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IHS Herold/Harrison Lovegrove Study Finds Record Oil & Gas Development Spending, Minimal Reserve Growth, Profits Flat Despite Rising Prices

NORWALK, Conn. & LONDON-(Business Wire)-September 4, 2008 - The worldwide upstream investment of 232 oil and gas companies was unchanged at $402 billion in 2007, according to the 2008 Global Upstream Performance Review, released today by oil and gas research firm IHS Herold Inc. and upstream corporate advisor Harrison Lovegrove & Co. Ltd., a Standard Chartered group company. Record development spending, up 20 percent from 2006, generated just a 0.3 percent increase in reserve volumes to 264 billion barrels of oil equivalent (boe). Acquisition spending fell 30 percent from 2006 record levels to $90 billion, but remained at a historically high level.

“Higher prices drove a 10 percent increase in revenue to $931 billion,” said Robert Gillon, IHS Herold senior vice president and co-director of Equity Research. “But cost pressures have been unrelenting, with lifting costs rising by 17 percent and government take up 5 percent to $253 billion, or 51 percent of pre-tax profit. As a result, net income edged up 2 percent to $246 billion, which is a record result but is far from the heady advances of the prior three years.”

Standard Chartered Bank Managing Director Rodney Schmidt commented, “A positive result is that oil and gas producing operations generated cash flow of $430 billion in 2007, up 10 percent from 2006, which is larger than capital outlays by about 7 percent. However, emerging issues, such as potential structural changes to demand and the impact of waning prices while cost pressures remain, will undoubtedly impact the industry’s performance going forward.”

The IHS Herold/Harrison Lovegrove study found returns to oil industry shareholders during 2007 remained robust. Dividends increased 11 percent to $92 billion, and common share repurchases totaled $94 billion, 5 percent higher than in 2006. Combined, these payouts amounted to just over 50 percent of corporate net income and the payout ratio has been virtually unchanged over the past five years.

Overall Findings

The 2008 Global Upstream Performance Review, IHS Herold’s 41st annual study of 232 oil and gas companies based on publicly available data filed with the U.S. Securities and Exchange Commission (SEC) and other similar agencies worldwide, measured industry performance in a number of key areas:

Prices & Revenues – Worldwide revenues increased by $86 billion, implying an average realized price of $47.53 per barrel, a 9 percent increase from 2006.
Cash Flow & Capital Spending – Cash flow per boe increased 8 percent to $21.99, slowed significantly after rising 75 percent in the 2003-2006 period. Cash flow exceeded investment, reversing the 2006 result.
Exploration & Development – Development spending increased 20 percent, accounting for 62 percent of total investment, up from 52 percent in 2006. Exploration spending increased 19 percent and is now more than double the 2003 total.
Mergers & Acquisitions – Proved acquisition spending dropped 34 percent and unproved acquisitions were down 36 percent after spiking in 2006, but remained at historically elevated levels. Implied proved acquisition cost dipped 21 percent to $8.93/boe.
Production & Reserves – Oil reserves reversed course, falling 1.5 percent, partly as a result of nationalization of oil fields in Venezuela, while oil production was flat. Natural gas reserves and production continued at the 3 percent growth rate of the last five years.
Reserve Replacement – Replacement cost advanced a modest 3 percent in 2007, a much lower rate than the preceding four years. Finding and development cost increased 7 percent to $15.42 per boe as the industry replaced just 113 percent of production through the drill-bit.
Profits – Net income per boe was flat at $12.98 after nearly doubling since 2003. Margins were lower for the third consecutive year.

Key regional findings of the 2008 Global Upstream Performance Review are:

Finding and development costs in the U.S. were cut in half on a surge in positive reserve revisions. Unit profitability declined for the second consecutive year.
Conventional oil and gas spending in Canada plunged nearly $30 billion as gas reserves and production continued to fall. Oil sands outlays doubled, driving strong oil reserve growth.
Oil and gas reserves in Europe are dropping sharply as cash flow exceeds capital spending, and production fell on operational problems on major new projects.
Development spending in the Africa & Middle East region is continuing to rise, and reserve replacement and finding and development costs were very high.
Asia-Pacific remained the most profitable region due to relatively lower costs and tax rates, but lower rates of reinvestment indicate opportunities are constrained.
Oil and gas reserves in South & Central America continue to fall, but light is at the end of the tunnel due to Petrobras’ sub-salt discoveries.
Government take in the Russia & Caspian region is high and rising, limiting profitability, but the resource potential is so substantial that capital investment grew 58 percent.

About IHS Herold

Founded in 1948, IHS Herold Inc. is a specialized research and consulting firm focusing on valuation, strategy, and performance measurement of the world’s leading oil and gas companies. IHS Herold closely monitors the world’s energy capital markets and the dynamic merger, acquisition, and divestiture marketplace for energy assets. IHS Herold is part of IHS (NYSE: IHS), a leading global source of critical information and insight, dedicated to providing the most complete and trusted data and expertise. IHS product and service solutions span four areas of information that encompass the most important concerns facing global business today: Energy, Product Lifecycle, Security and Environment. By focusing on customers first, IHS enables innovative and successful decision-making for customers ranging from governments and multinational companies to smaller companies and technical professionals in more than 180 countries. IHS has been in business since 1959 and employs approximately 3,000 people in 20 countries.

About Harrison Lovegrove & Co.

Harrison Lovegrove & Co. Limited (“HLC”), a Standard Chartered group company, is a leading oil and gas corporate finance advisory firm. Their combined advisory team has over 50 dedicated oil and gas professionals based in London, Houston, Washington, Calgary, Moscow, Perth, Dubai, Singapore and Kuala Lumpur. They advise oil & gas companies in developing their businesses through acquisitions, divestitures, swaps of upstream and midstream assets and subsidiaries, and the takeover and defence of listed companies. Standard Chartered also has a leading track record of providing acquisition and project finance and other investment banking products to oil & gas companies.

Copyright © 2008 IHS Herold Inc. (“IHS Herold”). All rights reserved. Herold Press Release is published by IHS Herold Inc., 14 Westport Avenue, Norwalk, CT 06851, USA. The information contained herein has been obtained from sources believed to be reliable, but IHS Herold does not guarantee their accuracy or completeness. No information or opinions contained herein constitutes a representation or solicitation for the purchase of any securities of the companies mentioned herein. From time to time, IHS Herold and/or its officers and employees may have long or short positions in the securities mentioned herein or during the past year may have transacted in securities of the companies mentioned.

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