April 5 (Bloomberg) -- ChevronTexaco Corp. is paying more in its acquisition of Unocal Corp. than it ever has before for new oil and gas reserves, after exploration failures cut output for three consecutive years.

ChevronTexaco, the second-largest U.S. oil company, agreed yesterday to pay $16.4 billion in cash and stock for El Segundo, California-based Unocal. That equates to $9.37 for each barrel of new reserves, 33 percent more than what ChevronTexaco spent to boost reserves in 2004, when it had the highest such costs among the 10 biggest publicly traded oil producers.

``This indicates they are having trouble replacing reserves at a reasonable price,'' said Michael Cuggino, who oversees $340 million at Pacific Heights Asset Management LLC in San Francisco. ``When the name of the game is replacing what you're producing, you are going to acquire reserves wherever you can.''

Shares of ChevronTexaco, based in San Ramon, California, climbed 29 percent in the past year. The Standard & Poor's Energy Index of 29 oil, gas and refining companies, surged 46 percent, as oil and fuel prices climbed to all-time highs. Exxon Mobil Corp., the largest publicly traded oil and gas company, advanced 45 percent.

Reserves fell 6 percent last year for ChevronTexaco after tests in Africa and the Gulf of Mexico showed the company's fields held less oil and gas than previously thought. Output dropped 12 percent since Chevron Corp. bought Texaco Inc. in 2001, partly because of asset sales.

ChevronTexaco paid $7.05 for each barrel of new reserves in 2004, compared with $5.40 a barrel at Irving, Texas-based Exxon Mobil. ChevronTexaco paid $3.49 per barrel of new reserves in 2003 and $1.95 in 2002.

`Competitive'

ChevronTexaco Chief Executive David O'Reilly told investors on a conference call yesterday that the company's higher per- barrel costs for reserves will be ``competitive'' with rival energy companies.

O'Reilly needs oil prices to remain above $35 for the next six to seven years to profit from the Unocal transaction, said Douglas Ober, who manages $1.9 billion, including 625,000 ChevronTexaco shares, at Adams Express Co. in Baltimore.

That's almost $9 a barrel higher than the U.S. Energy Department's estimate for crude prices of $26.41 a barrel through 2012. The average of the past five years has been $32.08 a barrel, based on benchmark futures traded on the New York Mercantile Exchange.

Oil for May delivery touched a record $58.28 a barrel yesterday on the Nymex.

Oil prices have more than doubled in the past two years as economic expansion in China, India and the U.S. raised fuel demand faster than OPEC and other producers increased output. Natural-gas prices have also surged amid increasing use by power plants, chemical producers and household furnaces.

`Making This Work'

``If oil is significantly less'' than $35 a barrel, ``there could be problems making this work,'' Ober said in an interview. ChevronTexaco is the third-biggest holding in Ober's Petroleum & Resources Corp. fund, behind Exxon Mobil and BP Plc.

O'Reilly, 58, yesterday said much of the production to be acquired in the Unocal deal isn't affected by fluctuations in crude-oil prices.

``The majority of Unocal's assets and resources are natural gas and these are overseas,'' O'Reilly said. ``Many of them are long-term contracts, so we are not buying today's crude price.''

All of the gas Unocal produces in Thailand and some of its Myanmar output is committed to PTT Public Co., Thailand's state- owned energy company, under contracts that don't expire until 2010 at the earliest, according to company filings.

Asian gas sales fetched the lowest prices for any region where Unocal has operations, filings showed. The company received $3.17 per thousand cubic feet of gas in Asia last year, compared with $5.23 in the U.S. and $5.24 in Canada.

Other Bidders

ChevronTexaco shares fell $2.33, or 3.9 percent, to $56.98 yesterday in New York Stock Exchange composite trading.

Unocal had its biggest decline since April 2000 because some investors expected the company to fetch $70 a share, said Jason Putman, an analyst at Victory Capital Management in Cleveland, which oversees $54 billion.

Unocal shares had climbed as much as 57 percent since a Jan. 6 report in the Financial Times said China National Offshore Oil Corp. was considering a $13 billion bid for Unocal. They dropped $4.75, or 7.4 percent, to $59.60 yesterday.

China National, known as CNOOC, or Italy's Eni SpA, may try to outbid ChevronTexaco, Putman said. ``Eni could come along and make an offer,'' he said. ``I don't think it's a done deal.''

Drilling Plans

ChevronTexaco's oil production dropped 6 percent to a daily average of 1.782 million barrels in January and February, and gas output fell 13 percent to 3.725 billion cubic feet, partly because of lingering damage from Hurricane Ivan to platforms in the Gulf of Mexico.

Stepped up exploration and production spending is meant to help stem the decline.

On March 31, ChevronTexaco said it agreed with Spain's Repsol YPF to invest $6 billion to develop new oil fields in Venezuela, home to the largest oil reserves in the western hemisphere. That followed a March 22 announcement of up to $1 billion in investments to begin oil production from wells off the coast of Brazil.

The company also has plans to spend $23 billion in the next five years to drill new wells and start pumping oil and gas in Kazakhstan, Angola, Nigeria, the Gulf of Mexico and Australia. Those projects won't boost the company's output until 2009, George Kirkland, ChevronTexaco's executive vice president of exploration and production, said in December.

``They are being forced to acquire reserves,'' said Tim Ghriskey, who manages $650 million, including an undisclosed number of ChevronTexaco shares, at Bedford Hills, New York-based Solaris Asset Management. ``They are sort of admitting that they can't find oil so they're having to buy it.''

To contact the reporter on this story: Joe Carroll in Chicago jcarroll8@bloomberg.net

Last Updated: April 5, 2005 00:03 EDT