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Houston Chronicle: Reserves Not Replaced at 100 Percent

June 21, 2007, 2:53PM

By JOHN PORRETTO AP Business Writer
© 2007 The Associated Press

HOUSTON — The world’s major oil companies replaced reserves at levels below 100 percent for the third straight year in 2006, while costs to find and produce the key asset continued to rise, a new analysis shows.

Reserve replacements last year, excluding acquisitions and divestitures, were 91 percent, slightly below the 92 percent replaced in 2005, according to a report released Thursday by investment bank Bear Stearns & Co.

At the same time, the companies’ search and development costs rose to $13.63 per barrel of oil equivalent, up 28 percent from 2005, the report said.

Reserve replacements represent the ratio of reserves found over production for a given period. Analysts typically say a company’s reserves replacement should average more than 100 percent over a three- to five-year period to indicate growth.

“The major oils continue to record reserves in large blocks, but with less frequency,” the report said. “The timings of these bookings causes swings in reserve-replacement performance.”

Jeff Tillery, an analyst with Pickering Energy Partners in Houston, said declining reserves could have some effect on rising gasoline prices, particularly as worldwide demand grows. But he noted companies such as Irving, Texas-based ExxonMobil Corp., Royal Dutch Shell PLC and others majors produce a small portion of the world’s oil and gas compared with government-controlled national oil companies.

The Bear Stearns report also noted that oil and natural gas production by the majors rose 4 percent last year from a year earlier, lifted in part by acquisitions such as ConocoPhillips’ $35.6 billion purchase of Burlington Resources Inc. and Occidental Petroleum Corp.’s $3.8 billion takeover of Vintage Petroleum Inc.

The report said finding and development costs continue to be influenced by the need to extract oil from more technically challenging areas, such as deeper waters and rugged terrain.

“Inflationary pressures stemming from a tight market for deepwater rigs, labor and materials also took a toll,” Bear Stearns said.

Looking ahead, the investment bank said it expects reserve bookings to “remain lumpy” in 2007, and for replacements among the major oil companies to remain mixed. Over a period of five years to 10 years, Bear Stearns said replacement-booking levels are likely to be in the 100 percent to 110 percent range.

“In other words, we have confidence that the exploration efforts being undertaken now will pay off in the near future,” the report said.

Of some of the world’s major integrated oil companies, Bear Stearns noted:

_BP PLC was a top performer in 2006, and its project pipeline appears solid, as new developments in Angola and the Gulf of Mexico progress.

_Chevon Corp. has not fully replaced reserves since 2003 but showed improvement last year based on reserve additions in the United States, Bangladesh, Kazakhstan and elsewhere.

_Exxon Mobil should replace full production in 2007 with bookings from major projects in Angola, Nigeria, Qatar, Norway and Australia.

_Royal Dutch Shell has a portfolio of projects that could add meaningful reserves in coming years.

_Houston-based ConocoPhillips has a 10-year average reserves replacement of 95 percent, excluding acquisitions, and reserve additions could lift this year’s level to 100 percent.

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