HOUSTON, June 4, 2013 /PRNewswire/ -- US oil and gas producers significantly increased exploration, development and acquisition spending in 2012 despite a 58% decline in after-tax profits that was largely driven by low natural gas prices, according to Ernst & Young's US oil and gas reserves study.
The study analyzes US upstream spending and performance data for the largest 50 companies based on 2012 end-of-year oil and gas reserve estimates.
Total capital expenditures for the 50 companies reached $185.6 billion – the most in the study's history. Largely due to increased tight oil and liquids activity, exploration spending reached $26.3 billion and development spending soared to $103.4 billion
"The increased exploration and development spend we're seeing in this year's study speaks to the incredible opportunity unfolding in tight oil from shale formations and the high cost of developing these unconventional resources," said Marcela Donadio, Americas Oil & Gas leader for the global Ernst & Young organization. "Everyone wants in and they are paying a premium to play."
Total 2012 capital expenditures rose by 20% compared to the prior year, with the largest increases in development spending and proved property acquisitions.
Development spending increased 21% compared to 2011 while exploration spending rose 20%. The large independents accounted for the biggest rise in combined exploration and development spending. Their spending increased 36% while spending by the integrated companies increased 20% and the smaller independent segment increased spending by 1%. As the smaller independents' reserves are generally more weighted toward natural gas, the low gas prices throughout much of 2012 had a substantial impact on their cash flows and spending ability.
The data presented in the study for 2012 indicated that companies spent 17% more to acquire properties compared with 2011. Spending for proved properties rose from nearly $14 billion in 2011 to $21.6 billion, while spending for unproved properties reached $33.8 billion in 2012.
The cost to find and develop new reserves surged to $45.03 per boe in 2012, reflecting not only the increased spending, but also the substantial downward revisions of natural gas reserves as a result of low natural gas prices.
Oil and gas reserves
Tight oil developments and an increased focus on natural gas liquids contributed to a 45% surge in US oil/liquids reserves over the five-year study period. In 2012, oil reserves for the 50 companies rose to 23.3 billion barrels, while production increased by 13% to 1.6 billion barrels.
Extensions of existing reserves and discoveries of new reserves -- which have increased every year of the five-year study time period -- reached 3.8 billion barrels in 2012. These strong additions helped fuel an oil production replacement rate of 258% in 2012.
"For years, people said the industry would struggle to replace US oil reserves," Donadio said. "The steady rise in extensions and discoveries as well as oil production replacement rates changes that story."
Depressed natural gas prices, however, resulted in substantial downward revisions to reserves and drove total gas reserves down 10% from 2011 to 2012. Despite production curtailments throughout much of 2012, gas production increased 4%.
Revenues and profits
Although total oil and gas production increased 7% in 2012, it could not compensate for the $26.4 billion in property impairments recorded due to low natural gas prices. These impairments, paired with a price-driven 3% decrease in revenues and increases in other costs, contributed to a 58% fall in after-tax profits for study companies.
More about the study
The US oil and gas reserves study is a compilation and analysis of certain oil and gas reserve disclosure information reported to the Securities and Exchange Commission. The study includes the top 50 exploration and production companies based on 2012 end-of-year oil and gas reserves estimates. It examines the companies' US operations for a five-year period from 2008 through 2012.
About Ernst & Young
Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 167,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential.
Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. This news release has been issued by Ernst & Young LLP, a client-serving member firm of Ernst & Young Global Limited located in the US.
For more information about our organization, please visit www.ey.com
How Ernst & Young's Global Oil & Gas Center can help your business
The oil and gas industry is constantly changing. Increasingly uncertain energy policies, geopolitical complexities, cost management and climate change all present significant challenges. Ernst & Young's Global Oil & Gas Center supports over 9,000 oil and gas professionals with technical experience in providing assurance, tax, transaction and advisory services across the upstream, midstream, downstream and oilfield service sub-sectors.
The Center works to anticipate market trends, execute the mobility of our global resources and articulate points of view on relevant key industry issues. With our deep industry focus, we can help your organization drive down costs and compete more effectively to achieve its potential. For more information, please visit www.ey.com/oilandgas.
SOURCE Ernst & Young