Worldwide finding and development costs on the rise
 
By OGJ editors 
HOUSTON, June 11 -- The worldwide oil and natural gas industry faces 
increasing challenges in replacing reserves and growing production, 
according to 2002 statistics from the Merrill Lynch Global Securities 
Research & Economics Group.

Recently, companies have announced missed production targets and 
have slashed 2003 production forecasts. The study covered integrated 
oil companies in developed and emerging markets along with US and 
Canadian exploration and production companies.

The study's participants had an aggregate market capitalization of more 
than $1 trillion. Combined 2002 production for the companies studied 
was 25 million b/d of oil and 76 bcfd of natural gas.

Finding, development costs 
Although technological advances led to lower finding and development 
costs in the early 1990s, F&D costs have increased since 1997, Merrill 
Lynch analysts said in the May 29 report.

Unless capital efficiency improves through renewed technology changes 
similar to those seen in the early 1990s, finding and development costs 
are likely to rise because of deteriorating returns within an aging 
resource base.

"Companies have already captured most of the benefits from earlier 
breakthrough technologies in mature areas, and are now required to 
increase their maintenance capital just to maintain production levels from 
their established production base," the report said.

Lower costs in emerging countries and the deepwater areas partially 
offset the struggle to replace reserves in mature areas, but companies 
are opportunity constrained in these lower-cost areas, analysts said.
"After a dip in F&D costs in 2000, costs have risen even more 
dramatically in both 2001 and 2002," they noted. Singe-year data 
showed 2002 F&D costs, excluding acquisitions, were $7.30/bbl or more 
than double 1997 levels.

Reserve replacement 
Reserves replacement also has been declining since the late 1990s 
because companies have chosen to limit capital spending instead of 
pursuing higher-cost projects.

"Despite the fact that oil prices have averaged over $23/bbl since 1997 
and $28/bbl since 2000, the integrated oil companies have 
conservatively established a normalized oil price of $18-20/bbl in 
determining whether they will pursue new projects. Our view is that a 
normalized oil price in the $24-26/bbl range is likely for the foreseeable 
future."

For the Merrill Lynch global oil universe, reserve replacement has 
declined from 130% of annual production in 1998 to 122% in 2002, 
excluding acquisitions and sales.

"Increasing F&D costs and flat capital spending suggest that industry 
reserve replacement figures will likely decrease further in the future," the 
study said.

Meanwhile, a growing proportion of reserve additions are in the proven 
undeveloped category, suggesting that the quality of the total reserve 
base may be deteriorating, analysts noted.

Spending, reinvestment 
Despite a surge in cash flow starting in 2000, the core integrated oil 
companies only recently increased total spending to 1997-98 levels of 
$54 billion/year, the report said.

"A reluctance to spend, coupled with higher F&D Costs have resulting in 
weaker production growth than many analysts had anticipated. Going 
forward, we see no signs that the industry intends to significantly 
increase its level of capital spending," Merrill Lynch analysts said.
They anticipate future disappointments in both individual company 
volume growth and also total volume growth from outside the 
Organization of Petroleum Exporting Countries.