US oil and gas industry in position for economic upturn

While the US oil and gas industry in 2008 saw higher E&P costs, a drop in year-end oil reserve and lower profits, its total capital spending rose 35 % from 2007 levels and natural gas reserves rose 4 %, consulting firm Ernst & Young said in its annual Exploration and Production benchmark study.
"Despite rising production costs, the oil and gas industry continues to be positioned for an economic upturn as it makes significant investments in exploration and production activities. It's critical for the industry to continue its investments in domestic opportunities since we expect that energy demand in the long term will continue to increase," Marcela Donadio, Americas Director of Oil and Gas for Ernst & Young said.

The study, which surveyed the results of 40 US producers over a five-year period, found that while 2008 revenues rose 35 % to $ 183.3 bn, increases in production costs and depreciation, depletion and amortization led to an 8 % drop in after-tax profits. The report said production costs were $ 14.72/barrel of oil equivalent last year, up 25 % from 2007. These costs, it added, have more than doubled from $ 6.55/boe in 2004.
In addition, Ernst & Young said that because low year-end prices forced several companies to reduce or revise reported reserves, finding and development costs per boe increased dramatically in 2008. The all sources measure was $ 39.58/boe in 2008.

Negative revisions of 1.2 bn barrels were reported for oil reserves in 2008, leading the way to a 7 % decline in year-end reserves from 16.1 bn barrels in 2007 to 15 bn barrels in 2008, the report added.
The study also said that while producers reported negative revisions of 6.7 tcf in gas reserves in 2008, ending reserves still grew 4 % from 139.9 tcf in 2007 to 145.2 tcf in 2008. Proved property acquisition costs decreased in 2008, but total capital expenditures costs increased 35 % to $ 132.1 bn, the study added.

"E&P companies have been making significant investments in their oil and gas operations, with aplowback percentage of 102 % during 2006-2008 and 91 % over the five-year period," Charles Swanson, Houston office managing partner for Ernst & Young said. "Since 2004 gas reserves and production have grown at 56 % and 29 %, respectively."
The report said the US oil and gas industry "has made some painful adjustments to last year's reversal of fortunes. Some scaling back of upstream investment has occurred in 2009 and some proposed developments have been postponed. But much of the upward cost pressure has eased with the weakened industry and general economic conditions."

"As the recovery in oil and gas markets gathers steam in the second half of 2009, the US oil and gas industry appears poised to resume its growth and be a key contributor to the US and global economic recovery," the report said.
"When the commodity prices stabilize, the industry should be in a good position. Compared to the recovery of the last major collapse in the 1980s, today's oil and gas industry is much learner, more efficient and better-positioned to take advantage of opportunities during an economic recovery," Swanson said.