What is the Real Cost of Exploration and Production?
An annual study by Ernst & Young LLP, the Exploration & Production (E&P) findings revealed the gas and oil industry had an increase in E&P costs, oil reserves decline and this ended in profits being less. The capital spending was up 35% in 2008 compared to 2007 and a 4% growth in reserves of natural gas was recorded in 2008. This demonstrated the long-term commitment and vision of the industry to the gas and oil supply as a constant.
The results were from a five year collection of 40 E&P companies that were examined to see how well the performance of the industry is going and identify the challenges being faced. Excerpt of the report are as follows:
- There was a 35% increase in revenues – 183. 3 billion dollars in 2008 in the U.S. however, amortization, depletion and depreciation decreased the profit by 8% after taxes.
- The cost of production was $14.72 a BOE (barrel of oil equivalent) in the U.S. in 2008, a increase of 25% from 2007. The costs are more than double the cost in 2004 which was $6.55 a BOE.
- In 2008, negative changes for oil reserves were reported totaling 1.2 billion barrels. This paved the way for a decline of 7% in the ending reserves. 16.1 billion barrels for 2007 dropped to 15.0 billion barrels for 2008.
- 6.7 Tcf (trillion cubic feet) in gas reserves changed negatively in 2008 but there was still a 4% increase in reserves in 2007. They went from 139.9 Tcf to 145.2 Tcf. Costs for the acquisition of proven property was less in 2008, but there was an increase in total expenditures of 35% which cost 132.1 billion dollars in the U.S.
Ernst & Young, U.S. Director of Oil & Gas Marcela Donadio had this to say “The prediction is for an economic upturn in the gas and oil industry even with the production costs rising as investments are made in production as well as exploration activities. Expectations for increased energy demand call for the critical continuation of investments when it comes to domestic opportunities.”
Charles Swanson, the managing partner for Ernst & Young’s Houston office says the E&P companies are investing in their gas and oil operations quite heavily and a 102% plow back was realized for the 2006 to 2008 period and 91% for the five year time line. Production and gas reserves have increased 56% and 29% since 2004.
Since last year’s problems the U.S. industries of gas and oil have adjusted albeit painfully. They have postponed quite a few proposed developments and upstream investment has been scaled back. Due to the weakened economy and industry sectors the pressure of upward costs is eased. In the second six months of 2009, the gas and oil markets will resume growth and be a major contributor to the economic recovery in the U.S. as well as the global recovery according to an analysis from Ernst & Young.
Swanson noted that when the stabilization of commodity prices occurs the position of the industry should improve. The gas and oil industry of today is in a much better position to recover from economic problems than it was during the last collapse which occurred in the 1980s. They are better equipped and more efficient when it comes to taking advantage of the economic recovery opportunities.
This study by Ernst & Young is compiled and analyzed based on the information given by select gas and oil companies that are publicly traded and is reported in the annual reports they have filed with the U.S. Securities and Exchange Commission. Spanning a five year period, the report is a representation of 40 E&P companies. They account for about 70% of U.S. oil reserves totaled and 61% of gas reserves in the U.S.
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