By Tatyana Zaharova

21-08-03 A recent study by the consulting group Wood Mackenzie, called "Value Creation through Exploration" tried to analyse the international upstream performance of oil companies by applying a broad rang of measures.
Wood Mackenzie looked at 25 companies and their exploration and production activities. The companies ranging in size from majors to smaller independent producers, including BP, ChevronTexaco, ConocoPhillips, ENI, ExxonMobil, Anadarko Petroleum, Burlington Resources, Kerr-McGee, Norsk Hydro and Talisman Energy.

Traditional measures to evaluate upstream performance of a company consist mainly of reserve replacement and finding costs. But the study also takes value created through exploration and the per-barrel margin for each discovery into consideration. All investigated companies together invested $ 50 bn between 1996 and 2002.
As a result, they discovered oil and gas deposits which were valued at $ 100 bn. After taking the net present value of money into account, the value was $ 73 bn, a net gain of $ 23 bn after having deducted expenses. Two third of the companies managed to created value and six of them achieved returns of 14 % or more per year.

The companies carried out exploration activities in 80 countries. The most successful regions were the deepwater Gulf of Mexico, West Africa, Kazakhstan and Egypt. Less successful were upstream activities in Latin American and North Africa. The most disappointing investments have been mature, legacy regions which have attracted more exploration expenditure than which could have been justified by their attractiveness.
An interesting fact is that in many cases, successful companies had an almost identical strategy like firms which were not able to create value. Diversified, as well as being tightly focused companies were successful. The same can be said for the equity-debts ratio of a company. In some cases, strategic alliances were crowned with success, in others not. In conclusion, it can be said that there is no simply strategy for successful upstream operations. It is a combination of the ability to leverage skills and legacy positions and at the end a bit of luck is also necessary.

The most successful company has been Shell. Although the company saw two years of poor reserve replacement it has created the most value through its exploration activities if compared to its competitors. Second comes British Petrol and in the third place is ExxonMobil.
For the authors of the study, above average exploration spending is definitely positive and can be seen as a key driver of performance within the next years. Shell, Exxon, as well as Statoil and Total could easily spend more on upstream activities. Coincidently, Shell and Exxon, which are flushed with cash due to high oil and natural gas prices, announced an increase in upstream spending. A good level of exploration spending is attributed to ENI, BG and BHP. The Spanish Repsol-YPF spends little on exploration and would better give up production or increase spending in higher risk areas which promise higher returns.

Although the oil prices remain on a high level since 1999, exploration spending by the 25 companies is still around 30 % lower than at the peak of 1998 and before the oil price collapse of 1997-1998. The main enemies of increased upstream investments are mergers and acquisitions, share buybacks, cost reductions and the low opening of new upstream basins.
The report also hints at another problem for oil companies. Earnings per barrel declined by 15 % in 2002, to an average of $ 4.9 per barrel of oil equivalent. The main culprit for the decreased profitability is a 20 % increase of finding and development cost to $ 6.85 per barrel.