Study: US Oil, Gas Companies Add To Reserves

An improved price environment combined with innovation, efficiency savviness and cost reductions combined to help 50 of the top U.S. oil and gas companies increase revenues and production while significantly growing oil and gas reserves in 2017.

This is according to EY’s latest U.S. oil and gas reserves and production study, which was released July 13. Both oil and gas reserves reached their highest levels since 2014 when the market downturn sent oil and gas prices tumbling, forcing companies to operate more efficiently to make money.

Of the 50 study companies, 41 reported oil production replacement rates of more than 100%. That’s up from only 29 in 2016. WildHorse Resource Development Corp. (NYSE: WRD) and Southwestern Energy Co. (NYSE: SWN) had three-year (2015-2017) oil production replacement rates of 2,989% and 1,124%, respectively, according to the study.

“What we’re seeing is even in the face of adversity and the challenges with pricing, the oil and gas companies in our study group have really focused on being efficient, being economical—having downed costs per barrel—and focusing on expanding their portfolio,” Herb Listen, Americas oil and gas assurances leader and partner for EY, said during a media call. “It’s showing in the growth of the reserves.”

The study showed oil reserves for the study companies jumped by 21% to about 29 billion barrels (Bbbl) in 2017 compared to the prior year. The increase was driven by significant discoveries and extensions, which skyrocketed by 76% to about 5 Bbbl.

The arrow also pointed upward for oil production, which jumped 5% to 2.4 Bbbl, with study companies reporting 1.7 billion net upward revisions.

Revenues were also up 32% to $135.9 billion for the study companies thanks to rising oil prices. Listen pointed out that prices increased from about $43 per barrel in 2016 to $51 in 2017.

“As those prices have increased and costs have come down companies have been able to revise their reserves upward based on those economics,” Listen said. He described the increase in reserves, due to more discoveries and extensions, as a reflection of companies’ ability to use their capital spending to procure and resource more crude reserves. “That is a huge takeaway in the study this year.”

Like oil, gas reserves rose by 19% to about 176 trillion cubic feet (Tcf) despite weak Henry Hub prices, which EY said had a monthly average below $2 per million British thermal units (MMBtu) in early 2016 but improved later that year and throughout 2017 to about $3.00 MMBtu.

Gas production for the companies participating in the study fell 7% to 12.5 Tcf, and those companies reported 9.9 Tcf net upward revisions as extensions and discoveries grew by 63%.

Speaking on gas reserves, extensions and discoveries rising despite lackluster prices, Listen said this might indicate the cost of producing such reserves have perhaps fallen year over year or maybe the cost of getting gas to market has dropped. “Perhaps there are better economics in other areas vs just in the gas price that are helping to lift up the economic viability of these discoveries” or the study groups could be focused more on Tier 1 acreage with abundant gas supplies and lower lifting costs, he said.

Falling Costs

The study revealed that oil and gas companies continue to bring down costs.

Proved reserve acquisition costs, finding and development costs and reserve replacement costs were all down. The latter—dollars needed to add a barrel of proved reserves—dropped to about $6.62 per barrel of oil equivalent (boe) in 2017, compared to $13.36 in 2016 and $16.79 in 2014.

“Some of this is obviously due to the efficiency and improvements that are occurring in the sector. Some of that is sustainable,” Listen said. “However, some of that is likely due to service cost reductions and probably can’t be sustained without continued stress on the service sector due to increasing labor costs and services costs.”

There was not enough information available on the companies’ public disclosures to delineate reasons for the cost reductions or to what degree certain efficiencies had on cost cuts, but technology and innovation are playing roles—a trend EY has been talking about in its studies in recent years, according to Listen.

Companies have been drilling longer laterals and adjusting completion techniques. Listen mentioned advances in rigs. “One rig can do what, for example, what three, four or five used to be able to do in 2012, 2013, 2014. You just add up your costs per rig and you think about those costs in 2014 vs today just due to the improvements in technology and improvements in the shale manufacturing process and so forth,” he said.

The study, which was based on information reported by publicly-traded integrated companies and independent companies in annual reports filed with the U.S. Securities and Exchange Commission, also showed:

• Capex grew 32% to $114.5 billion with growth evident in all spending categories by led by exploration and development;
• Companies drilled 30% more development wells and 23% more exploration wells in 2017 compared to the prior year; and
• Impairments dropped 47% to $10.2 billion, the lowest since 2013, as oil prices further stabilized.

Looking Forward

EY pointed out that U.S. crude oil production is expected to rise to a record average high of 10.8 MMbbl/d in 2018 and increase again in 2019 to 11.8 MMbbl/d, becoming the world’s biggest oil producer. Likewise, gas production is also forecast to increase to a record 81.2 Bcf/d in 2018 and to 83.8 Bcf/d in 2019.

“The EIA June 2018 Short-Term Energy Outlook projects average annual WTI prices of US$64.5 per barrel for 2018 and US$62 per barrel for 2019, which, on average, is 24% higher than 2017 WTI prices of US$51 per barrel,” according to the study. “Projections for average annual Henry Hub prices are US$3.00 per MMBtu for 2018 and US$3.1 per MMBtu for 2019.”

What does this mean in terms of reserves?

“My perspective is that the study companies in this sector have proven time and time again to be innovative and to be resilient in the face of adversity and that’s what companies in this industry had to face over the last several years,” Listen said.

But he anticipates that it will be harder for companies to drive down costs as much as they have in recent years. Listen said he doesn’t necessarily expect to see much efficiency gains going into next year in terms of reserve additions—at least not to the magnitude seen in 2017.

“I do think there is still continued room for improvement and that there will be reserves growth as companies continue to develop and explore but I don’t expect that to come from better economics absent crude oil prices going up,” he said. “It’s going to be from true drillbit development, continued development and exploration of the resources.”

Velda Addison can be reached at vaddison@hartenergy.com.