CAPITAL SPENDING PLANS BY U.S. and non-U.S. oil and gas companies during 1998 were jeopardized by a plunge in oil prices (Tables 1-3).
For operations in the U.S., capital spending was expected to move up for the fourth year in a row, becoming the highest industry investment level since 1985.
Plans called for higher downstream outlays but slightly lower upstream spending in the U.S.
These plans, which are the core for an annual capital expenditure survey compiled by Oil & Gas Journal, show that companies expected to spend a total of $46.1 billion on U.S. projects in 1998, up 5% from about $44 billion in 1997.
Another survey-taken at midyear 1998 by Salomon Smith Barney, New York-also projected a general increase in 1998 upstream spending despite the oil price decline and worries about Asian economies (Tables 4-6).
The brokerage firm`s midyear 1998 survey of worldwide oil and gas E&P spending showed that planned expenditures for 1998 would increase by 6%, compared with a 11% increase indicated in its yearend 1997 survey.
Its midyear survey revealed that 179 oil and gas companies planned worldwide expenditures in 1998 of $85.8 billion vs. $80.8 billion estimated for 1997. In its year-end 1997 survey, 202 companies said they expected the year-on-year increase to be to $93.8 billion from $84.6 billion. But that was before the price of West Texas intermediate crude oil fell below $15/bbl.
OGJ survey
Downstream spending in the U.S. was anticipated in the OGJ survey to increase 17% during 1998 to a total of $18.2 billion, following a 0.2% drop in 1997.
U.S. upstream outlays were set to slip 2% to $27.9 billion. That followed a jump of 33% in 1997 to $28.4 billion.
Companies had been increasing investments outside the U.S., spurred by the surge in economic growth and oil demand. In 1998, however, the outlook was clouded by economic turmoil in a number of Asian countries and the collapse of oil prices.
U.S. upstream spending
The U.S. E&P spending jump in 1997 sharply exceeded projections in the early-year OGJ survey for a 10.5% gain to $20.1 billion.
Outer Continental Shelf (OCS) lease bonus payments in 1997 jumped 42% to $1.245 billion. A year earlier, the U.S. Minerals Management Service (MMS) had estimated OCS bonus payments of only $710 million in 1997. A string of deepwater discoveries boosted interest in Gulf of Mexico leases. For 1998, MMS estimated payments of $960 million, down 23% from 1997.
The increase in oil and gas prices in 1996-97 provided funds for increased drilling activity and production projects. Oil and gas wellhead revenues during those 2 years were at the highest level since 1985.
Capital spending on U.S. exploration and drilling jumped 33% in 1997 to $22.7 billion. The year before, the increase was projected at only 12%. In 1998, plans called for a decline in exploration and drilling spending of 1% to $22.5 billion.
Capital spending on U.S. production and new enhanced recovery projects increased 33% in 1997 to $4.5 billion. Spending was expected to slip 1% in 1998 to $4.4 billion.
U.S. non-E&P spending was projected to increase 17% in 1998 to $18.2 billion. This followed a drop in non-E&P spending of 0.2% in 1997 to $15.5 billion. Increased spending was expected in almost all categories, including refining, marketing, petrochemicals, and pipelines. There were to be modest declines in capital spending for other transportation equipment.
In 1997, substantial declines in refining and petrochemical spending were the main reasons for the drop in non-E&P capital outlays.
Spending on pipelines was up 46% in 1997 at $2.56 billion. Total pipeline spending was expected to increase 24% in 1998 to $3.16 billion. Plans called for 3,104 miles of natural gas pipeline and 2,498 miles of crude oil and products pipeline to be laid in the U.S. in 1998. This was up from 2,728 miles of natural gas pipeline and 1,924 miles of crude oil and products pipeline to be laid in the U.S. in 1997.
U.S. refining capital spending fell 21% in 1997 to $3.102 billion. Spending in this sector was expected to rebound in 1998 by 24% to $3.85 billion. Planned outlays for 1998 were for adding to existing capacity, upgrading refining facilities, and installing equipment to meet changing environmental standards. Capital spending for refining peaked at $6.1 billion in 1992 as outlays for environmental projects peaked.
Spending in Canada, elsewhere
The OGJ survey projected a 0.8% decline in total capital and exploration spending plans for the Canadian petroleum industry in 1998 to $11.9 billion (U.S.).
In 1997, Canadian capital spending increased 19% to $12 billion. The sharp increase in 1997 came from gains both upstream and downstream.
Canadian E&P spending was on an upswing. Canadian gas production had increased for export to U.S. markets and to meet rising domestic demand. But slowing growth in gas demand in the U.S. and lower oil and gas prices were expected to rein spending in 1998.
Exploration and production spending in Canada was projected to fall 7% in 1998 to $8.9 billion. This followed an increase of 11% in 1997, when E&P spending was an estimated $9.5 billion.
U.S. and Canadian companies were expected to continue investing heavily outside the U.S. and Canada.
The OGJ survey collected data from 32 U.S. and Canadian companies planning expenditures outside of North America. These companies planned to spend a total of $27.7 billion in 1998, up 13% from $24.5 billion in 1997. Upstream spending was planned to be up 12% in 1998 at $20.6 billion. Non-E&P spending was expected to move up 16% to $7.1 billion.
The increase in non-E&P outlays was attributed to increases in refining, petrochemical, and marketing projects. Refining outlays by this group were expected to move up 13% to $1.3 billion. Petrochemical spending was to be up 47% at $1.9 billion. Marketing spending was expected to be up 11% in 1998 at $2.9 billion. All other international outlays by this group of companies were to slip to $988 million from $1.056 billion in 1997. Other spending totaled $1.127 billion in 1996.
Salomon survey
Salomon Smith Barney believed the U.S. and Canada`s 2-year surge in E&P activity would moderate while activity elsewhere continued to expand.
Independent producers in the U.S. and operators in Canada represented the entire change to 1998 spending plans reflected in Salomon`s midyear 1998 update.
In the U.S., 107 surveyed independents planned a 5% reduction in spending compared with 1997-to $13 billion from $13.7 billion. Sixty-eight Canadian operators planned an aggregate reduction of 12% to $7.9 billion from $9 billion.
The combined impact of weak oil prices and deteriorated economics for heavy oil magnified the spending curtailments in Canada.
There was little mystery about the cause of the spending plan cuts that occurred since the beginning of 1998. Oil prices were the overwhelmingly dominant consideration, Salomon Smith Barney said.
In the U.S., budget cuts since December 1997 were indicated by Union Pacific Resources Co., Chesapeake Energy Corp., and Occidental Petroleum Corp. Furthermore, Barrett Resources, Apache Corp., and Ocean Energy slashed 1998 budgets compared with 1997. However, Burlington Resources, Coastal Corp., Snyder Oil Corp., and Sonat projected spending growth in 1998.
Other spending
Spending growth outside North America, which increased 16% in 1997 and was projected to grow 14% in Salomon Smith Barney`s December 1997 survey, remained at about the 14% level in the midyear 1998 update.
Of 82 respondents, 52% indicated that low oil prices had not affected their plans, while 47% of respondents indicated that they had decreased their budgets in response to low oil prices. The robustness of overall spending growth, Salomon Smith Barney said, could be attributed to large international projects, which were relatively insensitive to short-term fluctuations in oil prices.
Budget reductions since December 1997 were indicated by YPF SA, British Gas plc, and Unocal Corp. And Amoco Corp. and British Petroleum, which agreed to merge during 1998, as well as OMV AG, cut 1998 budgets compared with 1997. But Elf Aquitaine and Neste Oy increased their budgets since December 1997, and Exxon Corp., Agip SpA, and Royal Dutch/Shell raised spending plans in 1998 compared with 1997.
The average expectation for oil prices fell to $16.25/bbl at midyear from the $18.06/bbl indicated in Salomon Smith Barney`s December 1997 survey. Longer range oil price expectations were $17.96/bbl with an equal number of respondents indicating that their expectations had decreased or been unchanged.
 |
 |
 |
 |
 |
 |
Companies expected to increase deepwater spending
AN INCREASING SHARE OF OIL INDUStry capital expenditures through 2002 was expected to be for deepwater oil and gas developments.
Spending outlays for 1998-2002 were projected to reach a combined $71 billion as the industry expanded its hunt for fields offshore, said Douglas-Westwood Ltd., Canterbury, U.K.
Deepwater expenditures in 2002 were expected to be $18.8 billion, compared with $10.8 billion in 1998.
John Westwood, coauthor of a deepwater study by Douglas-Westwood, said, "As shallow water oil is increasingly depleted, deepwater reserves are becoming more important, and oil companies big and small are gearing up for a major financial commitment."
Driving increases in deepwater action:
- Depletion of shallow-water reserves.
- Greater potential for large finds compared with shallow water.
- Improved technology and management practices and resulting reduced development costs.
- Fiscal policies by host governments favoring ventures in deep water.
Future activity
Douglas-Westwood predicted that 134 oil and gas fields would be developed in water deeper than 300 m during 1998-2002. During the 5 year period, 65 deepwater floating production systems would be installed, and 1,296 deepwater wells would be drilled. More than 8,000 km of pipelines and risers would be installed for deepwater developments, and 5,800 km of control lines would be needed.
Deepwater fields accounted for 90% of the reserves involved in likely developments off Brazil. In the Gulf of Mexico, they accounted for 89% of reserves; off West Africa 45%; off Norway 38%; and off the U.K. 9%.
"For these key areas," Douglas-Westwood said, "44% of the combined reserves of future fields are in deep water-a clear demonstration of the growing importance of deepwater activity to the world oil and gas industry."
Brazil`s Petroleo Brasileiro SA, for example, planned to increase production 50% to 1.5 million b/d. Of this, 60% would come from fields in water deeper than 400 m.
At year-end 1996, global production from deepwater fields, or those at water depths greater than 300 m, was about 1 million b/d. At the 1998 Offshore Technology Conference, Exxon Exploration Pres. Jon Thompson said he expected this figure to triple by 2000, at which time deepwater production would account for 10% of total offshore output.
Douglas-Westwood predicted that the number of deepwater fields brought on stream would increase to 30/year from 15/year in 1998.
