Release date: May 28, 2020 | Next release date: June 3, 2020
Exploration and development expenditures likely to drop from 2019’s four-year high
Global expenditures related to oil and gas exploration and development (E&D) increased $42 billion (13%) in 2019, totaling $361 billion, according to the aggregate financial reports for 102 oil companies. Additions to these companies’ collective proved reserves totaled 18 billion barrels of oil equivalent (BOE), consistent with the 2010–18 annual average additions. As a result of the significant price declines since the beginning of 2020, however, global proved reserves will likely be revised significantly downward this year. E&D expenditures will also likely decline significantly, with several companies already announcing large budget reductions.
The U.S. Energy Information Administration (EIA) based this analysis and its recently published 2019 Financial Review primarily on the published financial reports of 102 publically traded companies, so the conclusions are not necessarily representative of the sector as a whole because the analysis does not include private companies that do not publish financial reports.
Proved reserves are defined as estimated quantities of oil and natural gas that analysis of geologic and engineering data demonstrates with reasonable certainty are recoverable under existing economic and operating conditions. Because crude oil prices are paramount to the profitability of E&D projects, price changes can significantly affect companies’ proved reserves levels and the volume of reserves they can claim as additions. The U.S. Securities and Exchange Commission requires companies to value proved reserves based on the average of crude oil prices from the first trading day of each month for the year. Using, for example, front-month Brent futures closing prices for the first trading day in each month of 2020, this value is $44.76 per barrel (b) through May, 28% below the 2019 full-year average of $62.58/b (Figure 1). The 2020 year-to-date average through May is weighted to the first quarter, and lower prices in the remainder of the year will bring this value even lower.
During significant price declines, oil companies can take impairment charges for assets that fall in value below the cost of developing them. Impairment charges represent the decrease in value of assets a company owns, typically its amount of proved reserves. Current low prices suggest that these companies will likely post large negative revisions to their proved reserves in 2020.
In a low price environment, E&D expenditures can also decline significantly. According to their financial statements, these companies’ collective E&D expenditures averaged $20/BOE in 2010–19, an average ratio of 26% to Brent crude oil spot prices during that period (Figure 2). In its May Short-Term Energy Outlook, EIA forecasts Brent crude oil prices will average $34/b in 2020. If realized, these price levels imply E&D expenditures per BOE could fall to about $10/BOE in 2020, depending on how much spending is actually reduced. In recent investor presentations, many companies have already announced budget cuts.
Organic additions to proved reserves—those added through improved recovery and extensions and discoveries—are linked directly with expenditures in E&D. In 2019, the largest increase in E&D expenditure was in Latin America, which increased $16 billion in 2019 to $46 billion, primarily because of the bid by Brazilian state-controlled Petrobras for production sharing rights in the presalt Buzios field. E&D expenditure for the companies analyzed increased $9 billion each in the United States and the Russia, Central Asia, and Asia Pacific region, whereas expenditure declined $2 billion in Canada. E&D expenditures declined slightly in both the Europe region and the Middle East and Africa region (Figure 3).
Finding costs are defined as costs incurred in E&D as well as acquiring unproved reserves per BOE of organic proved reserves additions. Finding costs provide an indicator of the expenditures needed to add a single BOE of proved reserves. Because of the disparity between the timing of companies’ expenditures and the formal reporting of changes to their proved reserves, standard practice is to average the results over several years. The 2017–19 average finding costs were lower for all regions than the 2014–16 and 2011–13 averages, respectively, but the 2019 world weighted average finding cost increased 34% from 2018 levels to $20.36/BOE (Figure 4).
Several companies in this group have released first-quarter 2020 financial results, but some announced delays in their publication as a result of office closures and personnel disruptions related to COVID-19 mitigation efforts. For further analysis and a list of the companies included in this study, see EIA’s annual Financial Review. Later this year, EIA will issue its annual U.S. crude oil and natural gas proved reserves report, which focuses exclusively on proved reserves located in the United States, including all U.S. producers (publicly traded and privately owned).
U.S. average regular gasoline and diesel prices rise
The U.S. average regular gasoline retail price rose more than 8 cents per gallon from the previous week to $1.96 per gallon on May 25, $0.86 lower than the same time last year. The Rocky Mountain price rose more than 17 cents to $1.99 per gallon, the Midwest price rose more than 10 cents to $1.89 per gallon, the West Coast and East prices each rose more than 7 cents to $2.55 per gallon and $1.91 per gallon, respectively, and the Gulf Coast price rose nearly 6 cents to $1.60 per gallon.
The U.S. average diesel fuel price rose less than 1 cent, remaining virtually unchanged at $2.39 per gallon on May 25, 76 cents lower than a year ago. The West Coast price rose nearly 2 cents to $2.90 per gallon, the Rocky Mountain price rose 1 cent to $2.35 per gallon, the East Coast price rose nearly 1 cent to $2.50 per gallon, and the Midwest price rose slightly, remaining virtually unchanged at $2.23 per gallon. The Gulf Coast price was unchanged at $2.18 per gallon.
Propane/propylene inventories rise
U.S. propane/propylene stocks increased by 1.5 million barrels last week to 64.2 million barrels as of May 22, 2020, 7.4 million barrels (13.0%) greater than the five-year (2015-19) average inventory levels for this same time of year. Midwest, Rocky Mountain/West Coast, East Coast, and Gulf Coast inventories increased by 1.0 million barrels, 0.3 million barrels, 0.2 million barrels, and 0.1 million barrels, respectively.
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Retail prices (dollars per gallon)
| Retail prices | Change from last | ||
|---|---|---|---|
| 05/25/20 | Week | Year | |
| Gasoline | 1.960 | 0.082 | -0.862 |
| Diesel | 2.390 | 0.004 | -0.761 |
Futures prices (dollars per gallon*)
| Futures prices | Change from last | ||
|---|---|---|---|
| 05/22/20 | Week | Year | |
| Crude oil | 33.25 | 3.82 | -25.38 |
| Gasoline | 1.038 | 0.068 | -0.897 |
| Heating oil | 0.982 | 0.062 | -0.989 |
| *Note: Crude oil price in dollars per barrel. | |||
Stocks (million barrels)
| Stocks | Change from last | ||
|---|---|---|---|
| 05/22/20 | Week | Year | |
| Crude oil | 534.4 | 7.9 | 57.9 |
| Gasoline | 255.0 | -0.7 | 24.1 |
| Distillate | 164.3 | 5.5 | 39.5 |
| Propane | 64.240 | 1.544 | 3.731 |