Sept. 2000 Vol. 221 No. 9  Drilling

Robert E. Snyder,  Editor

E&P spending survey; New MMS regulations

On July 25, Arthur Andersen released its 21st annual survey of exploration and production trends, Global E&P Trends 2000. The 144-page study is a review and analysis of revenues and profitability, capital spending, oil / gas reserves, and performance measures over the five-year period from 1995 – 1999, for 163 publicly traded companies with proved oil / gas reserves of more than 5 MMboe. As a group, these companies account for some 86% of total U.S. crude / NGL reserves, and 64% of U.S. gas reserves. The group includes 39 companies headquartered outside the U.S.

Victor Burk, Andersen’s Managing Partner for the Energy Industry said survey results generally represent the entire U.S. and international E&P industry except for the national oil companies, which may have performance trends that vary significantly from those of the survey companies.

For a summary of some key survey results: Worldwide upstream capital spending declined 5% to $91.9 billion, with decreases in all categories except proved property acquisition costs, which rose 72% to $30.3 billion, largely reflecting three major transactions outside the U.S. by Repsol, Norsk Hydro and Talisman. Worldwide E&D spending fell 22% to $61.6 billion, including a 34% decline in exploration spending to $13.4 billion.

U.S. upstream capital spending dropped 29% to $35.4 billion, with decreases in unproved property acquisition (67%), exploration (36%) and development (28%). Proved property acquisition costs were about flat at $7.6 billion, led by Devon Energy, Santa Fe Snyder and Apache.

   Revenue / operation results. Worldwide revenues from oil / gas producing activities increased 25% in 1999 to $149 billion, following 1998’s 24% drop to $119.2 billion. Upstream, after-tax profits bounced back to $33.2 billion from $4.5 billion in 1998. Of the 163 companies surveyed, 145 reported after-tax income, while only 18 reported losses.

U.S. revenues from upstream activities increased 16% to $47.1 billion, reflecting a 42% rise in average wellhead prices for oil to $15.58/bbl, and a 7% increase in gas to $2.07/Mcf. U.S. upstream, after-tax profits rose to $10.2 billion, compared to a $409.5 million loss in 1998.

   Investment performance. The surveyed companies experienced improvement in all measures of upstream investment performance. Worldwide reserve replacement costs (RRC) decreased 24% to $4.26/boe, with the highest RRCs reported in Asia-Pacific ($5.11/boe) and the U.S. ($4.99/boe). Finding and development costs (FDCs), excluding revisions, declined 23% worldwide to $6.27/boe; U.S. FDCs fell 34% to $6.49/boe. Proved reserve acquisition costs declined 14% worldwide to $3.61/boe, and 4% in the U.S. to $4.47/boe.

   Production replacement rates / costs. The worldwide oil production replacement rate, based on finding / development efforts and excluding revisions, rose to 92% in 1999, while gas production replacement rate declined to 98%, the lowest in the five-year period. The U.S. oil production replacement rate, reported on the same basis, declined to 69%, the lowest in five years, off from 93% in 1998. Gas production replacement rate decreased to 88%. Worldwide / U.S. production costs declined to the lowest levels in five years, dropping 4% worldwide to $3.73/boe, also declining 4% to $3.62/boe in the U.S.

Burk said, on releasing the study, that – despite the improved revenues, profits and cash flow that began in 1999 and are continuing into 2000 – E&P companies have been cautious about increasing capital spending. This is due to a combination of the hard lessons learned during the oil price collapse of 1998 and the E&P industry’s struggle to create value.

This leads to today’s situation – and the major challenge facing upstream companies – that while oil / gas prices have recovered and are at their combined highest level in history, E&D spending has not recovered at the same rate, and E&P company stock prices have lagged the price recovery by even more. If E&P companies cannot create value in the marketplace with oil prices at $30/bbl and gas at $4/Mcf, how will they create value when prices decline?

Burk says, "Research on 10,000 companies has found that those which create value understand all their assets – not just the physical ones. They must find ways to create and realize value in these total assets – the value that may not be recognized in their employees, their customers and their supplier relationships, as well as financial and organizational assets, such as intangibles, strategy and vision." For more information, or to order, call 800 872 2454 or 941 341 3020. Two Houston contacts are: James Petrie, Jr., 713 237 2357; and Kristie Steffek, 713 237 4838.

MMS proposes regulation revisions. The August issue of IADC’s Drill Bits says the U.S. Minerals Management Service has proposed a revision of its "Oil and Gas Drilling Operations regulations" contained in Subpart D of 30 CFR Part 250. Among the provisions of the notice is a requirement that BOP stacks include a blind shear ram within one year after effective date of the rule. IADC requested and obtained a 30-day extension of the deadline until October 19, for comments.

In addition to the proposed requirement for blind shear rams, the proposed rule would: 1) impose record keeping requirements for diverter tests similar to those required for BOPs; 2) propose use of maximum anticipated surface pressure for determining BOP test pressure; 3) incorporate the accumulator volumetric capacity provisions of paragraph 12.3 of API RP 53 by reference; 4) incorporate by reference, provisions of paragraphs 17.10 – .12 and 18.10 – .12 of API RP 53, regarding inspection, maintenance, and quality management of BOPs; and 5) retain MMS regulatory control over in-place design environmental criteria for MODUs and their electrical hazardous area designation.

Outside the scope of rule making, MMS is also soliciting comments on the addition of requirements addressing coiled tubing drilling operations and requiring drilling rigs to use automated pipe handling systems during drilling operations.

"These rule changes could have significant impacts on drilling contractors," IADC’s Alan Spackman says, "It’s important that IADC obtains your views." For more information or to help IADC develop a response, Contact Alan at: alan.spackman@iadc.org; Tel: 281 578 7171, ext. 207.