capital expenditures as a percentage of netback (revenues less production costs).

On the natural gas side, extensions and discoveries saw a decrease for the second consecutive year but were still strong at 24.6 trillion cubic feet. Active drilling programs led ExxonMobil (4 tcf) and Chesapeake (3.3 tcf) to report the largest extensions and discoveries in 2012.

However, substantial downward revisions of 29.3 tcf were recorded in 2012 by the study companies due to depressed prices. Plains, Ultra Petroleum and Quicksilver were the only companies to report downward revisions that were greater than 50 percent of beginning reserves.

Nonetheless, gas production increased in each year of the five-year study, climbing to 13.6 tcf in 2012. BHP reported the largest increase in production (409.3 billion cubic feet), again primarily due to its acquisition of Petrohawk. Chesapeake’s production grew by 125 bcf, largely because of increased output in the Marcellus Shale and despite production curtailments in the first half of 2012 in response to low prices.

Supply-demand balance altered

Meanwhile, the study notes that increasing U.S. production is not only impacting Middle Eastern players through import reductions, but also changes the global supply-demand balance and its impact on oil prices.

“Increased production and reduced cost originated by shale gas has contributed to the rise of new petrochemical production capacity in the United States,” Thorsten Ploss of Ernst & Young said in a statement.

“New feedstock cost advantaged capacities can reduce exports from the Middle East into the Americas. Middle Eastern producers will have to focus more on alternative markets which potentially yield lower profit margins.”







Source Article from http://www.petroleumnews.com/pntruncate/16393154.shtml

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