Extremely low oil and gas prices sharply curtailed US capital spending plans during 1999.
Companies also blamed their declining investments outside the US and Canada on the same factors, as well as uncertainty concerning future price and demand levels.
The depressed spending projections were revealed early in 1999 in Oil & Gas Journal`s annual survey of upstream and downstream outlays (Tables 1-3). OGJ`s annual capital expenditure survey showed that companies planned to spend $32.6 billion on US projects in 1999, compared with about $41 billion in 1998.
Conclusions reached in that survey were echoed in a midyear update by Salomon Smith Barney Inc., New York (Tables 4-6). Its sweep of the industry showed that the upstream segment`s spending decline would be the steepest in 13 years.
The midyear canvass of 170 companies showed that those firms planned to decrease worldwide E&P expenditures to $66.8 billion in 1999 from $84.5 billion in 1998. In its yearend 1998 survey, 175 companies had expected a reduction to $79.2 billion in 1999 from $89 billion in 1998.
The result confirmed that the contraction in 1999 would be the most severe since 1986, Salomon Smith Barney said.
Oil and gas industry total US capital spending hit a high of $83 billion in 1981. Subsequent decreases in oil prices, company revenues, and company profits led to a sharp decline in industry spending to a low of $25.2 billion in 1987.
During 1988-98, industry capital spending movements were somewhat less volatile; outlays in that period averaged $34.5 billion/year.
For 1999, weak crude oil and natural gas prices, together with slowing growth in worldwide petroleum demand, cut company cash flow and profits. That reduced the funds available for new-project investment.
By the second half of 1999, crude values, as reflected in the futures price for light, sweet crude on the New York Mercantile Exchange, had reached more than $25/bbl-twice their levels of early in the year. But companies remained cautious. The price rise was known to have resulted from unusual production restraint by members of the Organization of Petroleum Exporting Countries under an agreement that became more difficult to keep in force as prices rose.
OGJ survey
Early-year budgets for US E&P called for a 24% drop in spending in 1999 to $18.8 billion. Falling oil and gas prices had pushed 1998 E&P spending down 13% from 1997 to $24.8 billion. The 1998 level fell short of reported plans for 1998 of $27.9 billion as companies cut spending while oil and gas prices fell.
Spending for outer continental shelf lease bonuses fell in 1998 to $1.32 billion from $1.411 billion in 1997. For 1999, the US Minerals Management Service estimated OCS bonus payments of only $725 million.
The drop in commodity prices had slashed US wellhead revenues in 1998 to $59 billion from $85 billion in 1997 and $86.4 billion in 1996, the highest level since 1985.
US non-E&P spending was expected to drop 15% in 1999 to $13.8 billion. Downstream spending increased 4% in 1998 to $16.2 billion.
Spending declines were expected in almost all industry functions in 1999, including marketing, petrochemicals, pipelines, transport, and other activities. A possible exception was refining, where increased petroleum product demand was sustaining outlays.
Refining investment moved up 12% in 1998 to $3.486 billion. Spending in the refining sector was estimated to increase by 1% in 1999 to $3.525 billion. Outlays in 1999 were to include spending aimed at increasing capacity, upgrading existing facilities, and meeting environmental standards.
Capital spending in the refining sector hit a record high $6.1 billion in 1992 as outlays for environmental projects peaked. Spending in this sector also reflected steadily increasing US demand for petroleum products. US product demand had increased for 7 consecutive years through 1998 and was projected to increase again during 1999.
Canada, other regions
A slump in total capital and exploration spending for the Canadian petroleum industry looked likely to continue in 1999. Plans showed a drop of 10% during the year to $11 billion.
In 1998, Canadian capital spending fell 15% to $12.2 billion. That decline and the one expected for 1999 occurred mostly upstream.
Canadian E&P spending in the early 1990s averaged $5.5 billion/year then increased during 1994-97 to $9.7 billion/year.
But a slump in gas demand in the US and lower oil and gas prices discouraged Canadian spending in 1998 and chilled plans for 1999.
E&P spending was projected to fall 13% in 1999 to $8.2 billion after a 21% decline in 1998 to an estimated $9.4 billion.
US and Canadian companies were also planning to cut spending on projects outside of the US and Canada early in 1999, according to the OGJ survey.
The survey collected data from 32 US and Canadian companies planning capital and exploration expenditures outside the US and Canada. The companies planned to spend a total of $23.5 billion in 1999 vs. $30.8 billion in 1998. Outlays for the companies totaled $29.5 billion in 1997.
Salomon survey
Results of the Salomon Smith Barney midyear survey indicated that spending by US independent producers would decline from 1998 levels by 36%, and spending by major companies in the US would fall by 28%.
In all, US expenditures were projected to fall by 32% in 1999, Salomon Smith Barney said.
Spending plans in Canada showed a 15% decline from the prior year.
Outside North America, operators expected 1999 expenditures to fall by 16%.
Compounding the obvious impact of the late 1998 oil price collapse was active consolidation within the E&P segment of the industry. Although hard to quantify, there was abundant evidence that mergers and restructuring among operators had created an additional drag on industry spending in the first half of 1999, Salomon Smith Barney said.
"Two other significant points of note emerge from our conversations with respondents," the firm said.
The first was the fluidity of the midyear 1999 environment. "We do not have an historical reference, but the number of respondents that are still revising plans for 1999`s spending program in terms of both amount and mix appears to be unusual."
The second was the range of interpretations E&P companies made of events of January 1998-July 1999. "At the extremes," Salomon Smith Barney said, "some companies view the rebound in oil prices as confirmation that we have experienced an aberration in the oil markets-essentially a blip, maybe longer and deeper than anyone expected, but still a blip-and that oil prices are now back at a sustainable midpoint.
"Others conclude that we have been sent a warning that the structure supporting oil prices is much more fragile than previously believed and that caution remains essential in developing and executing investment programs."
The increased severity of spending cutbacks was apparent across all budget size categories, the company said.
Since December 1998, the most dramatic change in forecast 1999 spending reduction had occurred in the group with budgets of $1-2 billion. However, this group also had experienced several large mergers during first-half 1999, which moved several firms up from the smaller budget categories and increased the intensity of cost-reduction efforts.
Meantime, 73% of the respondents to the Salomon Smith Barney midyear survey indicated plans to increase 2000 spending from levels of 1999. Included in this group were more than 65% of respondents that anticipated increasing expenditures in 2000 by a substantial amount, or more than 10%.
"This is by far the largest number of planned increases for the coming year reflected in a midyear survey since we began asking the question 11 years ago and eclipses any prior indications of substantial increases," Salomon Smith Barney said.
The company noted that a majority of the respondents planning substantial increases in 2000 were operators with budgets of less than $500 million. "Nonetheless, the result comfortably supports our current Salomon Smith Barney forecast for a 10-12% spending increase in 2000."
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Decline seen in worldwide seismic spending
WORLDWIDE SEISMIC SPENDING DURING 1999 WAS expected to decline to $3.9 billion from $5 billion in 1998.
The anticipated cut stemmed from the low oil prices prevailing early in the year, according to a survey by Merrill Lynch & Co., New York. The firm`s appraisal found that seismic spending had become increasingly dependent on economic factors and less contingent on technical and operational factors.
The investment firm polled more than 100 oil and gas companies about seismic activity, spending, and trends.
"In our 1997 survey," it said, "top actors seen driving seismic activity growth were acquisition technology, 3D reshoots, and lease activity. In 1998, the top drivers were oil and gas prices."
Low oil prices in particular were responsible for the expected decrease in seismic spending in 1999. Marine expenditures were projected to decline 16% to $2 billion and land expenditures 35% to $1.2 billion.
Oil price effects
For the first time in several years, budgeted seismic expenditures were expected to be lower in 1999 than in 1998; however, in the 1997 and 1998 surveys, seismic expenditures for a given year were greater than had been projected the prior year.
"The potential impact on seismic activity will be substantial if oil were to remain below $13-14 and natural gas were to remain below $2 for an extended period, which we define as an additional 6 months," said Merrill Lynch. Both oil and gas prices rose strongly in the second half of 1999. If prices had remained low, petroleum companies would likely have reduced marine activity by 34% and land activity by 43%, Merrill Lynch said.
"Another interest point," said Merrill Lynch, "is that a larger percentage of the independents responding (vs. majors) said they wouldn`t cut expenditures if oil and natural gas prices remained low."
Future trends
Economics were driving a trend toward increased multiclient seismic vs. proprietary work.
"The cost of participating in a multiclient survey is roughly 30% of a proprietary contract shoot," said Merrill Lynch. "Improved economics have also prompted oil companies to acquire data for analysis on an area-wide basis in the deepwater Gulf of Mexico, rather than just concentrating on single, scattered blocks."
Other drivers of multiclient demand included lease sales in the Gulf of Mexico, farm-ins and farmouts, and the turnover of offshore blocks among oil companies.
"Internationally, multiclient (work) has grown as well, with North Sea multiclient (seismic) now (accounting for) around 25% of the market, up from virtually nil 5 years ago. The opening of Brazil`s offshore region to international oil companies will most likely lead to the adoption of the multiclient concept (there) as well."
Respondents to the survey saw the Gulf of Mexico as the most active marine seismic market through 2001 (see chart). Climbing on the list of active marine seismic areas in 1999 was Latin America, where the increase was expected to be driven by activity off Brazil.
"The other key areas," said Merrill Lynch, "are the North Sea, where licensing rounds spur demand, and West Africa, where huge finds off Nigeria and Angola have attracted the major oil companies."
