Oil and gas finding 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 when 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 US Securities and Exchange Commission. Finding costs are calculated by Evaluate Energy as costs incurred in exploration divided by additions to proved oil and gas reserves from extensions and discoveries.
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 but 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 fastchanging 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 (NYSE:XOM) addition of XTO's huge US gas reserves to its portfolio. You get…
