Royal Dutch Shell plc (ADR) (RDS.A): One Obscure Factor That Dictates the Future Price of Oil

As the same time, though, the average price for a barrel of West Texas Intermediate crude, the U.S. benchmark, fell by about 10% over 2012, and natural gas prices hit 12-year lows in April 2012, which led to several asset writedowns. Companies with a gas-heavy profile suffered more than others. In 2012, Linn Energy LLC (NASDAQ:LINE) was forced to write off about $440 million worth of its reserves because of sliding gas prices.

With natural gas prices back on the upswing today, those same companies that had written down their assets in 2012 can start to put them back on the books. This is why Range Resources Corp. (NYSE:RRC) and Cabot Oil & Gas Corporation (NYSE:COG) both have reserve replacement costs below $6.25, one-fifth of the industry average. Both of these companies have very natural gas-heavy portfolios, so as gas prices go back up, they can put these assets back on their books without spending any money on further exploration or acquisitions.

What a Fool believes
In 2013, capital expenditures for E&P are expected to be higher than they were in 2012, but because we can’t exactly predict the movements of oil prices, it will be difficult to determine what 2013 reserve replacement costs will look like. One indicator that reserve replacement costs may remain high is that integrated majors such as BP plc (ADR) (NYSE:BP) and Royal Dutch Shell plc (ADR) (NYSE:RDS.A) are some of the biggest spenders when it comes to exploration and production. These two have reserve replacement costs well above the industry average, which will skew replacement costs higher for everyone.

The article 1 Obscure Factor That Dictates the Future Price of Oil originally appeared on and is written by Tyler Crowe.

Fool contributor Tyler Crowe owns shares of Linn Energy. You can follow Tyler at under the handle TMFDirtyBird, on Google +, or on Twitter @TylerCroweFool.The Motley Fool recommends Range Resources.

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