Cost Of Oil

The U.S. oil and gas industry's costs of finding resources rose 35 percent last year amid the wild rise and fall in commodity prices, an Ernst & Young study released Thursday showed.

The three-year average cost per barrel of oil equivalent, excluding acquisitions of proved reserves, was $27.22. But in 2008 that spiked to $51.96.

"This validates that finding oil and gas reserves is very, very expensive," said Marcela Donadio, oil and gas sector leader for the Americas. She noted that cost also demonstrates why some companies have delayed final investment decisions on costly expansions or new projects, such as those in Canada's oil sands or deep-water exploration.

The study examined U.S. exploration and production results for 40 companies from 2004 through last year. The companies, which include oil majors as well as large and small to midsize independents, collectively hold 70 percent of U.S. oil reserves and 61 percent of U.S. natural gas reserves.

Overall costs, including acquisitions, rose 35 percent last year to $132.1 billion, the study said.

But oil reserves fell 7 percent to 15 billion barrels, largely because regulatory reporting rules required companies to book reserves that can be produced economically at the closing price on the last trading day of the year.

Last year that price was $44.60 a barrel -- far below the year-end 2007 price of $95.

The same rule forced reductions of 6.7 trillion cubic feet of booked natural gas reserves as well. Even with those write-downs, gas reserves rose 4 percent overall amid the boom in shale production last year.

However, starting at the end of 2009, companies can book reserves based on average annual price rather than a one-day snapshot. In 2008, that average was about $99 a barrel.

So as prices recover alongside the economy, reserves that were written off can be restored to companies' books as they become economical to produce again, said Charles Swanson, managing partner of Ernst & Young's Houston office.

"It certainly was a year to remember," he said.

Source - Rigzone