Energy investors fared well in 2004 as shareholder returns reached record levels, but there were snags-upstream costs continued to rise and drilling and oil-service capacity is being strained, according to John S. Herold Inc. and Harrison Lovegrove Co. in their 2005 Global Upstream Performance Review. Reserves and production growth for 2001-04 among the companies surveyed was moderate, the firms report. Oil reserves were flat at 143.4 billion barrels while natural gas reserves grew 5% to 562.8 trillion cubic feet. Since 2000, gas reserves have grown by 100 trillion cubic feet while gas production is up 17.6%, according to the report. Producers' reserve-life index continues to slide, the firms add, while the cost of reserve replacement and finding and development (F&D) keeps climbing. "On a barrel-of-oil-equivalent (BOE) basis, the index has slipped in both the world outside North America and worldwide, while North America's has managed to creep upward slightly." The analysis shows that, in the past five years, F&D has risen 15%. The firms expect "further sharp advances...in 2005 and beyond." In the U.S., reserve-replacement costs rose from approximately an average of $8.15 per BOE in 2001 to approximately $10.20 last year. Some of the increased costs are the result of renewed interest in mature areas. "Upstream capital is no longer rapidly fleeing mature U.S., Canada and Europe; [these areas] experienced 20%-plus gains last year," the firms report. Investment in Africa, the Middle East and Asia-Pacific continued to grow but at a slower pace than in the past. As for South and Central America, investments declined in 2004. "...Strong wellhead pricing and a sea of 'black ink' is sparking a renaissance in North America and European upstream investment activity," the firms report. Among the major oils, Royal Dutch Shell was the most active spender in 2004 with $10.6 billion of total upstream capex, just ahead of ExxonMobil at $10.5 billion; BP ($9.8 billion); EnCana ($8.6 billion); PetroChina ($7.5 billion); ConocoPhillips ($6.6 billion); Chevron ($6.4 billion); Total SA ($6.3 billion); Statoil ($5.8 billion); and ENI ($5.7 billion). Capex was generally spent more on development than exploration. "Development outlays were up 14% to $117.4 billion while exploration, excluding acreage, was relatively stagnant at $27 billion." A great deal of spending was on buying growth: total proved acquisition outlays moved upward, jumping to $38.3 billion. Global upstream M&A activity shot up 50% last year while the worldwide deal count climbed to a five-year high. Other spending was on stock buybacks, which nearly doubled last year to $50 billion-far exceeding global spending on exploration. What E&P executives should do at this time is not get too comfortable, the firms advise. "The industry needs to avoid the complacency that can arise in times of plenty and avoid the value destruction that can stem from overly aggressive or irrational capital investment."