Worldwide capital spend among oil and gas companies up despite profits being down

A new study of global oil and gas reserves from one of the “Big Four” accounting firms EY finds that worldwide expenditure among oil and gas companies increased 13% in 2012, despite relatively flat upstream revenues and a fall in upstream profits.

The study, which analyzes five years (from 2008 to 2012) of worldwide and regional exploration and production results for 75 companies, finds that growth in spending was because of strong exploration and development activity.

Spend on exploration went up 14% and on development went up 22% in 2012, says the report.

Dale Nijoka, Global Oil & Gas Sector Leader at EY, told the press:

“Strong capital spending has resulted in the discovery of substantial new reserves.However, profits suffered in 2012 as an oversupply of gas reserves has kept prices low in North America. With increases in global demand, these new additional reserves will pay off over time.”

Reinvestment in oil and gas operations varied widely

Although total spending in 2012 was up for all regions covered by the study, the amount reinvested in oil and gas operations varied widely among them over the 2008-2012 period.

In percentage terms, the overall worldwide plowback was 54% over the five-year period, with the US showing the highest level at 123% and Europe the lowest at 31%. (Plowback is the ratio of total capital expenditure to revenues less production costs.)

For the companies covered by the study, the total worldwide capital expenditure in 2012 was US$541 billion.

Although 2102 saw strong growth in exploration spending and development spending, this was offset somewhat by falls in property acquisitions.

Spending on exploration and development combined grew by 20% in 2012 and by 48% from 2008 to 2012.

Years of underinvestment in oil and gas explorations

Nijoka notes:

“Many years of underinvestment in oil and gas operations will take a toll on future production and reserve growth. Recent increases in spending in Africa, the Middle East and Europe will need to be sustained or even further increased in the coming years to see a turnaround in these regions.”

The report compiles and analyzes information that companies make publicly available in their annual reports, or that is disclosed in annual reports that companies file with the US Securities and Exchange Commission (SEC).

The report highlights that:

  • Revenues and profits: global after-tax profits for the companies covered by the study were US$268.4 billion in 2012 which is down 16% on 2011. Combined oil and gas production rose 2% in 2012, and revenues rose a modest 1%.
  • Oil reserves: global end-of-year oil reserves for the companies in the study went up 3% in 2102, with Canada and the US reporting the largest increases. Oil production in Europe fell as recent capital spend has not been enough to maintain the reserve base, says the report.
  • Gas reserves: global end-of-year gas reserves for the companies in the study fell 2% in 2012. Additions reported as extensions and discoveries totaled 64.8 trillion cubic feet but were offset somewhat by downward revisions due mainly to low prices for natural gas in the US and Canada. Natural gas production rose 3% in 2012, with the US reporting the largest rise.

The 75 companies included in the report are considered generally representative of the exploration and production industry as a whole, although EY notes that “many national oil companies do not publicly disclose financial and operational data and their performance trends may vary significantly.”