Despite skyrocketing commodity prices, in 2008 oil and gas companies marked increased E&P costs, decreased profits and a decline in ending oil reserves, according to Ernst & Young’s recently released U.S. E&P Benchmark Study. The survey included 40 integrated and independent oil and gas companies representing about 70% of total domestic oil reserves and 61% of gas reserves.

Proved-property acquisition costs decreased in 2008, but overall capital spending increased by some 35% over 2007 spending to $132.1 billion, says Marcela Donadio, Americas oil and gas sector leader for Ernst & Young.

“The data tells us the companies in this group are clearly maintaining a strategic, long-term vision in their capital expenditures. We expect to see some tempering of the capital expenditures in 2009, but we believe the industry continues to focus on long-term strategies despite relatively low commodity prices.”

Although the surveyed companies’ 2008 revenue grew 35%, to $183.3 billion, increases in production costs and depreciation, depletion and amortization (DD&A) led to an 8% decline in after-tax profits, from $42.8 billion in 2007 to $39.3 billion in 2008.

“Production costs have doubled since 2004, and have remained at an all-time high throughout 2008,” Donadio says. DD&A costs increased from $30.2 billion in 2007 to about $67.8 billion in 2008.

Meanwhile, negative oil-reserves revisions, mostly due to write-downs in reserves valuations driven by lower commodity prices, led to a 7% decline in 2008 ending reserves to 15 billion barrels of oil from 16.1 billion in 2007. However, oil production showed a 1% increase in 2008.

Negative revisions of 6.7 trillion cubic feet (Tcf) were recorded for gas reserves in 2008, but ending reserves still grew 4%, from 139.9 trillion in 2007 to 145.2 trillion in 2008. Gas production increased in each of the past five years, and grew 8% in 2008. The gas all-sources production-replacement rate was 149% in 2008.

Finally, with low year-end prices forcing many companies to reduce or revise reported reserves, finding and development costs per barrel of oil equivalent “increased dramatically in 2008,” from $14.51 per barrel equivalent in 2007 to $39.58 in 2008. Also, production costs grew 25%, from $11.81 per barrel equivalent in 2007 to $14.72 in 2008.