Capital spending in 2002 will decline in the US and Canada, especially in the upstream sector. Elsewhere, spending will increase, as indicated by Oil & Gas Journal's annual capital spending survey of US and Canadian oil and gas companies.
An anemic global economy has hit demand for oil and gas, and this limited demand is being felt all the way from the products market back to the wellhead. Weaker oil and gas prices and ample supplies have suppressed drilling rates.
A year ago the OGJ capital expenditures survey indicated that US upstream spending in 2001 would increase 12%, but the latest results show that the jump was 33%, as the number of well completions last year soared. OGJ expects that fewer well completions will reduce upstream spending 24% this year. Total US upstream and downstream spending will decline 15%, while in Canada total spending will dip 2.5%.
All figures are in US dollars.
Demand, supply, prices
Demand for oil this year is expected to increase by 500,000 b/d compared with an increase of just 100,000 b/d last year, according to the International Energy Agency. And amid weak demand, the Organization of Petroleum Exporting Countries continues to struggle with output constraint until the economy rebounds, bringing demand along with it.
The world export price of oil last year averaged $23.15/bbl, down from $27.51/bbl a year earlier. Sluggish demand in the fourth quarter of 2001 drove down the world export price to an average $17.68/bbl during November.
The closing futures price of crude on the New York Mercantile Exchange last December averaged just $19.53/ bbl, down from $29.30/bbl a year earlier. The price of NYMEX crude remained depressed into 2002, averaging $19.80/bbl in January but increasing to $20.42/bbl last month.
IEA expects total non-OPEC supply to increase 900,000 b/d this year, while the US Energy Information Administration forecasts that US production of oil will decline 6,000 b/d this year to 5.83 million b/d.
Natural gas demand in the US shrunk 5% last year, according to the most recent EIA estimates. EIA expects that gas demand in the US will increase 4% this year.
Taking into account unusually warm weather in January and the excessively large amount of working gas in storage, EIA lowered its forecast of dry gas production in the US for 2002 in its February Short Term Energy Outlook (STEO) and then again in the March STEO. The current projection is that US gas production will decline 4.6% from last year.
Without a reduction in output, prices would collapse. The US wellhead price for gas in January averaged $2.00/MMbtu vs. an anomalous $8.06/MMbtu in January 2001 and $2.60/MMbtu in January 2000.
"Because of the lack of heating demand, the weak economy, and the resultant excess storage levels for natural gas this winter, natural gas market fundamentals are obviously not favorable for strong price performance in the near term," EIA stated in the February STEO.
US upstream spending
Companies plan to decrease their US upstream spending in 2002 by nearly a quarter from last year's outlays. Lower prices for oil and gas last year pinched many companies' earnings and cash flows, and as prices remain at those lower levels, the incentive to drill for new supply is diminished.
Based on the results of the latest survey as well as trends in the industry, OGJ forecasts that US upstream capital expenditures this year will total $29.7 billion, declining 24% from a year ago to almost match expenditures in 2000 (Table 1).
Capital expenditures for drilling and exploration are expected to decline to $24.3 billion from $32.1 billion. OGJ estimates that about $3 billion of this will be spent on geophysical and geological costs. OGJ also forecasts that the number of US well completions will drop this year to 28,000 from last year's estimated 36,990 and 28,050 a year earlier (OGJ, Jan. 28, 2002, p. 86).
US spending on production and enhanced recovery projects-declining at the same rate as that for drilling and exploration-will total $4.6 billion this year. Wellhead revenues, which vary with production and price, are expected to total $92 billion this year, down from $132 billion last year and $129 billion in 2000.
An indicator of upstream activity, the Baker Hughes Inc. count of active rotary rigs in the US has declined since July 2001 when the count averaged 1,278 for the month to an average 867 for January. OGJ forecasts that the Baker Hughes count will average 230 fewer rigs this year than it did last year.
Outer Continental Shelf bonus payments will fall 26% this year, the US Minerals Management Service estimates, as three lease sales are projected to generate $742 million. This is down from $1 billion in OCS lease bonus payments last year-also from three lease sales. In 2000, two lease sales generated $442 million in bonus payments.
Non-E&P spending
Non-E&P spending in the US this year is expected to increase modestly to $17.8 billion from $16.9 billion. This follows a 14% increase in US non-E&P spending last year. Among the downstream sectors, though, there are varying swings in spending taking place this year.
The survey indicates that refining investments will decline 8% this year to $3.6 billion. Such outlays declined 5% last year. Reduced spending at refineries can reflect a drop in demand for petroleum products, while increased spending in this area often means that refiners are adding capacity to meet growing demand.
Petrochemical sector spending will increase 1% this year to $925 million following a 5% increase last year. In 2000, hefty cash flows and increasing demand pushed petrochemical expenditures to $2 billion. Spending on marketing will continue to grow this year, totaling $3.5 billion compared with $3.3 billion last year and $2.9 billion in 2000.
Pipeline spending will be especially strong, as more than 4,600 miles of pipeline construction is planned in the US this year (OGJ, Feb. 4, 2002, p. 64). Spending for crude and products pipelines is estimated at $887 million this year.
This is based on plans for 882 miles of pipeline construction vs. $570 million in spending last year for 578 miles of crude and product lines. In 2000, US crude and product pipeline spending totaled $201 million.
Natural gas pipeline expenditures will move up 53% this year to $4.6 billion. Outlays for US gas pipelines declined 8% last year. Plans call for the construction of 3,700 miles of gas pipelines this year, up from 2,450 miles last year and 3,200 miles in 2000.
Investments in forms of transportation other than pipelines are expected to edge up 2% to $570 million this year following a 3.5% increase last year. Oil and gas companies will spend $570 million on mining and other nonpetroleum projects in the US this year, up slightly from last year. Miscellaneous expenditures will fall to $3 billion from $3.9 billion a year ago.
Capital expenditures in Canada
Capital spending in Canada this year will follow the same pattern as in the US, with decreased upstream activity and heavier pipeline construction.
Canadian upstream spending in 2002 will decline 11% (Table 2). A year ago, upstream expenditures in Canada jumped 30%. Downstream spending is expected to continue to climb, however, primarily on the strength of products pipeline construction.
Total spending in Canada will be $21 billion, down just 2.5% in spite of the large upstream decline. This follows a 22.5% increase in total Canadian spending last year. One-third of all spending will be allocated to the upstream side.
Drilling and exploration expenditures are expected to total $9.9 billion in 2002, down from $11.1 billion last year but exceeding 2000 outlays of $8.6 billion.
Spending for production in Canada this year will total $4 billion vs. $4.5 billion in 2001 and $3.5 billion in 2000.
The Baker Hughes count of active rotary rigs in Canada in January averaged 405, down from 539 a year earlier. And OGJ forecasts that well completions in Canada will decline to 15,796 this year from 17,834.
Receiving a big boost from pipeline construction, non-E&P spending in Canada will increase 20%.
Spending for crude and products pipelines is expected to triple last year's expenditures in this sector. Plans call for more than 1,000 miles of crude and products lines to be laid this year, up from 345 miles in 2001. This is forecast to push spending in this area to $1.3 billion from $440 million last year.
Gas pipeline construction, pegged at over 900 miles this year, will be close behind. This will put spending on gas lines at $1.1 billion. In 2001, Canadian gas pipeline construction expenditures totaled $917 million, a decline of 31% from the year before.
Spending for other modes of transportation in Canada will be unchanged this year, and refining outlays will drop 1% to $420 million.
Petrochemical spending will move up 5% to $186 million, while marketing budgets will get a 20% boost to $668 million.
Expenditures for mining and other energy projects will remain strong in Canada this year, buoyed by large investments in development of the country's oil sands. Capital spending for Canadian oil sands nearly doubled from 1999 to 2000, according to Canadian Association of Petroleum Producers. OGJ forecasts that total spending on mining and other energy will be $3 billion this year.
Spending outside US and Canada
Spending outside the US and Canada will increase for the second consecutive year, according to OGJ's survey.
Table 3 shows the collective spending plans of five major oil and gas companies and four independent producers. These nine companies are based in the US and Canada and are planning projects that involve capital expenditures outside the US and Canada this year. The companies plan to increase spending on such projects 4.5%, following an 11.6% increase last year. This will bring 2002 spending outside the US and Canada by these companies to $17.3 billion.
The majority of these expenditures, $11.2 billion, will be allocated to production. This is an increase in production investments for the group of companies, albeit a smaller one than last year. Spending for drilling and exploration will decline 5% to $3 billion, the same amount spent on these activities in 2000.
Downstream capital spending outside the US and Canada by these nine companies will decline 7% this year. Last year the group cut such outlays 19%. The largest percentage decline will be for refining investments, which will plunge to a bit over half of last year's expenditures.
Petrochemical investments will increase 42% after falling off 61% last year. Capital spending for marketing activities will surge 43% to $1.3 billion following a modest 5% increase last year from $829 million in 2000.
Expenditures by the sample of companies for pipelines outside the US and Canada will rebound slightly following last year's 62% decline. These companies in 2000 spent $37 million on pipeline construction. This year they plan to invest $15 million in pipelines, the same amount they have budgeted for investing in forms of transportation other than pipelines.
The companies in the survey will increase capital spending on mining and other energy projects 5% to $200 million. Last year these expenditures increased 53%.
