Spending for worldwide exploration and production is expected to increase 21.3% to $261 billion this year, up from the 14.7% projected last December for 308 companies surveyed by Lehman Bros. Inc., New York.
The increase is the “result of adding $21 billion to 2006 budgets, partially offset by overspending 2005 budgets by $7 billion,” Lehman Bros. reported last month. The growth is driven by increased investments in the US and outside North America.
“The 224 oil and gas companies we surveyed with investments in the US are now budgeting a 27.7% increase in 2006 domestic spending, a significant increase from the 14.9% growth indicated in December. We believe that domestic expenditures are benefiting from continued high oil prices. Independents, significant participants in the US market, are more sensitive to commodity price changes. Also, rig and service costs have been rising significantly as capacity tightens,” said Lehman Bros. analysts.
International spending is predicted to rise 20.1% among the 88 companies surveyed in that category, driven by 9% additions to 2006 planned expenditures and partially offset by overspending of 2005 budgets by 5%. That’s up from a 14.9% increase projected in December. “Spending increases are coming from significant European companies, US independents and majors, and several national oil companies or state-sponsored enterprises in many regions such as Latin America, Asia-Pacific, and Russia,” the survey report said.
Canadian E&P expenditures are expected to rise 14.6% in 2006 for the 69 surveyed companies with operations in that country. “This is modestly above the 13.3% suggested by our December survey due to adding 4% to 2006 budgets, partially offset by a 3% overspending of 2005 budgets. While industry conditions remain strong in Canada, capital expenditures are being limited by difficulty securing rigs, the rise in the Canadian dollar vs. the US dollar making services more expensive, and the timing of megaprojects,” said Lehman Bros. analysts (Table 1).
Price outlook
The surveyed companies are now using an average price of $55.70/bbl of crude, up from $49.90/bbl previously, as the basis for their 2006 budgets. However, their price assumptions for natural gas have declined to $6.95/Mcf from $7.65/Mcf in December.
“On average, companies said they would reduce spending if oil prices fell to $42/bbl and natural gas prices declined to $5/Mcf,” said Lehman Bros, adding: “Prices would have to stay at these levels for a sustained period of time to cause reductions.”
The August contract for benchmark US light, sweet crudes hit $75.78/bbl-an all-time high for a front-month contract-during the July 7 trading session on the New York Mercantile Exchange before closing at $74.09/bbl. Earlier in the first week of July, the same contract had a record high closing price of $75.40/bbl before prices dropped with profit-taking. Subsequent-month prices increased sequentially on July 7 to a peak of $77.38/bbl in April 2007 and remaining above $69/bbl through December 2012. The front-month natural gas contract closed at $5.52/MMbtu the same day, with each consecutive month priced sequentially higher to $10.03/MMbtu for February 2007.
“For 2007, 67% of the companies in our survey forecast higher E&P spending, and 72% of these are planning double-digit increases. We believe this is encouraging with respect to 2007 budgets,” the analysts said.
Big, small increases
The strongest year-over-year increases in E&P spending are among companies that spend $100 million-1 billion, which includes most publicly traded US independent E&P companies (Table 2).
“These companies are forecasting increases of 30.6% in 2006,” said Lehman Bros. analysts. “This is double the 15.3% improvement that this company group was forecasting in December and is due to upward budget revisions.” This group includes Southwestern Energy Co., up 71%; Marathon Oil Co., up 45%; El Paso Corp., up 41%; Pogo Producing Co., up 67%; Denbury Resources Inc., up 66%; Williams Production Co., up 27%; and Quicksilver Resources Inc., which more than doubled.
The smallest 2006 budget increases are expected among companies that spend more than $1 billion, with spending levels up 25.9% vs. the 14.5% increase anticipated in the December survey. “This growth in budgets in 2006 vs. 2005 is, in part, due to the underspending of 2005 budgets and also to additions to 2006 budgets. Those companies that spend less than $100 million on E&P are budgeting a solid 28.5% rise in expenditures; this is well above the 16.9% improvement that this company group was forecasting in December,” the analysts said. Only Eni SPA showed a drop in spending in its US activities.
“The supermajors are also becoming more active in the US. BP PLC, Chevron Corp., ConocoPhillips, and Royal Dutch Shell PLC are all expected to spend more in the US in 2006,” the Lehman Bros. analysts said. “BP is forecast to increase domestic expenditures by 13%, Chevron by 19%, ConocoPhillips by 26%, and Royal Dutch Shell by 29%.”
Budgets are expanding for several national oil companies and state-sponsored enterprises in the Asia-Pacific region and Russia, and Canadian independents are also increasing their non-North American investments. Four large European oil companies are estimated to have budgeted increases exceeding 20% in 2006 E&P spending outside of North America, including Royal Dutch Shell, 29%; Eni, 29%; Repsol YPF SA, 43%; and Hydro Oil & Energy, 25%. In addition, Statoil is planning a 14% year-over-year increase in 2006 capital expenditures.
Two supermajors are forecast to ramp up their international budgets strongly in 2006: ConocoPhillips with a 37% increase and Chevron with 21%. ExxonMobil Corp., one of the largest spenders outside North America, is raising its 2006 international budget by 6%. Five large US independents are indicating substantial increases in their international E&P budgets-Apache Corp., 26%; Occidental Petroleum Corp., 19%; Noble Energy Inc., “more than doubling”; Newfield Exploration Co., “up over three times”; and Devon Energy Corp., 60%.
Government-owned or state-sponsored companies, which have been leading higher international E&P spending in recent years, are also forecasting still higher spending in 2006. These companies include those in Latin America (Petrobras, up 63%, and PDVSA, up 12%), China (Petrochina, up 13%, and China National Offshore Oil Corp. Ltd., up 51%), and Russia (TNK, up 42%, OAO Gazprom, up 20%, and Gazprom Neft [formerly Sibneft], up 61%).
Canadaian shift
The shift in E&P spending by the larger Canadian companies away from North America is moderating increases in Canadian expenditures compared with to the rest of the world. Lehman Bros. said it attempted to exclude oil sands spending not directly related to drilling and services.
The largest budget increases in Canada are among companies that spend $100 million-1 billion/year and are pegged at 25.3% in 2006 (Table 3). The larger independent E&P companies are among these, including many US companies and the larger Canadian companies. “The very largest and very smallest companies are showing more modest spending growth-14.1% for those companies spending less than $100 million and 10.5% for those that spend more than $1 billion,” the analysts said.
“Canadian independents are showing some of the strongest commitments to 2006 spending increases in Canada, with Talisman, Canadian Natural Resources, Petro-Canada, and Nexen all forecasting more than 20% increases in their E&P expenditures. We estimate Talisman will increase spending by 46%, Canadian Natural Resources to boost investments by 24%, Petro-Canada to raise spending by 25%, and Nexen to lift its spending by 67%,” Lehman Bros. said. Two Canadian independents reduced their budgets-EnCana by 5% and Husky Oil Co. by 15%-due to the acceleration of 2006 planned expenditures (shifted into 2005) and to the timing of megaprojects.
Other large companies planning increases in Canada include ConocoPhillips, 36%; Total SA, a six-fold increase; Shell Canada, 41%; Pogo Producing, more than tripling its spending; and EOG Resources Inc., 33%. Offsetting some of these increases are budget declines in Canada for Devon Energy, 7%; Imperial Oil Ltd., 9%; Murphy Oil Corp., 20%; Pioneer Natural Resources Co., 18%; and Quicksilver Resources, 21%.