excluding net purchases. This ratio is often used as an indicator of the cost of adding another barrel of reserves through exploration and development activity. Since 1989, both U.S. and foreign finding costs have averaged about $5 per barrel and, in 1993, were $5.37 per barrel worldwide (Table 15). Reductions in the FRS companies' finding costs from 1992 to 1993 were minor compared to the dramatic cost reductions achieved in the late 1980's, when the rapid decline in oil prices drove the trend toward prospect highgrading and accelerated adoption of cost-saving technology (Figure 12).

In foreign regions, finding costs continued to decrease slightly in 1993, in spite of increases in OECD Europe and Canada (Table 15). Costs in OECD Europe increased partly because the United Kingdom revoked exploration tax credits in 1993.62 The FRS companies' finding costs in Canada went up because revisions of previous estimates of reserves were revised downward. In other regions, technological and managerial improvements continued the reduction in finding costs evident since the early 1980's.

Production (or lifting) costs are the costs of extracting oil and gas, and include operating (direct lifting) costs, production taxes, and royalties. Several regions typically have high direct lifting costs per barrel, either

because field sizes are small (Canada and the lower-48 onshore United States), or because production equipment is expensive to operate (the North Sea). In 1993, the FRS companies reduced direct lifting costs in almost all regions, including the United States, Canada, and OECD Europe (Table 16). These cost-cutting efforts have been effective in counteracting the expense of advanced technologies adopted to sustain production from mature and declining fields.

Overseas production taxes including royalties fell in 1993, mostly due to changes that took place in OECD Europe (Table 16). The United Kingdom reduced the Petroleum Revenue Tax on North Sea oil and gas from 75 percent to 50 percent of production in 1993.63 In spite of the tax breaks provided by the province of Alberta and the Canadian government, the FRS companies' Canadian production taxes did not decrease, probably because the oil that is exempt from the taxes is yet to be produced. Production taxes in the United States changed little from 1992.

Differences Widen Between U.S. and
Foreign Reserve Additions

Additions to crude oil reserves in 1993 reflected the FRS companies' shift in investment targets from the onshore

BOE = Barrels of crude oil equivalent.

Note: Finding costs are 3-year weighted averages of exploration and development expenditures, excluding expenditures for proved acreage, divided by reserve additions, excluding net purchases. Reserve additions exclude BP America's and Exxon's total 1987 downward revisions of Alaska North Slope natural gas reserves of 13.461 trillion cubic feet, and Arco's 1985 downward revisions of 8.3 trillion cubic feet. Gas is converted to barrels of oil equivalent on the basis of 0.178 barrels of oil per thousand cubic feet of gas.

Source: Energy Information Administration, Form EIA-28.

United States to offshore and overseas regions (Table 17). Onshore reserve additions continued to decline, but offshore reserve additions increased due to major discoveries of crude oil in the Gulf of Mexico by Shell, and upward revisions of previous estimates of natural gas reserves by Phillips Petroleum." Although the FRS companies increased U.S. reserve additions from 1992 to 1993, they continued to produce oil and gas faster than they replaced reserves. Also, for the fourth consecutive year, the FRS companies were net sellers of U.S. oil and gas reserves (Table 17). Improved recovery remains an important source of crude oil reserve additions in the United States, but does not compensate for a lack of new producing properties. Accordingly, the production replacement ratio (reserve additions divided by production) fell from 50 percent to 46 percent for onshore oil operations. In contrast, the FRS

companies doubled their production replacement ratios in offshore regions, and replaced 99 percent of the oil they produced in foreign areas. Production replacement ratios, both onshore and in foreign regions,were higher for natural gas than for oil, reflecting the companies' preparation for expected growth in the worldwide demand for natural gas. In offshore locations in the United States, the natural gas production replacement ratio increased dramatically from 58 percent to 113 percent. In foreign regions, replacement of gas continues to exceed production.

Refining and Marketing

Income and Profitability

The year 1993 saw an improvement in the earnings and profitability of the FRS companies' U.S. refining/marketing operations (Table 18 and Figure 13). This improvement followed three consecutive years of weak financial results, when U.S. downstream (refining and marketing) operations were the poorest performing of the FRS companies' domestic petroleum lines of business (Table 3). The FRS companies reported U.S. refining/marketing net income of $1.7 billion (excluding unusual items) and a return on investment of 3.4 percent for 1993. In contrast, in 1992, the FRS companies reported a $200-million dollar loss and a negative 0.4-percent rate of return. Although showing a marked improvement from 1992, the profitability of U.S. refining/marketing operations in 1993 remained low, both in historical context and compared with other FRS lines of business.

Part of the improvement in financial results can be traced to increased U.S. refined product demand. Economic activity in the United States typically has a major impact on domestic refined product demand. The U.S. economy continued to expand in 1993, growing 3 percent from 1992.65 The strength of the current U.S. economic expansion was particularly evident in the transportation sector. Motor gasoline demand in 1993 surpassed the previous record high of 7.4 million barrels per day (b/d) realized in 1978. Air travel and jet fuel sales also rose substantially from 1992.67 Overall, U.S. gasoline, distillate, and jet fuel sales rose 2.4 percent, although total refined product demand was

66

Smaller FRS companies tended to be more successful in reducing marketing expense, although lower marketing expense and higher margins were realized by all FRS companies (Table 19). In their 1993 annual reports, a number of the FRS companies reported that earlier restructurings had significantly reduced downstream operating expenses in 1993, and were responsible for higher refined product margins. For example, Exxon, whose earnings from downstream operations almost tripled, noted that, among other things, the improvement was due to "major operating expense reduction programs in marketing and refining."70 Mobil noted that "business improvement and expense reduction initiatives implemented in 1993 have significantly reduced annual expenses. Outsourcing of staff functions, such as service station real estate and engineering, and re-engineering of some administrative functions (billing and accounting, service station maintenance) have contributed significantly to overall operations efficiency and improved income."71 Also, scaling back on advertising expenditures reduced retail gasoline marketing costs. The FRS companies' expenditures on television spot advertisements for gasoline fell an additional 5 percent in 1993, after posting declines in 1992 and 1991.7 Employment cutbacks also reduced operating costs. Overall U.S. retail gasoline station employment (all gasoline marketers) also declined in 1993 (by 2 percent to 612 thousand employees)," despite a 2.6-percent rise in gasoline and diesel fuel sales.74

Capital Expenditures and Restructuring

The FRS companies reduced their U.S. refining capital expenditures by 13 percent in 1993 (Table 20). Part of the decline in U.S. downstream capital investment reflected a tapering off of earlier investments needed to comply with recently-introduced refined product specifications. Some of this recent investment was in preparation for October 1993, when reductions in the sulfur content of diesel fuel were to go into effect. As mandated by the Clean Air Act Amendments of 1990, the sulfur content of on-road diesel fuel was to have been reduced from a maximum of 0.25 percent per volume to 0.05 percent per volume. Due in part to heightened environmental standards, the FRS companies' U.S. refining capital expenditures more than doubled between 1990 and 1992.

The year 1993 saw a further consolidation of FRS company refining operations. There were six fewer wholly-owned FRS refineries in operation in 1993 than in the previous year. DuPont shut down its Santa Maria, California refinery" while Coastal suspended refining operations at its three Kansas refineries.76 Amoco sold its Savannah, Georgia refinery to Citgo, a wholly-owned subsidiary of Petroleos de Venezuela. Still, the largest FRS company refining divestiture in 1993 involved Exxon's sale of its 260,000 b/d Bayway, New Jersey refinery to the independent refiner, Tosco in April of 1993. Six months after the Bayway purchase,

19.

"Mobil, 1993 Mobil Fact Book, p. 52.

75E.I. Du Pont de Nemours and Company, 1992 10-K, p. 12.

76The Coastal Corporation, 1993 Annual Report, p. 29.