Some fascinating data points on the global oil and gas business from Ernst & Young last week.
The group released its annual Global oil and gas reserves study. And the findings suggest some worrisome trends afoot in the petroleum business.
The report confirmed that high costs are plaguing the business. Exploration and development spending by E&Ps globally jumped 20% in 2012 alone. And rose a towering 48% between 2008 and 2012.
On its own, the rise in spending might simply indicate good times at hand for the industry. But a few other numbers from the report sound a warning on this front.
Namely, profits. Despite the big increase in spending, oil and gas firms globally actually made less money in 2012. After-tax profits for the sector declined 16% from 2011 levels.
The fall in money-making is backed up by figures from the field. In-ground reserves increased just 3% for oil, and gas reserves actually fell by 2% during 2012. Production growth was also sluggish, with oil output growing just 2% and gas only 3%.
Overall, these figures paint a bleak picture. Costs are rising fast, but not resulting in great returns.
This could signal that the incredible advances made in drilling productivity recently are reaching the limits. This appears to be particularly the case in the U.S. Where Ernst & Young found that producers in 2012 were forced to re-deploy a world-leading 123% of operating profits back into new capital spending on projects. Globally, the average re-investment of profits was just 54%.
This suggests U.S. E&Ps particularly are being pushed to spend beyond their means. In order to maintain the growth investors have become so accustomed to for U.S. shale plays.
This situation can't continue. When costs rise faster than productivity, eventually profits are eaten up. Followed by a stagnation of production and reserves growth.
If these new numbers are right, we might see some unpleasant surprises in the global E&P sector over the coming months. Which could in turn be bullish for commodities prices, if supply growth falters.
Here's to heeding the warning and the opportunity,
By. Dave Forest