While weather-related headlines may still scream “summer” in some places, from sweltering heat to powerful hurricanes to rain-induced mudslides at Burning Man in the Nevada desert, we’ve actually turned the corner in a weather drop. Oil and gas prices have rallied from Q2 2023 lows and supply issues, particularly for oil, are top concerns as the heating season approaches. Long-term production from peer group Diversified E&P, whose production streams are 40% to 60% weighted to gas and oil, respectively, is a significant factor in US supply. In today’s RBN blog, we look at the crucial topic of reserve replacement by major US diversified producers.
In Say you’ll be there we posed the question, “How much longer can US oil and gas production sustain?” EIA estimates of “proven” 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 condensates and 10-17 years of remaining volumes of natural gas in the main producing basins. Critical to maintaining or improving these inventories is the rate at which US producers are replacing the reserves they produce. Equally critical (especially in an era of greater scrutiny of capital efficiency) is the price paid to achieve this rate.
In Part In the first of this series we looked at the overall reserve replacement metrics for our universe of 41 major US E&Ps. Using three-year averages, the most reliable method for analyzing long-term trends, we found that the reserve replacement rate recovered from a significant decline in 2020, when falling prices led to significant negative revisions of reserves, up to 200% by 2022. This doubling of added reserves was achieved at an average reserve replacement cost (RRC) of just under $10 per barrel of oil equivalent (boe), in compared to 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.
