In late June, Ernst & Young published a global E&P benchmark study that takes a look at how 40 E&P companies are performing on a number of levels. One of the things the report evaluates is how increasing costs are impacting production.

Many assume that the high barrel price for oil means huge profits across the board for oil and gas companies, operators included. The assumption that follows is that operators will invest that large influx of cash in E&P, with the end result being higher production levels.

Though operators are not making as much money as service and supply companies, they are making decent profits. However, the profits are not nearly as high as one might imagine. With exploration costs increasing 165% from 2003 to 2007 and development costs going up 180% over the same period, the amount of money it takes today to carry out E&D activities is enormous.

“Production costs are going up quite a bit,” said Marcela Donadio, Americas oil and gas sector leader for Ernst & Young. “E&P companies are working to get the most out
of producing assets.”

The Ernst & Young study evaluated publicly available information for 40 E&P companies with US operations. “These companies hold approximately 74% of total US
oil reserves and 68% of US gas reserves based on Energy Information Administration data,” the company said. The report is the result of examining E&P trends surrounding capital spending, revenues, oil and gas reserves, and performance measures.

The report is extensive, but the following summarizes some of the key findings:
• Exploration costs and development costs more than doubled from 2003 to 2007.
• Companies have been making significant investments in existing properties, with an 83% plowback percentage over the five-year period.
• Total costs incurred in 2007 were US $96.6 billion, 16% lower than in 2006, as proved and unproved property acquisition costs decreased significantly.
• Finding and development costs per barrel of oil
equivalent (boe) and proved reserve acquisition
costs per boe had double-digit decreases in 2007
compared to the five-year period highs experienced
in 2006.
• Revenues from oil and gas producing activities increased 12% in 2007 to $141.5 billion. Results of operations increased only 4% in 2007, however, primarily due to rising production costs and an increase in depletion, depreciation, and amortization. Production costs per boe continued to climb, showing a 15% increase in 2007 to $11.71 per boe.
• Oil production has remained flat over the past four years at 1.2 billion bbl. The oil production replacement rate was 100% in 2007. The finding and development reserve replacement rate for oil was 119%.
• Gas production grew 7% in 2007, while ending gas reserves increased 7% to 138.6 Tcf. Gas production replacement rates in 2007 well exceeded those for oil.

“The US gas market is healthy,” Donadio said, attributing the industry’s success in great part to unconventional gas in the Barnett Shale and the Rocky Mountains and to coalbed methane.

The study stops short of forecasting results for 2008, but with price volatility still a serious factor, it appears that this year’s results might well turn out to be more of the same.