Technology Pushes Reserves, Profits Higher

Independents equipped with the technology and techniques needed to tap U.S. plays led the way toward a 9% increase in oil and gas reserves in 2013 amid slightly lower capital spending and strong commodity prices.

The findings were released June 24 in the 2014 U.S. Oil & Gas Reserves Study by Ernst & Young LLP (EY). The study examined exploration and production (E&P) spending and performance data for the largest 50 companies based on end-of-year reserve estimates.

Oil reserves increased to 25.4 billion barrels (Bbbl) by year-end 2013, up 2.1 Bbbl from the previous year. The jump marked a 52% increase from 2009, according to the study, with independents contributing the most. Gas reserves also increased 9%, to 5.4 trillion cubic meters (Tcm) (178.7 Tcf) by year-end 2013, rebounding from a drop in 2012 caused by downward reserve revisions prompted by low natural gas prices.

The study also revealed that discoveries and extensions for oil and gas reserves reached their highest levels in the study’s five-year period. Excluding purchases and sales, EY said the additions for oil reserves were 4.1 Bbbl in 2013 and contributed to an oil production replacement rate of 222%. As for gas reserves, extensions and discoveries of 846 Bcm (29.9 Tcf) were reported, with a gas production replacement rate of 229%.

“We are in an energy renaissance. I think that the key for companies that are operating in this environment today--in terms of their success--is one, being able to be cost effective and two, being innovative,” said Herb Listen, a U.S. oil and gas assurance leader for EY. “The companies that are the most cost effective and the most innovative in deploying this technology and exploiting the shale gas, NGL and oil are going to be the most profitable, and they are going to be the most successful companies out there.”

Compared to 2012, total upstream capex dropped 7% to $173.5 billion. EY attributed lower unproved property acquisition costs and lower exploration costs to the decline. Acquisition costs dropped to $22.8 billion from $33.9 billion, while exploration costs fell to $22.1 billion from $26 billion. The study showed that development costs increased slightly, going from $103.5 billion to $106.7 billion, as companies move from the purchasing property to targeting hydrocarbons in hopes of turning profits.

“An 11% increase in revenues and significant decrease in property impairments fueled a 53% increase in after-tax profits for the study companies in 2013 to $33.4 billion,” EY said. “An increase in oil production helped push revenues to $199 billion in 2013. … Production costs increased in 2013 mainly due to higher lease operating expenses, and many companies made strong investments in their 2013 operations with a plowback percentage of 125%.”

Key to the industry’s success has been technology, which John Russell, also an oil and gas assurance leader for EY, said is an area of focus for independents. He spoke of being impressed by how these companies tackle technology when entering a play.

“The first wells are expensive because what they are doing is coming up with the technology and strategy needed to unlock reserves from those reservoirs, and they are different for each one,” Russell said. “It is really interesting to see how the fracking changes, how the number of days on the well are decreasing. They are trying to drill more wells from one pad. And it’s really all about getting the costs down and increasing the returns.”

He later added that technology is partly behind the strong returns on investment being seen for some plays.

“When you start talking about these multiple fractures and horizontal drillings from one pad site, you can use the rig and drill several wells going in different directions, the returns are increasing,” Russell said. “[Companies] are really focused on the economics and not just going out in the middle of a field and drilling a vertical well and hoping to hit something. Lots of science and technology goes into this. I think that is what is driving the returns.”

Strong commodity prices are helping, too.

“There is no doubt that the single most influential factor around the profitability of an oil and gas company is commodity prices, which they don’t control,” Listen said. “With the opportunity for the U.S. to continue to decrease its dependence on foreign oil, be a leader in oil production in the U.S. again and with the prolific natural gas reserves that exist, there’s a lot of opportunity and a lot of reason to be bullish with respect to commodity prices. What companies do is they control what they can control, and what they can control is their costs and the efficiency of producing.”

Listen said oil and gas companies are turning more to small- and medium-sized oilfield services companies to deploy technology, “because perhaps they’ve got some technology or they are more nimble in being able to move their people to various places within the play.” Lower costs could also be among the reasons why EY said these types of oilfield services companies are in more demand today.

While successful unconventional shale plays were highlighted, opportunities are still available offshore, Russell pointed out. But there are heightened regulatory pressures and high operating costs.

The “tried and true” Gulf of Mexico operators still have great cash flow, and there are great reserves there; however, companies would like to see natural gas prices come up, Russell said, later adding “there are some big returns out there if you’ve got the capital structure to wait for the return.”