US companies explore Wall St. for oil reserves
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NEW YORK (Reuters) - Big U.S. oil and gas companies added more oil reserves in 2005 by using their checkbooks instead of their drill bits, and paid top dollar for the privilege, analysts said on Friday.
So far, it appears the major companies that replaced more than 100 percent of their production last year did so by buying fields rather than finding them -- a trend that could quietly usher in shrinking global reserves.
"Basically, (an oil field is) like beachfront property. It's very hard to come by," said Fadel Gheit, senior vice president for oil research at Oppenheimer & Co.
Oil prices sprang to a record high last year above $70 a barrel, due largely to a lack of global spare production capacity after years of robust demand growth.
Gheit said companies are facing higher exploration and development costs which has made the prospect of buying up smaller rivals or operations more appealing -- but there aren't many bargains left.
"Even the best in class are not replacing reserves as cheaply as they were a year ago. All the low-hanging fruit is gone," he said.
Chevron Corp. (CVX.N: Quote, Profile, Research), whose global reserves fell 6 percent in 2004 to 11.25 billion barrels of oil equivalent (boe), won U.S. independent oil and gas producer Unocal Corp. over Chinese National Oil Company and Italian group ENI (ENI.MI: Quote, Profile, Research).
Chevron paid $16.4 billion for Unocal, which pushed up its reserve replacement ratio to 175 percent of production. Without Unocal's oil and gas reserves, Chevron said its reserve replacement would have been low.
ELEPHANT DISCOVERY
"Part of the reason (companies are having trouble adding real reserves) is that there has not been an elephant discovery -- one over a billion barrels -- for 15 years," said Gheit.
Even the most recent big discoveries are found in areas that are difficult because of geology or other factors. So companies are forced to be creative in adding reserves as production declines.
"The U.S. oil production reached its peak in November 1970," said Charley Maxwell, oil analyst at Weeden Co.
Maxwell said that all the easy reserves -- those close to the surface with infrastructure for moving it out -- have been exhausted. "A lot of the world has been explored. Now all we have left are the trouble spots," he said.
ConocoPhillips' return to Libya after being ordered out by President Reagan almost 20 years ago helped it replace its production with more than twice as much in reserves.
Libyan reserves and a growing stake in Russian oil company Lukoil helped it replace 230 percent of its oil and gas production in 2005, adding 1.553 billion boe in 2005 to proved reserves.
The company will also close soon on its $36 billion purchase of U.S. independent Burlington Resources, adding about 2 billion boe to its reserve base.
Without these factors, ConocoPhillips said it would have replaced about 100 percent of production.
While the low-hanging fruit may be gone, the size of companies ripe for the picking is larger than ever, according to Gheit.
"Any company with a market capitalization of less than $50 billion is a target," he said.
NEW FIELDS DOWN THE ROAD?
While replacing reserves had a lot to do with mergers and acquisitions in 2005, some analysts say that companies may be locking in higher oil prices to fund new exploration projects that could spell real reserves in years to come.
"I expect companies to more than replace production as we see higher prices and higher activity," said Steve Enger, an oil analyst with Denver-based Petrie & Parkman.
He said that larger companies are increasing their 2006 exploration and development spending from the year earlier.
Enger said that while the lag time between oil prices rising and drilling increasing is less than a year in the United States, it can be far longer for reserves to be booked for some of the larger, foreign plays.
"Looking at some of the large increments of production outside of OPEC, offshore Africa, it could five to 10 years to production," he said.
NEW YORK (Reuters) - Big U.S. oil and gas companies added more oil reserves in 2005 by using their checkbooks instead of their drill bits, and paid top dollar for the privilege, analysts said on Friday.
So far, it appears the major companies that replaced more than 100 percent of their production last year did so by buying fields rather than finding them -- a trend that could quietly usher in shrinking global reserves.
"Basically, (an oil field is) like beachfront property. It's very hard to come by," said Fadel Gheit, senior vice president for oil research at Oppenheimer & Co.
Oil prices sprang to a record high last year above $70 a barrel, due largely to a lack of global spare production capacity after years of robust demand growth.
Gheit said companies are facing higher exploration and development costs which has made the prospect of buying up smaller rivals or operations more appealing -- but there aren't many bargains left.
"Even the best in class are not replacing reserves as cheaply as they were a year ago. All the low-hanging fruit is gone," he said.
Chevron Corp. (CVX.N: Quote, Profile, Research), whose global reserves fell 6 percent in 2004 to 11.25 billion barrels of oil equivalent (boe), won U.S. independent oil and gas producer Unocal Corp. over Chinese National Oil Company and Italian group ENI (ENI.MI: Quote, Profile, Research).
Chevron paid $16.4 billion for Unocal, which pushed up its reserve replacement ratio to 175 percent of production. Without Unocal's oil and gas reserves, Chevron said its reserve replacement would have been low.
ELEPHANT DISCOVERY
"Part of the reason (companies are having trouble adding real reserves) is that there has not been an elephant discovery -- one over a billion barrels -- for 15 years," said Gheit.
Even the most recent big discoveries are found in areas that are difficult because of geology or other factors. So companies are forced to be creative in adding reserves as production declines.
"The U.S. oil production reached its peak in November 1970," said Charley Maxwell, oil analyst at Weeden Co.
Maxwell said that all the easy reserves -- those close to the surface with infrastructure for moving it out -- have been exhausted. "A lot of the world has been explored. Now all we have left are the trouble spots," he said.
ConocoPhillips' return to Libya after being ordered out by President Reagan almost 20 years ago helped it replace its production with more than twice as much in reserves.
Libyan reserves and a growing stake in Russian oil company Lukoil helped it replace 230 percent of its oil and gas production in 2005, adding 1.553 billion boe in 2005 to proved reserves.
The company will also close soon on its $36 billion purchase of U.S. independent Burlington Resources, adding about 2 billion boe to its reserve base.
Without these factors, ConocoPhillips said it would have replaced about 100 percent of production.
While the low-hanging fruit may be gone, the size of companies ripe for the picking is larger than ever, according to Gheit.
"Any company with a market capitalization of less than $50 billion is a target," he said.
NEW FIELDS DOWN THE ROAD?
While replacing reserves had a lot to do with mergers and acquisitions in 2005, some analysts say that companies may be locking in higher oil prices to fund new exploration projects that could spell real reserves in years to come.
"I expect companies to more than replace production as we see higher prices and higher activity," said Steve Enger, an oil analyst with Denver-based Petrie & Parkman.
He said that larger companies are increasing their 2006 exploration and development spending from the year earlier.
Enger said that while the lag time between oil prices rising and drilling increasing is less than a year in the United States, it can be far longer for reserves to be booked for some of the larger, foreign plays.
"Looking at some of the large increments of production outside of OPEC, offshore Africa, it could five to 10 years to production," he said.
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