According to Ernst & Young LLP's annual Exploration & Production (E&P) benchmark study, the industry experienced increased E&P costs, a decline in ending oil reserves and ultimately decreased profits. However, total capital spending for 2008 was up 35% from 2007 and natural gas reserves grew 4% in 2008, demonstrating the industry's long-term vision and commitment to providing a constant supply of oil and gas.

"Despite rising production costs, the oil and gas industry continues to be positioned for an economic upturn as it makes significant investments in exploration and production activities. It's critical for the industry to continue its investments in domestic opportunities since we expect that energy demand in the long term will continue to increase," said Marcela Donadio, Americas Director of Oil & Gas for Ernst & Young LLP.

The results for 40 E&P companies over a five-year span were analyzed to identify how the industry is performing and what challenges it is facing. Highlights from the report include:

- Revenues grew 35% to $183.3 billion in 2008, but increases in production costs and depreciation, depletion and amortization led to an 8% decline in after-tax profits.

- Production costs were $14.72 per barrel of oil equivalent (BOE) in 2008, a 25% increase from 2007. These costs have more than doubled from $6.55 per BOE in 2004.

- With low year-end prices forcing several companies to reduce or revise reported reserves, finding and development costs per BOE increased dramatically in 2008. The all sources measure was $39.58 per BOE in 2008.

- Negative revisions of 1.2 billion barrels were reported for oil reserves in 2008, leading the way to a 7% decline in ending reserves from 16.1 billion barrels in 2007 to 15.0 billion barrels in 2008.

- Negative revisions of 6.7 trillion cubic feet (Tcf) were recorded for gas reserves in 2008, but ending reserves still grew 4% from 139.9 Tcf in 2007 to 145.2 Tcf in 2008.

- Proved property acquisition costs decreased in 2008, but total capital expenditures costs increased 35% to $132.1 billion.

"E&P companies have been making significant investments in their oil and gas operations, with a plowback percentage of 102% during 2006-2008 and 91% over the five-year period," said Charles Swanson, Houston office managing partner for Ernst & Young LLP. "Since 2004 gas reserves and production have grown at 56% and 29%, respectively."

The US oil and gas industry has made some painful adjustments to last year's reversal of fortunes. Some scaling back of upstream investment has occurred in 2009 and some proposed developments have been postponed. But much of the upward cost pressure has eased with the weakened industry and general economic conditions. As the recovery in oil and gas markets gathers steam in the second half of 2009, the U.S. oil and gas industry appears poised to resume its growth and be a key contributor to the US and global economic recovery.

"When the commodity prices stabilize, the industry should be in a good position. Compared to the recovery of the last major collapse in the 1980s, today's oil and gas industry is much learner, more efficient and better-positioned to take advantage of opportunities during an economic recovery," noted Swanson.