Analysts: E&P spending to jump more than 19% in 2001

Worldwide spending on exploration and production of oil and natural gas will jump more than 19% next year, based on �the largest, most comprehensive study ever� among both independent and integrated operators, officials of Lehman Brothers reported Monday.

A Nov. 13-Dec. 15 survey of 344 producers revealed that most plan to increase US upstream spending by an average 19.1% in 2001. Among the independents, who have been the primary drivers in the upstream recovery over the past 18 months, the proposed increase is even bigger, with 231 of those companies increasing their budgets an average 21.7%.

The major integrated companies are increasing their US upstream spending by 15.9% on average, according to the report authored by James D. Crandell, who did similar surveys for Lehman Brothers this past May and in December 1999.

But the �most encouraging� news from the latest survey is that budgets for international exploration and production also will rise significantly next year, with 113 of the surveyed companies planing an average increase of 19%, Crandell reported. That�s �well above the 4.1% increase expected in 2000,� he said. Producers generally have underspent their international E&P budgets this year.

Most of the gain in international spending is a result of large budget increases by two supermajors, BP and the Royal Dutch/Shell Group, up from depressed levels this year. However, Lehman Brothers also reported substantial budget increases among large US independents ranging from 11% by Pogo Producing Co. in Houston to 79% at Cross Timbers Oil Co. in Ft. Worth, Tex.

For the second consecutive year, Canada is poised to show the most improvement with an average 19.9% increase in spending next year by 84 of the companies surveyed, Lehman Brothers reported. Both US and Canadian projected E&P expenditures are above original estimates of the mid-year survey in May.

The projected strong increase in E&P spending for next year is driven primarily by high natural gas prices�particularly in the US and Canada�and the resulting strong cash flow to producers.

However, Crandell said, �Unlike 2000, where the growth in spending was highly skewed towards North American natural gas drilling, the planned increases in 2001 E&P expenditures are broad based.�

Lehman Brothers� bullish outlook for increased upstream spending next year is supported by reports of other industry participants and analysts. Raymond James & Associates Inc. earlier this month reported that budget increases already reported by 21 independents averaged 25%, supporting �a consensus increase of about 20%.�

However, Raymond James analysts reported, �We believe these estimates are understating the amount of actual 2001 E&P spending increases by one-third.�

That�s because producers still �are taking a cautious approach to the sustainability of higher energy prices,� they said.

Indeed, respondents to Lehman Brothers� latest survey said they were basing their projections on average prices of $25/bbl for oil and $3.75/Mcf for natural gas. But they said they would increase their budgets another 19% if oil prices were in the range of $30-$35/bbl.

Moreover, Raymond James officials predicted, �Given the limited service company infrastructure, E&P costs are likely to explode over the next year. In other words, E&P budgets will be up 20% next year only if companies drill the same number of wells as last year. Our guess is they intend to drill more wells next year.�

Of those companies surveyed by Lehman Brothers, 94% said they expect drilling costs to rise next year, especially day-rates for drilling rigs. A solid majority, 63%, said higher rig rates would affect their drilling programs.

As a result, more producers are trying to lock in suppliers�especially drilling contractors�through long-term contracts or multiple-well deals. They also plan to put more jobs out for bid and to do more turnkey deals in an effort to reduce costs, Lehman Brothers reported.

The report said 71% of the companies surveyed expressed concern over a lack of equipment to carry out their drilling programs. A substantial majority is even more concerned about availability of qualified personnel.

�This is especially true for North American-oriented companies, many of whom think it is the largest problem that the industry faces today,� Crandell said.

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