While the weather-related headlines might still scream “summer” in some places — from stifling heat to powerful hurricanes to downpour-induced mud bogs at Burning Man in the Nevada desert — we’ve actually turned the corner into meteorological fall. Oil and gas prices have moved up from their Q2 2023 lows and supply issues, particularly for oil, are the chief concerns as the heating season approaches. Long-term production by the Diversified E&P peer group, whose production streams are weighted 40%-60% for gas and oil, respectively, are a major factor in U.S. supply. In today’s RBN blog, we analyze the crucial issue of reserve replacement by the major diversified U.S. producers.
In Say You’ll Be There we raised the question: “How much longer can shale support U.S. oil and gas production?” EIA estimates of “proved” reserves, which are assumed to have at least a 90% chance of eventual recovery under existing economic and operating conditions, imply about 10 years of remaining volumes of crude oil and condensate and 10-17 years of remaining volumes of natural gas in the major producing basins. Critical to maintaining or improving these inventories is the rate at which U.S. producers are replacing the reserves they produce. Equally critical (especially in an era of heightened scrutiny over capital efficiency) is the price paid to achieve that rate.
In Part 1 of this series we examined the overall reserve replacement metrics of our universe of 41 top U.S. E&Ps. Using three-year average data, the most reliable method of analyzing long-term trends, we found that the reserve replacement rate bounced back from a major dip in 2020, when plunging prices resulted in major negative reserve revisions, to 200% in 2022. This doubling of the reserves added was accomplished at an average reserve replacement cost (RRC) of just under $10 per barrel of oil equivalent (boe), compared with nearly $25/boe in 2016 and $15/boe in 2020. These results were achieved with a reinvestment rate (total cash flow divided by capital expenditures) of 39%, a 10-year low.
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