Development and exploration capex among the 100 largest domestic public oil and gas companies increased 17% in 2011 compared with the previous year, according to Global Hunter Securities’ annual Finding & Development (F&D) Cost Study.

Furthermore, according to the July 12 report, 2011 aggregate spending -- excluding acquisitions -- increased to $200.3 billion compared with $170.7 billion in 2010. During a five-year period from 2007 to 2011, average development spending had a compound annual growth rate (CAGR) of 6.6%.

Natural gas reserves in 2011 eroded as last year’s growth rate dipped to 2.6% compared with 9.5% in 2010, according to the study. “Capital was undoubtedly redirected to oil projects” as oil reserves increased 4.4% year-over-year, improving upon a five-year CAGR of 2.8%, the report stated.

Mike Kelly, lead analyst of the Global Hunter report, said, “In 2011, our group’s aggregate proved reserves totaled 99.7 billion barrels of oil equivalent (Boe) and are composed of 44.4% oil.”

Drillbit F&D costs, which have mostly been in a free-fall mode for the previous five years, had a moderate decline in 2011 vs. the previous year. “The cost to turn the bit to the right and book either a Mcf of or a Boe of proved reserves declined 7% year-over-year to $17.76 per Boe,” said Kelly. “Average drillbit F&D costs have declined by a staggering 33.6% during the last five years as the industry’s capital has been aggressively reallocated into unconventional resource plays.

“In these unconventional plays, efficiencies have continually improved over time and many plays have moved into an almost manufacturing-like development mode. The product of this shift has been a ramp in reserve additions per dollar of capital deployed,” he added.

While drillbit-specific F&D costs declined, the report indicated that increased acquisition costs drove total F&D costs higher. The group of 100 companies spent $262 billion and added 11.2 billion barrels (bbls) of reserves in 2011. The average total F&D cost was $19.27 per Boe, up 12% year-over-year and above the five-year average F&D cost of $18.27 per Boe. Pricey acquisitions drove this year’s F&D costs higher as companies paid an average $36.74 per Boe to acquire reserves, an increase of 50% year-over-year and 26% higher than the five-year average.

“The main culprit for rising acquisition F&Ds is the $43 billion spent on unproven acquisitions in 2011 -- also known as spending on acreage that doesn’t yield any proven reserves on day one. The aggregate spending on unproved acquisitions is up an amazing 188% over the last five years and again highlights the industry’s paradigm shift to focus on unconventional resource plays,” Kelly said.

Aggregated data collected from the 100 companies in 2011 include:

? More than 332 trillion cubic feet (Tcf) of natural gas reserves.

? More than 44 billion barrels (BBbls) of liquids reserves.

? An average daily production of 68 billion cubic feet (Bcf) of gas, which is about 20% of global production.

? 11.2 million barrels (MMBbls) of liquids, or about 12.5% of worldwide production.

? Cash flow of $1.96 trillion, which increased 27% year-over-year and is now larger than Russia’s gross domestic product (GDP), which is the 9th largest in the world.

The top five companies in 2011 with the lowest all-sources F&D cost per Boe were Evolution Petroleum Corp. ($1.65), Antero Resources ($2.64), Rosetta Resources Inc. ($4.58), PostRock Energy Corp. ($4.67), and BP ($4.98). “With the exception of Antero, the low-cost leaders were notably inactive in the acquisition market last year,” Kelly said.

Kelly also said that, in aggregate, the E&P industry needs higher oil and gas prices. On a per Boe basis with all-sources F&D costs of $19.27, future production costs of $15.96 and future development costs of $15.63, at least $31.59 per Boe is being spent on each unit of reserves.

“Given that the average cash flow per unit in 2011 was $39.51 per Boe, a fully loaded margin of only $20.24 per Boe is being generated once subtracting the all-sources F&D cost. The SEC’s fully taxed PV10 (standard measure) is even more onerous; in 2011 the average value per Boe of proved reserves was only $10.46. It certainly highlights how difficult this business is and the need for high commodity prices to make the economics work,” he said.

In conclusion, Kelly said that 2011 “was a good year to own an oilfield. The PV10 value per Boe of reserves for companies with more than 50% of their reserves consisting of oil was 83% higher than those that were majority gas-weighted -- $15.81/Boe vs. $8.64/Boe, respectively.

“This is hardly a shocker given that the average oil price used by our 100 companies to calculate its 2011 SEC PV10 value was $94.61, which was 21.4 times the price of natural gas, which came in at $4.41 on average. The BTU disparity between the two commodities is only about six times,” he said. “Investors appear well aware of this stat and are willing to pay 86% more for an oil company’s reserves on average than for reserves held by a gas company.”