Proven oil and gas reserves grew last year for the first time since 2005 despite a 23% drop in international upstream investment, according to analysts at IHS Herold.
They record that upstream investment dropped to $378billion and yet total hydrocarbon reserves increased by 3% and production rose 1%, propelled by a 2.2% increase in natural gas output.
“We were very surprised at the strength of reserve additions given the weak economic conditions and tightness in credit markets during 2009,” said Nicholas Cacchione, director of IHS Herold and author of the latest analysis.
Oil reversed a two-year decline with the reserves base rising 3% to 164billion barrels.
The main driver was 8.6billion barrels in positive reserve additions. Extensions and discoveries in the Canadian oil sands and South and Central America added a record 7.9billion barrels.
Gas reserves climbed 3.7% despite a record 11.4trillion cu.ft in negative reserve revisions, as development of unconventional plays in North America and liquefied natural gas (LNG) resources in Asia accelerated.
The decline in capital spending was led by a 40% reduction by exploration and production companies, while the integrated oil companies cut investment by 9%.
Exploration spending was “most resilient”, dropping just 12% to $62.7billion.
In contrast, unproven acquisition costs were down 71%, and a 2% dip in proven acquisition outlays would have fallen 50% were it not for the $20billion Suncor/Petro-Canada merger.
“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.
“This decision, I think, reflected their desires to monetise known holdings that can be brought into production much more rapidly than something with a less certain payout several years down the road.”
Lower capital spending and higher reserves resulted in a near 50% decrease in reserve replacement costs – to $11.41 per barrel oil equivalent – and lowered finding and development costs to $12.23 per boe.
Strong natural gas reserve additions led reserve replacement rates to the highest levels in five years.
Despite what HIS Herold regards as “strong performance metrics”, upstream profits plunged 47% as a 13% decline in pre-tax expenses did not offset a 30% reduction in revenues.
IOCs (the majors) accounted for 85% 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.
Key regional findings of the 2010 IHS Herold Global Upstream Performance Review include:
Strong drill-bit additions aided improving results for reserve replacement costs and rates in the US. 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.
Oil and gas reserves in Europe continued to decline as companies redirected 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 Africa and the Middle East was down 14% … much less than the worldwide average.
Asia-Pacific reserves gained 3% 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 3%, the first gain in several years.
An uptick in proven acquisition spending limited total capital spending decline to 17% in the Russia/Caspian region, while drill-bit spending outlays fell 22%. Production in the region increased 18%, with strong results from both oil and gas output.
A modest global rebound in upstream capital spending in 2010 is expected.
“In North America,” Cacchione said, “E&P investment increased 30% in the first half of 2010, which was higher than expected. We think this should drive a global investment increase of more than 20% for the year.
“Outside of North America, where spending declines were less severe, we foresee upstream investment rising about 10%.
“Ultimately, we expect upstream revenue will recover nicely in 2010, possibly by more than 15%.”
He added that, by and large, the upstream side of the petroleum industry has sufficient capital to replace its reserves, and margins are at acceptable levels as long as oilfield service costs can be “kept under control”.