SPENDING ON PETROLEUM EXPLOration and production was strong in 1997 as the industry`s recovery gained momentum. Surveys by Salomon Bros., New York, and Oil & Gas Journal reflected aggressive upstream investment plans by oil and gas companies.
Trends pointed to more of the same. A midyear update of the Salomon Bros. survey of oil and gas companies showed a stronger percentage gain in worldwide upstream investments than did a similar poll conducted at at the end of 1996 (Tables 1-6). The firm said the 17.9% worldwide spending growth projected for 1997 was the largest such increase in the survey`s 15 year history.
The 211 companies in the Salomon Bros. midyear survey indicated total 1997 spending on upstream operations of $83 billion worldwide, including $22 billion in the U.S., $7.8 billion in Canada, and $20.6 billion outside North America.
The two most-frequently cited reasons for increases in the Salomon Bros. survey were investments in new properties, including new leases and acquisitions, and development warranted by successful exploration programs. Other reasons for higher spending were increased costs of operations, especially drilling rigs; major new developments such as offshore Canada and the former Soviet Union; and a shift in emphasis toward drilling and away from acquisitions, spending on which isn`t covered by the survey.
OGJ, which estimates total U.S. spending based on a survey it conducts at the beginning of each year, predicted 1997 investment gains not just in exploration and production but in downstream operations as well (Table 7).
Salomon Bros. survey
The increase in worldwide spending that the midyear Salomon Bros. survey projected for 1997 compared with a 14.7% gain projected for the year at the end of 1996 on the basis of a survey covering 228 companies.
Worldwide spending increased 15.2% in 1996 and 9% in 1995. Salomon Bros. called the trend "the most sustained growth in 15 years."
Most of the spending growth came from independent companies based in the U.S. and operators outside of North America.
The total worldwide upstream spending projected in the midyear survey compared with approximate actual 1996 spending by the companies surveyed of $70.4 billion.
The 228 companies in the yearend 1996 survey had indicated 1997 spending of $81.4 billion vs. $71 billion in 1996.
Trend`s momentum
Signs other than the 6 month increases in overall spending projections showed that the investment surge had momentum in 1997.
Between yearend 1996 and the middle of 1997, more than 45% of survey respondents had increased spending plans. The number of such companies was more than twice that of companies planning to reduce outlays.
In the midyear survey of 1996, 48% of respondents said they had raised spending plans since the preceding December. But gains in the yearend 1995 survey, which came while the exploration and production recovery was just getting under way, were relatively low.
"The number of respondents raising spending plans (in midyear 1997) is exceptional considering that the December survey indicated the strongest year-ahead outlook in 9 years," Salomon Bros. said.
In addition, the spending strength seemed to have been budgeted. Only 16% of midyear survey respondents expected 1997 to exceed levels planned at the start of the year, compared with 20% the year before. In the midyear 1997 survey, 68% of survey respondents expected worldwide upstream spending to match budgeted levels, and 16% expected spending to fall short of plans.
More than 54% of the companies expected second-half spending to exceed first-half outlays. That`s a traditional seasonal level. Salomon Bros. noted that the second-half spending bias was especially strong among U.S. majors and international operators.
In a sign of confidence, 47% of midyear survey respondents expected 1997 spending to exceed operating cash flow. Six months earlier, the figure had been 38%. Since 1992, more than 40% of respondents to the Salomon Bros. survey have reported exploration and production expenditures exceeding cash flow. One third of respondents typically had underspent cash flow since that year.
About 60% of the companies in the midyear survey expected to increase spending again in 1998-44% "substantially" (more than 10%) and 16% "modestly." About 19% expected 1998 spending to remain the same, 6% said spending would be down modestly, and 15% said spending would be down substantially.
A year earlier, 66% of the companies had signaled an increase in spending for 1997.
U.S. plans
Midyear 1997 spending plans for the U.S. were at their strongest level in the 15 years of the survey, Salomon Bros. said. Respondents in the middle of the year planned to increase outlays by 14.3%. Companies in the yearend 1996 outlook for 1997 foresaw a 12.7% gain.
In 1996, U.S. spending increased by 18.2% from the 1995 level.
Independent producers accounted for nearly all the midyear 1997 rise in spending projections.
The 129 U.S. independents in the Salomon Bros. midyear survey expected upstream outlays to rise by 23.7% in 1997 from 1996 levels. About 51% of the independents expected spending to be higher in the second half than in the first. And 48% of them expected to outspend operating cash flow.
More than 58% of the independents expected spending to increase again in 1998, with 46% expecting expenditures to be up by 10% or more. About one third of them expected spending to exceed operating cash flow in 1998.
About 47% of the independents in the survey increased 1997 spending plans between yearend 1996 and midyear. Changes were modest for the 22% of independents reducing spending plans in the period.
U.S. upstream investment plans by 15 major companies in the survey held steady in the first year. The increase foreseen for 1997 slipped to 6.2% at midyear from 7.6% at yearend 1996 because outlays for 1996 proved to have been higher than companies thought in December.
Six of the companies reported increases in 1997 budgets during the first half: Shell, Chevron, Texaco, USX, Phillips, and Occidental. Reducing budgets during the first half were Mobil, British Petroleum, and Amerada Hess.
Canadian budgets up
The 83 surveyed companies with operations in Canada projected a 1997 upstream spending increase of 17.3% at midyear, compared with an 11.6% gain foreseen at yearend 1996.
About 49% of those companies reported increases in their 1997 budgets, while 23% cut Canadian budgets in the first half of the year. An unusually short spring thaw lengthened the drilling season in Canada and accounted for part of the spending gain.
Of companies with Canadian operations, 64% expected 1997 outlays in Canada to match budgeted levels, 13% expected to overspend budgets, and 23% thought they would underspend planned levels. Some 46% of the respondents expected Canadian spending to exceed operating cash flow.
For 1998, about 55% of the respondents to the midyear survey expected increased upstream spending, while 24% expected no change.
Outside North America
Upstream spending outside of North American appeared in the midyear survey to be headed for a 20% increase in 1997. Spending outside the U.S. and Canada jumped 13.4% in 1996, at the end of which respondents to the Salomon Bros. survey had projected a 16.2% gain for 1997.
More than 44% of the 97 companies with investments outside of North American raised their planned 1997 expenditures between December 1996 and midyear. About two thirds of those companies expected outlays to match budgeted levels. The rest were about evenly split between underspenders and overspenders.
Almost half the companies with international investments thought 1997 spending would exceed operating cash flow.
Furthermore, more than 60% of the companies expected spending hikes in 1998. And 43% of the companies thought 1998 spending increases would be 10% or more. About 19% expected 1998 spending to decrease.
Price assumptions
Companies in the survey exhibited their optimism about upstream investments while expressing little expectation for increases in oil and gas prices.
Worldwide, prices foreseen by the companies averaged $19.84/bbl for West Texas Intermediate (WTI) crude at midyear vs. $19.67/bbl at yearend 1996 and $2.04/Mcf at Henry Hub for natural gas vs. $2.03/Mcf in December.
At the time of the midyear survey, the WTI price had averaged $21.64/bbl for 1997 and the gas price $2.38/Mcf.
More than 96% of the respondents said short-term oil and gas price changes had not influenced their spending plans for 1997 or 1998.
Between the late 1996 and midyear 1997 surveys, independent producers lowered their U.S. price expectations for 1997 to $19.66/bbl from $19.95/bbl and for gas from $2.03/Mcf to $2.08/Mcf. Major companies raised their combined expectation for the average U.S. oil price to $19.53/bbl from $18.49/bbl, while their average expected gas price remained at $2.02/Mcf.
In Canada, price expectations of surveyed companies rose to $20.33/bbl of WTI-equivalent crude (Canadian dollars) from $19.85/bbl at yearend 1996 and to $1.74/Mcf of gas from $1.56/Mcf.
For companies investing outside of North America, the midyear price expectation fell to $17.60/bbl of Brent crude from $17.99/bbl in December.
OGJ`s outlook
From its survey of U.S. oil and gas companies, conducted at about the time budgets were being adopted, OGJ projected total capital and exploratory spending on U.S. activities in 1997 of $35.8 billion. The total would have been a 7.7% gain on 1996 spending, the third straight annual increase in U.S. spending, and the highest total since 1991 (Tables 7-9).
OGJ projected the upstream portion of the U.S. total at $20.1 billion, a 10.5% increase from the 1996 level. It expected downstream outlays to rise 4.3% to $15.7 billion after a 9.9% drop in 1996.
By OGJ`s estimates, U.S. spending reached an all-time high of $83 billion in 1981 and slumped to a recent low of $25.2 billion in 1987. Since then, average U.S. outlays had been fairly steady at $32.2 billion/year.
Of the total upstream outlay projected in OGJ`s survey, expenditure for exploration and drilling was to climb 12% to $16.2 billion and for production and new enhanced recovery project facilities also by 12% to $3.2 billion.
The downstream spending total included $3.9 billion for refining, down slightly from 1996, and $2 billion for pipelines, up 14.8%. The total outlay for petrochemical facilities was expected to fall 4% to $2.7 billion. Expenditure for U.S. marketing facilities was projected at a record $3.27 billion, up 12.2%, and for nonpipeline transportation $612 million, down 6.8%.
The OGJ survey projected capital spending by U.S. companies on nonpetroleum activity of $3.2 billion, up 7.4%.
Canada`s spending
OGJ projected total 1997 capital and exploration spending for the Canadian petroleum industry of $13.3 billion, up 15.4% after a fractional decline in 1996. The total included exploration and production spending of $10.8 billion, up 8% after a 7% gain in 1996.
Spending on activities other than exploration and production in Canada was expected to total $2.49 billion, up 64%. The forecast included drops of 4.2% in refining spending to $296 million and of 7.7% in petrochemical spending to $72 million.
OGJ projected an 11.9% increase in marketing outlays in Canada to $330 million.
It forecast leaps in spending for Canadian crude and product pipelines to $440 million in 1997 from $22 million in 1996 and for gas pipelines to $657 million from $294 million. The outlay for other types of transportation was estimated at $97 million, up 18.3%.
The survey projected the total outlay on mining and other energy, including oilsands, at $298 million, up 6%. Spending on other activities was expected to climb to $304 million from $159 million.
Non-North American spending
Outside of North America, 24 U.S. and Canadian companies in the OGJ survey reported plans to spend a total of $16.3 billion in 1997, up 11.4% from the year before. The total included an 11.1% increase in upstream spending to $10.6 billion and an 11.9% gain in downstream spending to $5.6 billion.
The downstream total reflected spending gains of 6% in refining to $1 billion, 7.8% in petrochemicals to $1.4 billion, and 12.4% in marketing to $2.11 billion.
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