US natural gas producers had a rough start to 2023, with spot prices falling to just above $2.15/MMBtu last spring. But optimism abounded in midyear earnings calls on expectations that demand will eventually pick up, driven in large part by a near-doubling of US LNG export capacity by the end of the decade. A key question, however, is whether E&Ps have built up the proven reserves inventories to support future production increases to meet this demand. In today’s RBN blog, we look at the crucial issue of reserve replacement for major US gas-weighted E&Ps.
Before we began this four-part series, we asked ourselves, “How much longer can US oil and gas production sustain?” In Say you’ll be there, we said that the Energy Information Administration’s (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 condensates and 10 -17 years of natural gas in the main producing basins. Critical to maintaining or expanding these inventories is the rate at which US producers are replacing the reserves they produce. Equally important, especially in an era of greater scrutiny of capital efficiency, is the price paid to achieve this replacement rate.
In the first episode of our series, we looked at the overall reserve replacement metrics for the top 41 US E&Ps we monitor. 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 of just under $10/boe, compared to nearly $25/boe in 2016 and $15 /bep in 2020. These results were achieved with a reinvestment rate (total cash flow divided by capital expenditures) of just 39%, a 10-year low. In Replace Me Part 2, we revealed that major US oil-weighted producers were instrumental in driving this reserve replacement performance. The oil-focused group’s reserve replacement rate rose from 24% in 2020 to 357% in 2021 and 244% in 2022.
In Replace Me Part 3, we focused on the largest diversified producers, which have more balanced portfolios weighted between 40% and 70% in both oil and natural gas. The group’s three-year reserves replacement rate recovered from 133% in 2020 to 179% in 2021 and 177% in 2022, rates well below replacement rates generated by oil-weighted producers. Overall results dragged down tepid replacement rates for research and development (F&D) activities. The three-year replacement rate of the Diversified peer group of organic activities sank to 77% in 2020 and only slowly recovered to 91% in 2021 and 100% in 2022, meaning that jobs replacing production. Replacement costs went from $9.03/boe in 2019 to $13.76/boe in 2020 and for the next two years have been just below that level, the highest among the three groups of producers Among the questions raised by this performance was whether the higher gas weighting in their portfolios contributed to this underperformance, a question we could address by examining the reserve replacement results of gas-weighted producers.
Figure 1. Gas-weighted E&P 3-year reserve replacement metrics.
Source: Oil & Gas Financial Analytics, LLC
