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Financial Post (Canada): Global oil reserves up only 1% last year

Canada’s Oilsands Sole Booster, Study Says

Claudia Cattaneo, Financial Post
Published: Thursday, August 30, 2007

CALGARY — Record global oil and gas profits of US$243-billion and record spending of US$401-billion have resulted in a marginal 1% increase in world oil reserves last year — all of it coming from a 1.9-billion-barrel addition from Canada’s oilsands, according to a new study.

Without Canada’s contribution, 228 public oil and gas companies active globally and included in the study would have collectively produced more oil than they found, John S. Herold, a U.S.-based independent petroleum research company, and Harrison Lovegrove & Co., a global oil and gas advisory firm, said in the 2007 Global Upstream Performance Review, released yesterday.

“With many prospective regions still off-limits, oil reserve and production growth remains infinitesimal,” says the study, the 40th conducted annually by the two organizations and based on data filed with the U.S. Securities Exchange Commission and similar agencies worldwide.

“Global oil reserves would have fallen by 2.1% over the last two years without a 6.4 billion barrel increase in Canada. Oil production barely budged from 2005.”

The industry had disappointing reserve addition results despite looking hard for new deposits: Exploration spending grew by 39%, the largest jump in five years.

Meanwhile, with too much cash from high oil prices chasing too few prospects, oil and gas companies spent more money buying back their stock in the past two years than they did acquiring proved reserves, the study found. Dividends in 2006 reached a record of US$83-billion and share repurchases increased to US$88-billion.

“The industry has been able to generate enormous wealth for its shareholders over the last several years, both from the upstream and downstream sectors,” the report says. “However, questions are remaining as to the sustain-ability of this performance. We see the primary challenges lying in reserve maintenance, particularly for oil, and in controlling the costs of finding and producing hydrocarbons in a fiercely competitive environment.”

While high oil prices boosted industry revenue to US$832-billion, US$133-billion higher than in 2005, a greater proportion ended up in government coffers, or 37% of gross revenue, up from 27% four years ago, in the form of production-related taxes or income taxes, but not including royalty payments.

As accessibility to many regions declined, investment in Canada and the United States grew to 50% as a percentage of all investment in 2006, from 43% in 2002.

Companies such as EnCana Corp. have sold international assets and repatriated spending in recent years to North America, particularly to the oilsands, where projects are seen as politically and fiscally secure.

Oil majors such as Anglo/Dutch Royal Dutch Shell PLC, French Total SA and Norwegian Statoil ASA are also investing heavily in the unconventional deposits.

Despite record profits last year, the sector overspent its cash flow for the first time since 1999 while margins were lower after rising for three years, as all types of costs soared.

“Rising commodity prices are masking the fact that investment returns are under pressure,” the study says.

“Net income as a percentage of book value of oil and gas assets declined in 2006 following three years of gains. Barring a drop in drilling rates and oil-field services costs or an increase in commodity prices, we expect that profitability will slip again during 2007.”

The challenges are heating up the debate over peak oil, the report says.

“Without expressing a position on the matter, we believe that the issue has become part of the industry’s long-term planning,” the study says.

“If the peak oil theory is correct, and a decline in world production is imminent, a company must choose among four alternatives — try to become a dominant participant, find a niche operational talent, harvest assets or liquidate quickly.”

The picture is brighter for the natural-gas industry globally. Reserves and production grew by 3% in each of the past four years, thanks to the success of so-called “resource plays” that rejuvenated the U.S. sector and growing liquefied natural-gas operations in the Asia-Pacific region.

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