Reserve replacement costs measure the cost to the company of adding to their reserve base, whether through the company's own exploration and development efforts or through outright purchase of proven reserves from another company. For the economy as a whole, though, reserve replacement costs may not be the most appropriate measure of the actual costs of adding to U.S. oil and gas reserves. Reserve replacement costs include expenditures for acquisitions of proven reserves as well as acquisitions of leases for unproven acreage.

However, for the economy as a whole, acquisitions represent only a transfer of ownership. Net additions to U.S. reserves from acquisitions are always zero. In order to ascertain if the structural changes in the U.S. oil and gas industry might affect the costs of adding to reserves for the economy as a whole, a different measure is needed.

Excluding expenditures for acreage acquisitions, whether proven or unproven, and excluding existing reserves gained through purchases will more accurately reflect the economywide costs of adding to U.S. oil and gas reserves. Thus, the ratio of exploration and development expenditures (excluding acquisitions of leases and proven acreage) to reserve additions (excluding purchases of proven reserves) will be used as the economywide cost measure, and will be termed, "overall finding costs" (see endnote 24). Figure 10 presents overall U.S. finding costs for two groups: majors and surviving independents.

Overall U.S. finding costs for surviving independents are clearly higher than the majors' overall U.S. finding costs. Most recently (1991-1993), surviving independents' costs were nearly $2 per barrel of added reserves (in 1993 dollars) more than the majors. In the mid-1980's, the difference was about $5 per barrel, so the gap has narrowed but not disappeared (see endnote 25).

This latter result should be interpreted very carefully. Beginning in the early 1980's, the costs of finding oil and gas have declined in the United States (see endnote 26). Technological change and market adjustments have over time reduced the costs of adding reserves. However, at any point in time, finding more oil and gas will typically entail ever higher costs. That is, finding oil and gas reserves is subject to diminishing returns. Consequently, there is a tendency for companies that are expanding their reserves base to have higher finding costs than companies that are contracting.

In the 1990's, the surviving independents, overall, have been increasing their investments in U.S. exploration and development. In contrast, the majors, overall, sharply reduced their U.S. exploration and development commitments until the early 1990's from which time they have leveled off. The higher overall finding costs of the surviving independents compared with the majors, in part, reflects both an expansion of the independents' U.S. oil and gas operations and a consolidation of the majors' operations.