John S. Herold, Inc. 2002 Global Upstream Performance Review.

Business Editors

NORWALK, Conn.--(BUSINESS WIRE)--Dec. 23, 2002

More Effort, Less Success in 2001;

Profits Down 21%; CAPEX up 14%;

World Oil and Gas Reserve Replacement Costs Soar by 36%

Notwithstanding robust commitments of investment dollars to the upstream sector, oil and gas companies have been challenged to efficiently - and economically - replace worldwide reserves, according to independent energy research firm John S. Herold, Inc.

Herold noted that despite significant worldwide upstream "effort" (i.e. capital outlays) of more than $100-$160 billion per annum - and $158 billion in 2001 (+14 %), "success" (i.e. low-cost reserve replacement and above-average production growth) has been disappointing.

Herold Chairman & CEO Arthur L. Smith commented, "The final data confirm that investment results for the upstream are cause for concern. Energy investors and industry executives are troubled that billions ($605 billion over the past five years) have been plowed back into acquiring companies, securing leases, drilling wells and producing hydrocarbons. All said, these reinvestment outlays for the upstream appear equivalent to "spinning wheels" for the average public energy company."

The 2002 edition of Herold Global Upstream Performance Review found that the oil and gas industry increased capital outlays by 14% worldwide in 2001 to $157.5 billion. (The Herold analysis focused on 200 leading global energy companies and their capital commitment to oil and gas resource development.) Herold noted that wellhead prices wilted in late 2001 and brought about an unexpectedly sharp decline in upstream pre-tax earnings and EBITDA of 21% and 11%, respectively.

As was the case in 1998 (a year where robust spending commitments were budgeted early in the year in a Pavlovian response to very strong wellhead pricing) industry reserve replacement costs were disappointing as global RRCs surged an alarming 36% to $5.31 per boe (barrel of oil equivalent) and Finding and Development (drillbit) Costs (FDC) surged to $6.33 per boe. Regionally, astonishing increases in RRCs to uncompetitive levels were seen in the U.S. ($8.41/boe) and Canada ($8.44/boe).

Herold found that those energy companies with significant international E&P operations were better positioned to enjoy both stronger profitability and higher production growth due to both relatively lower finding costs (FDC) and more attractive reserve replacement rates (RRR).

Regions where reserve replacement was relatively attractive in 2001 were Asia, at only $2.48/boe and South & Central America at $2.99/boe. While the United States (33.6%) and Canada (17.8%) accounted for the bulk (51.4%) of worldwide upstream investment last year, reserves were most expensive to replace in North America at an apparent cost of roughly $8.40/boe.

"Clearly, companies with attractive international upstream operations have retained their competitive costs advantage. Producers may be well-served to focus on growth outside of traditional areas as evidenced by the skyrocketing costs of reserve additions in the mature North America and North Sea regions coupled with anemic reserve replacement rates," Smith said.

Growth through the drillbit became increasingly difficult last year, with 2001 worldwide Finding & Development Costs (FDC) of $6.33/boe, nearly 20% higher than adding reserves through drilling and acquisitions. It was a particularly challenging drilling environment in Canada, which had a whopping FDC of $12.12/boe last year, a 56% jump from the 3-year average and higher than U.S. FDC of $9.59/boe. These higher costs have pushed Canada to the lowest rank of Recycle Ratio (Netback/RRC) performance, even below the U.S. and Europe. While a torrential flow of capital north of the 49th parallel has kept reserve replacement rates in Canada relatively high, Herold questions whether the Canadian upstream will be able to continue to attract significant capital, considering these sub-par investment returns.

"Looking at the 2002 equation, energy company upstream results should be more sanguine. We expect industry-wide finding costs to decrease in 2002, as strong crude oil and natural gas prices aid in booking additional reserves that were previously uneconomic at lower prices. Also, drilling costs are under control and executives continue to focus on the high-grading of upstream assets, in turn enhancing drilling efficiency. A moderating factor will be 'a new conservatism' among reservoir engineers in their recognition of 'proved reserves'" Smith noted.

The leaders in 2001 worldwide RRC were Lukoil (LUKOY: $61.95) and El Paso Energy Partners (EPN: $28.75), both coming in at a mere $0.71.boe. Niko Resources (NKO $24.75), with promising exploration in India, was performed in the top tier at $0.96/boe. In the past three years, international companies fared well, such as Hurricane Hydrocarbons (HHL $10.00), with operations in Kazakhstan, and Russia's Yukos Oil (YUKOY $137.00) with RRCs of $0.61 and $0.68/boe, respectively. Fellow Russian producer Lukoil and Petroleos de Venezuela replaced reserves at only $0.78/boe in the past three years.

The Herold review noted that the leaders in worldwide upstream investment last year were Royal Dutch/Shell (RD:$43.21), BP (BP:$40.14); ENI (ENI:$4.16); ConocoPhillips (COP:$49.93) and ExxonMobil (XOM: $35.70) with individual corporate outlays of between $8 to $9 billion. Rounding out the top ten upstream capital spenders for 2001 were: ChevronTexaco (CVX:$66.65 --$6.7 billion); Devon Energy (DVN: $47.49-- $5.9 billion); Amerada Hess (AHC: $55.91-- $5.1 billion); PetroChina (PTR: $20.05-- $4.8 billion); and, TotalFinaElf (TOT:$68.58-- $4.7 billion).

Herold's Global Upstream Performance Review is a newly expanded report that includes data, information and analysis that were previously included in Herold's Reserve Replacement Cost Analysis. The new report includes additional upstream analysis of 200 publicly traded oil and gas companies, as well as two-page summaries for each company's upstream investment performance. John S. Herold, Inc. pioneered reserve replacement and finding cost analysis roughly 40 years ago.