Driven by a huge surge in acquisition activity in the U.S. and Latin America, total global upstream capital spending by 221 oil and gas companies studied increased 47 percent to $558 billion in 2010, according to a report from IHS (NYSE: IHS), the leading global source of information and analysis. This activity represents a record high and a healthy rebound after declining more than 20 percent to $380 billion in 2009.
The report, the IHS Herold 2011 Global Upstream Performance Review, noted that the significant increase in capital spending was primarily due to a seven-fold increase in acquisition spending to $125 billion, which is up from nearly $18 billion in 2009. Most of this spending occurred in the U.S. and in South and Central America, which each saw total upstream spending increases of approximately 130 percent to $195 billion and $91 billion, respectively.
ExxonMobil, which shelled out nearly $72 billion last year, was the largest capital spender globally, primarily due to its acquisition of XTO Energy. The move signaled ExxonMobil’s entrance into the unconventional natural gas resource play arena, and should enable the company to leverage XTO’s skills in other regions of the globe. Petrobras, the Brazilian national oil company, spent $65 billion in 2010 including $43 billion for the right to produce five billion barrels-of-oil-equivalent (boe) from the Brazilian pre-salt.
Other big-spenders that topped the IHS report’s list were: Royal Dutch Shell, PetroChina Company Ltd., BP, Chevron and Apache. Apache increased its capital spending four-fold, including the $4.7 billion acquisition of Mariner Energy and the $6.4 billion in property purchases from BP. Apache took advantage of these deals to increase its proven reserves, expand its deepwater prospects, create a more oil-balanced portfolio, and to diversify into more politically stable areas.
“These companies were able to aggressively pursue these investments because they had significant cash flow to invest,” said Nicholas D. Cacchione, director of energy equity research at IHS, and the lead author of the report. “Spending and cash flow were closely tied last year, and we expect the same for 2011, with both the E&Ps and Integrated oil companies continuing to invest at healthy levels.”
In terms of performance, Global Energy Development of the U.K. led the entire pack of 221 companies studied with a three-year reserve replacement cost of just 71 U.S. cents per boe, followed by Sasol of South Africa at $1.18/boe, Novatek of Russia at $1.55/boe, Magellan Petroleum Co. of Australia at $2.69/boe, Alliance Oil Co. Ltd. of Russia at $3.55/boe and Bankers Petroleum Ltd. of Canada at $3.59/boe. Russian producers dominated the best performers on the list, since the region is a leader in reserve replacement costs.
Worldwide oil and gas reserves grew by three percent in 2010 to 286 billion boe, which matched the growth rate for 2009, while U.S. reserves increased 10 percent to 51 billion boe in 2010. Oil and gas production grew five percent, with gas output growing slightly faster than oil, noted the IHS Herold Global Upstream Performance Review.
“We were encouraged to see such robust reserve growth in the U.S., particularly the 10 percent gain in oil and liquids reserves,” added Cacchione. “These results highlight the impact unconventional technology can have in rejuvenating mature assets and accessing tight reservoirs.”
Worldwide oil reserves grew three percent in 2010, with the U.S., Africa and Middle East regions providing the strongest increases. Natural gas continued on its long-term growth trend — gaining four percent in 2010. In the U.S., natural gas reserves grew 11 percent in 2010 to 185 trillion cubic feet (tcf). In contrast, European natural gas reserves continued on a long-term tailspin in 2010 — falling another 1.6 tcf from 68 tcf in 2009.
Capital spending by exploration and production (E&P) companies rebounded sharply in 2010, gaining nearly 70 percent to $198 billion, after a harsh decline in 2009. Integrated company spending increased more than 40 percent in 2010 on the strength of the ExxonMobil acquisition of XTO Energy as well as large investments in unproved properties by Petrobras.
In addition to the surge in purchases of unproved reserves, proved acquisition spending rose nearly 50 percent to $64 billion. According to the IHS Herold M&A database, approximately 10 percent of worldwide proved acquisition spending in 2010 was targeted toward deepwater reserves, while another 11 percent was devoted to proved unconventional reserves. However, the lion’s share of spending in both of these areas is still highly focused on non-proven resources. Development spending also was robust in 2010 – gaining 16 percent to $295 billion, while exploration spending expanded 10 percent to $69 billion, up from nearly $63 billion in 2009.
“With the recession behind us, companies started looking ahead and began re-stocking their portfolios,” said Cacchione. “The huge amount spent on unproved property suggests that companies are confident that cash flows will be adequate to develop these assets. It also illustrates the importance that companies are placing on unconventional assets, which are a significant source of future reserve and production growth.”
Reserve replacement and finding and development costs rose by approximately 50 percent in 2010 to $16.45/boe and $18.25/boe, respectively, primarily due to the surge in unproved acreage purchases, which have no reserve additions associated with them. Reserve replacement and finding and development replacement rates softened in 2010, but remained well above full replacement levels at 160 percent and 128 percent of production, respectively. Reserve replacement through the drill-bit was particularly strong in the U.S., coming in at 224 percent of production in 2010.
Upstream profits rebounded nicely in 2010, increasing nearly 60 percent to $12.66/boe. The industry primarily benefitted from a 21 percent increase in realized prices to $50.75/boe, but also profited from an 83 percent reduction in asset write-downs. However, a near 20 percent rise in lifting costs eroded some of the industry’s earnings.
The Asia-Pacific region continues to be the most profitable, earning $19.27/boe, which is well below the 2008 peak of more than $25/boe. Cash flow grew more than 20 percent and topped $500 billion for the study universe. The E&P companies closed most of the earnings gap with the integrated companies due to the curtailment of reserve write-downs, posting profits of $12.42/boe.
Dividends fell for the first time since 2002, which the report noted was a casualty of the BP Gulf of Mexico spill. Share buybacks recovered some, but not as significantly as cash flow. Said Cacchione, “We expect stock repurchases to remain subdued, since the industry can generate higher returns from development drilling on the unproved properties it already has in inventory, which are substantial in number.”
Key regional findings of the IHS Herold 2011 Global Upstream Performance Review:
- A 60 percent gain in oil/liquids additions and the elimination of natural gas reserve write-downs helped U.S. oil and gas reserves to post a 10 percent increase in 2010.
- Drill-bit spending in 2010 was up nearly 50 percent in Canada as spending on mineable oil sands resumed and unconventional gas plays attracted capital.
- Weak capital spending in Europe during the past several years helped drive oil and gas production down another three percent in 2010, continuing its long-term decline.
- Oil and gas reserves grew by nine percent in the Africa/Middle East region as significant bookings were made by Noble Corp, Sasol, and the Chinese National Offshore Oil Company (CNOOC).
- Oil and gas production in the Asia-Pacific region continued on its steady upward trend, increasing eight percent as gas output gained 11 percent.
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For more information on the IHS Herold 2011 Global Upstream Performance Review, please contact sales.energy@ihs.com. To speak with Nick Cacchione, please contact melissa.manning@ihs.com, or press@ihs.com.
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