Large oil firms hit record U.S. spending in 2012, as profits drop

Marcela Donadio, Americas oil & gas leader for the global Ernst & Young. (Emily Pickrell/Houston Chronicle)

Marcela Donadio, Americas oil & gas leader for the global Ernst & Young. (Emily Pickrell/Houston Chronicle)

The largest oil and gas companies increased their investment in onshore U.S. exploration, with a record $185.6 billion in capital expenditures in 2012, according to a study released Tuesday.

The Ernst & Young analysis found that independent energy companies, those that explore for and produce oil and natural gas but do not have refining operations, are driving the pursuit of domestic oil and are investing larger and larger shares of their profits in future projects.

The study analyzed the 50 largest oil and gas companies, including Exxon Mobil, ConocoPhillips, and Apache Corp.

“The increased exploration and development spend we’re seeing in this year’s study speaks to the incredible opportunity unfolding in tight oil from shale formations and the high cost of developing these unconventional resources,” said Marcela Donadio, Americas oil & gas leader for the global Ernst & Young organization, speaking to reporters at the report’s release.

“Everyone wants in and they are paying a premium to play,” she said.

More than 30 of the 50 companies studied have increased their level of capital spending domestically, investing in more expensive extraction techniques, such as enhanced oil recovery projects, that had been considered too costly in earlier years.

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The shift is pulling capital towards the U.S., fueling job growth and the further development of ancillary industries, such as seismic technologies.

“A lot of companies are selling international assets to bring cash back into the US,” said John Russell, a partner with Ernst & Young.

The investments, however, come even as the industry profits decreased almost 60 percent for these companies, driven by historically low natural gas prices in 2012.

Natural gas prices have been hard hit by a flood of new supply, with spot prices falling from an average of $4.12 per million British thermal unit in 2011 to $2.76 in 2012.

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The lower prices have depressed cash flows for companies with large natural gas portfolios, and decreased the amount of potential investment in future North American natural gas plays.

Many companies have shifted their portfolios to oil and liquids-rich plays, as natural gas reserves have become uneconomic to develop.

“There was a significant shift in capital allocation to crude, reflective of a very depressed natural gas environment in 2012, Donadio said. “Absent of sustainable natural gas prices, that trend will continue, because of the huge disconnect in the economic value of crude versus natural gas.”

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While natural gas prices, which closed on Monday at $4.02 per million British thermal units, have risen since 2012, some of the upward pressure has been due to weather patterns. Oil and gas producers will be reluctant to make significant capital investments into future plays until natural gas prices stabilize between a minimum of four to five dollars, Donadio said.

“If it is not economic, production is going to be curtailed,” Donadio said. “A lot of the manufacturing renaissance that everyone talks about, driven by the abundance of energy, might be stalled. A lot of the progress we have made in this country with respect to the abundance of natural gas would probably retreat.”

 

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