IHS Herold/Harrison Lovegrove Study Finds Global Oil & Gas Reserves Fall Despite Record Spending in 2009

2009 Global Upstream Performance Review Reveals Profits Soared in 2008, but Margins Continued to Shrink

• Press Release
• Source: IHS Herold Inc.
• On 10:00 am EDT, Wednesday September 23, 2009

NORWALK, Conn. & LONDON--(BUSINESS WIRE)--The worldwide upstream investment of 232 oil and gas companies increased 21 percent to $492 billion in 2008, according to the 2009 Global Upstream Performance Review, released by oil and gas research firm IHS Herold Inc. and upstream corporate advisor Harrison Lovegrove & Co. Ltd., a Standard Chartered group company. Despite record development spending, up 23 percent from 2008, worldwide oil and gas reserve replacement rates fell in 2008 to 88 percent of production, the first year since 2004 in which production was not replaced. Total worldwide oil and gas reserves were 0.4 percent lower at year end 2008 as a 3 percent increase in gas reserves was more than offset by a 4.4 billion barrel decline in oil reserves. Acquisition spending fell 30 percent from 2008 as the M&A market collapsed over the course of the last five months of the year. But unproved acquisition outlays more than doubled to $62.4 billion and surpassed proved outlays for the first time.

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“Higher prices drove revenues 31 percent higher to $1,232 trillion,” said Robert Gillon, IHS Herold senior vice president and Insight Leader. “But net income gained by a more modest 24 percent, held back by rapidly rising depreciation charges. DD&A was driven higher by escalating finding and development costs, which soared 66 percent to $25.50 per barrel of oil equivalent (boe).”

Standard Chartered Managing Director Rodney Schmidt commented, “With very strong commodity prices in 2008, the industry generated record cash flow of $590 billion from oil and gas operations. This was up 36 percent from 2007 and exceeded capital spending by roughly $100 billion. However, with upstream revenue and cash flow for 2009 already well off of last year’s levels, many in the industry face some serious challenges for investments and strategies going forward.”

The IHS Herold/Harrison Lovegrove study found returns to oil industry shareholders were impacted by the plunge in commodity prices in late 2008. Dividends rose to a record level, exceeding $100 billion for the first time, but common share repurchases were 23 percent lower, falling for the first time since 2004. As revenue fell in the second half of the year and financing options closed, many companies reduced or ended stock buyback programs to conserve increasingly scarce cash.

Overall Findings

The 2009 Global Upstream Performance Review, IHS Herold’s 42nd annual study of 232 oil and gas companies based on publicly available data filed with the U.S. Securities and Exchange Commission (SEC) and other similar agencies worldwide, measured industry performance in a number of key areas:

• Prices & Revenues – Worldwide revenues increased by $293 billion, implying an average realized price of $61.91 per barrel, a 30 percent increase from 2007.
• Cash Flow & Capital Spending – Cash flow per boe increased 35 percent to $29.66 per barrel. For the second consecutive year, cash flow exceeded investment.
• Exploration & Development – Development spending increased 23 percent, accounting for 63 percent of total investment, about the same 2007. Exploration spending increased 21 percent and has doubled since 2005 total.
• Mergers & Acquisitions – Proved acquisition spending dropped 30 percent to $44 billion as the M&A collapsed in the last five months of 2008, particularly in North America. Competition for unconventional resources was up sharply, led by the US region, with global spending for unproved acquisitions more than doubling to $62 billion.
• Production & Reserves – Oil reserves declined nearly 3 percent, primarily due to a 5.2 billion barrel decline in revisions due to the steep drop in commodity prices. Natural gas reserves grew at the 3 percent rate of the past five years, but production accelerated nearly 5 percent to 44.2 Tcf.
• Reserve Replacement – Reserve replacement and finding and development costs surge 70 percent and 66 percent to $23.44/boe and $35.50/boe, respectively, due to a sharp drop-off in positive reserve revisions. Reserve additions, both from all sources and via the drill-bit, were down over 20 percent.
• Profits – Net income per boe rose 24 percent to $16.07/boe, but margins were lower for the fourth consecutive year.

Key regional findings of the 2009 Global Upstream Performance Review are:

• Negative revisions in the U.S. caused replacement costs to triple and replacement rates to plunge. Unit profitability declined for the third consecutive year despite robust price realizations.
• Mineable bitumen reserve additions in Canada offset conventional and in-situ oil sands reserve declines. In contrast to the U.S. region, per unit profits were higher as cost increases were more moderate than gains in realized prices.
• Oil and gas reserves in Europe continued to decline sharply as companies redirect cash flows to other regions. The reserve replacement rate hit a ten year low.
• Higher acquisition activity in the Africa & Middle East region pushed capital spending up 25 percent. Positive reserve revisions from PSCs and PCAs increased reserves and slashed finding costs.
• Asia-Pacific remained the most profitable region despite higher taxes in China. The significant excess cash flow generated should shrink as final investment decisions are made on several large LNG projects.
• Capital spending in South & Central America surged 34 percent and profits soared as the tax rate fell. Oil reserves continued to decline, but major reserve bookings from pre-salt development are on the horizon.
• Capital spending dipped 8 percent, as Russia & Caspian was the only region with lower investment. Negative oil reserve revisions severally impacted replacement rates and drove costs higher.

About IHS Herold

Founded in 1948, IHS Herold Inc. is a specialized research and consulting firm focusing on valuation, strategy, and performance measurement of the world’s leading oil and gas companies. IHS Herold closely monitors the world’s energy capital markets and the dynamic merger, acquisition, and divestiture marketplace for energy assets. IHS Herold is part of IHS (NYSE: IHS - News), a leading global source of critical information and insight, dedicated to providing the most complete and trusted data and expertise. IHS product and service solutions span four areas of information that encompass the most important concerns facing global business today: Energy, Product Lifecycle, Security and Environment. By focusing on customers first, IHS enables innovative and successful decision-making for customers ranging from governments and multinational companies to smaller companies and technical professionals in more than 180 countries. IHS has been in business since 1959 and employs approximately 4,000 people in 20 countries.

About Harrison Lovegrove & Co.

Harrison Lovegrove & Co. Limited (“HLC”) is a leading oil and gas corporate finance advisory firm, which became part of Standard Chartered Bank in December 2007. Their combined advisory team has over 50 dedicated oil and gas professionals based in London, Houston, Washington, Calgary, Moscow, Perth, Dubai, and Singapore. They advise oil & gas companies in developing their businesses through acquisitions, divestitures, swaps of upstream and midstream assets and subsidiaries, and the takeover and defence of listed companies. Standard Chartered also has a leading track record of providing acquisition and project finance and other investment banking products to oil & gas companies, principally in its footprint area of Asia, Africa, and the Middle East. HLC is authorised and regulated in the United Kingdom by the Financial Services Authority. HLC provides services in the United States through its FINRA member affiliate, Standard Chartered Securities (North America) Inc.

Copyright © 2009 IHS Herold Inc. (“IHS Herold”). All rights reserved. Herold Press Release is published by IHS Herold Inc., 14 Westport Avenue, Norwalk, CT 06851, USA. The information contained herein has been obtained from sources believed to be reliable, but IHS Herold does not guarantee their accuracy or completeness. No information or opinions contained herein constitutes a representation or solicitation for the purchase of any securities of the companies mentioned herein. From time to time, IHS Herold and/or its officers and employees may have long or short positions in the securities mentioned herein or during the past year may have transacted in securities of the companies mentioned.

IHS Herold Inc.
Tom Biracree, 203-847-3344
tbiracree@herold.com