U. S. Oil and Gas Finding and Development Costs, 1973-82 -Lower 48 Onshore and Offshore

Abstract

Summary This paper presents and discusses the results of two very different methods of estimating oil and gas finding and development costs. The first method derives surrogate finding costs from the proved reserve additions and revisions reported during a given year and the reported expenditures in the same year. The second method derives ultimate finding costs from the estimated ultimate reserves applicable to a discovery year with all past, current, and future costs for finding and developing those reserves. The calculations for both methods use published data on oil and gas reserves and on the costs of acquiring, exploring, and developing oil and gas properties for the period 1973–82. All data are based on onshore and offshore period 1973–82. All data are based on onshore and offshore activities in the lower 48 states. An expenditures lag model is used in the second method to adjust expenditures by lag and lead times to approximate a match with the reserves discovered and developed over each period. The model captures additional information that is relevant to current planning and analysis by showing the expenditure phases that usually are masked in incurred expenditure data. For instance, incurred exploration costs peak in 1981, then decline, while lagged data show a continuing rise through 1982. The data also show a continuing increase in incurred development expenditures, while lagged expenditures peaked in 1980, then declined. Introduction Development of U.S. oil and gas reserves depends on the profitability of the industry, which in turn depends on profitability of the industry, which in turn depends on many factors, including sales prices for oil and gas and the costs of finding, developing, and producing reserves. Finding and development costs for oil and gas reserves affect investment levels and are important to investors, company managers, and policy makers. These costs, while important, are elusive because reliable data on past and future discoveries are not available and because costs are not matched properly with discoveries, Discussion of Definitions There is no generally accepted definition of finding costs, nor is there an agreed-upon method for determining the costs that should be included in the computation. Finding costs ideally would include all costs of acquiring properties, exploring, and developing the reserves discovered. properties, exploring, and developing the reserves discovered. The reserves preferably should be matched with the costs incurred for those reserves. However, estimating finding costs is difficult for the following reasons. Reserve Estimation The estimation of ultimate reserves is imprecise. Recoverable reserves from a reservoir are known only when all quantities have been recovered and the property ceases to produce, which occurs long after exploration and development concludes. Reserve estimates are least reliable at the discovery date and must be revised continually over the productive life of the property. Equivalency of Oil and Gas Unit finding costs depend on a unit of measure that converts crude oil, condensate, natural gas, and natural-gas liquids (NGL) to a common basis in crude-oil-equivalent barrels. Because these products vary in energy content, quality, and sales prices, products vary in energy content, quality, and sales prices, equivalency does not exist. Significant differences in finding costs can result solely from use of different units of equivalency and the mix of oil and gas. Royalties Finding costs depend on the positions of those who make the computation. From the producer's viewpoint, finding costs are based on exploration and development costs divided by the quantities of reserves that accrue to his benefit after the deduction of royalties. The producer's profitability depends on recovery of costs from producer's profitability depends on recovery of costs from less than 100% of the discovered reserves. From a national viewpoint, unit finding costs are lower because costs are spread over a greater number of units, including royalty units. Exploration, Development, or Both Many have viewed finding cogs associated with the exploration phase as a better measure of the true cost of finding reserves. However, the development work that follows through extensions also may result in reserve additions. The development work may prove that the initial estimates were too high in other cases, so downward revisions are needed. With only exploration costs considered, we did not feel that the costs would truly reflect the financial commitment needed to find and to develop reserves. JPT p. 2040