Oil and Gas Exploration Costs Rise Again for the Majors

Oil and gas exploration costs are on the rise once more, according to the latest company data compiled by Evaluate Energy for the major oil companies. Following a temporary lull in 2009, with spare capacity in the service industry and recession-induced falls in operating costs, the majors are facing sharply higher operating costs once more.

The graph below is based on company data reported to the U.S. Securities and Exchange Commission. Exploration costs are calculated by Evaluate Energy as costs incurred in exploration divided by additions to proved oil and gas reserves from extensions and discoveries.

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Oil Majors' Finding Costs - Source Evaluateenergy.com

But while operating costs may be rising, so are upstream profits, Evaluate Energy notes. With the exception of 2009, per barrel operating costs have been rising steadily for the last decade. It's interesting to note that, in general, this hasn't been squeezing companies' upstream margins because per barrel earnings have been keeping pace with those rising costs.


Meanwhile, the majors have been investing heavily in the upstream business, both in absolute and relative terms. Evaluate Energy's graph below shows the dramatic growth in total capital spending on exploration and production by the majors over the past decade.


First the good news: The majors have managed to replace more than 30 billion barrels of proved crude oil reserves over the last decade -- quite an achievement in a fast-changing and challenging environment. But here is the not-so-good news: Despite the heavy levels of capital spending shown above, the majors -- partly by design and partly by necessity -- have signally failed to materially expand either their production or their proved reserve base over the past decade.

More than a quarter of the majors' oil reserve replacement since 2000 has been due to acquisitions rather than organic growth -- through drilling or improved recovery, for example.

The graph below shows an Evaluate Energy analysis of oil reserve replacement for the majors. In the case of natural gas, one of the big factors that boosted the majors' natural gas reserves in 2010 was ExxonMobil's (XOM) addition of XTO's huge U.S. gas reserves to its portfolio. I get the impression the majors as a group are running hard to stand still. Certainly in terms of crude oil supply, they are being marginalized by the NOCs and the hunger for assets shown by China (more on that in a future blog). The graph below shows how the majors have maintained their crude oil reserves over the past decade through revisions to reserves, improved recovery, drilling, purchases and sales of assets.

Despite repeated promises to investors of increased crude oil production, this has not materialized. However, you may be surprised to hear, after the Horizon disaster and the ensuing sale of assets, that BP remains one of the best-performing companies in terms of crude oil production and reserve growth over the past decade.

Crude oil production trends for the Oil Majors - Source: Evaluateenergy.com

One of the key reasons for the growth in natural gas production for the group in 2010 was the addition of XTO to ExxonMobil's production portfolio.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.