Capital Spending Outlook U.S. companies' capital outlays to hit highest level since 1991

Robert J. Beck
Associate Managing Editor-Economics

U.S. oil and gas company capital spending is expected to climb in 1997 for the third year in a row and to the highest level since 1991.

Plans call for higher outlays upstream and downstream this year. OGJ's annual capital expenditure survey shows U.S. companies plan to spend $35.8 billion on U.S. projects in 1997, up 7.7% from about $33.2 billion in 1996.

Upstream spending in the U.S. is expected to increase 10.5% this year to $20.1 billion, following a 15.3% increase in 1996. Downstream outlays are to increase 4.3% to $15.7 billion. This follows a decline of 9.9% last year, when downstream outlays slipped to $15.1 billion.

Oil and gas industry capital spending peaked at $83 billion in 1981. Falling oil prices, revenues, and profits spurred a steep drop in industry spending, which hit a recent low of $25.2 billion in 1987. Since then, industry capital spending has been less volatile and has averaged $32.2 billion/year.

Companies plan to continue to boost investments in areas outside of the U.S. and Canada. The increased international spending is supported by higher prices along with the surge in economic growth and oil and gas demand in industrial and developing countries, particularly in Asia.

Prices

The level and volatility of crude oil and natural gas prices strongly influences industry investment plans.

Strong demand, particularly during the winter heating season, and low industry storage levels helped boost gas prices in 1996. The average U.S. wellhead price of natural gas last year jumped 41.5% to about $2.25/Mcf, and gas futures prices averaged $2.52/ MMBTU, up 49.4%.

Cold winter weather at the start of 1997 has helped sustain gas demand and support higher gas prices. But it is expected that natural gas prices on average will be slightly lower in 1997. A return to closer-to-normal weather and competition from other fuels will put downward pressure on prices.

Strong worldwide demand for petroleum products coupled with slower than anticipated growth in supply of oil from countries outside the Organization of Petroleum Exporting Countries boosted oil prices in 1996. According to the International Energy Agency, world oil demand moved up an estimated 1.6 million b/d to an average 71.7 million b/d last year. Accordingly, the price of West Texas intermediate crude oil increased 20.6% to an average $21.23/bbl. The price for world export crudes averaged $20.04/bbl for the year, an increase of 19.5%.

The price for world export crude oil averaged $23.29/bbl in January, up 30.2% from $17.89/bbl a year ago. But OGJ expects slightly weaker prices on average in 1997 because of a substantial increase in non-OPEC output.

U.S. upstream spending

Budgets for U.S. exploration and production call for a 10.5% increase in spending in 1997 to $20.1 billion, the highest level since 1985.

The level of E&P outlays in 1996 was significantly higher than plans OGJ reported a year ago (OGJ, Feb. 26, 1996, p. 23). Last year, industry plans were for E&P spending of $16.9 billion, up only 4%.

There was a sharp increase in Outer Continental Shelf lease bonus payments in 1996, up 112% to $878 million. In 1995, U.S. Minerals Management Service estimated OCS bonus payments at only $213 million. A string of discoveries, particularly in the deepwater and subsalt theaters of the Gulf of Mexico, have boosted demand for OCS leases. This year, MMS estimates payments of $710 million.

The increase in prices in 1996 provided funds for increased drilling activity and production projects. U.S. wellhead revenues were at the highest level since 1985.

Capital spending on exploration and drilling jumped 12.7% in 1996 to $14.5 billion.

A year ago, the increase was projected at only 5.8%. This year, plans call for an increase in exploration and drilling outlays of another 12% to $16.2 billion.

Capital spending on production and new enhanced recovery project facilities increased 12.7% in 1996 to $2.8 billion. Spending is projected to increase another 12% in 1997 to $3.2 billion.

U.S. E&P spending peaked at $57.8 billion in 1981. Following the plunge in oil prices, E&P outlays dipped to $14.2 billion in 1987. In the past 10 years, E&P spending has shifted with changes in oil and natural gas prices, ranging from $12.8 billion in 1992 to $17.5 billion in 1991.

The changes in spending are reflected in the counts of U.S. active rigs and well completions. Baker Hughes' tally of active drilling rigs in the U.S. peaked at an annual average of 3,970 in 1981 before plunging to a modern-era record low of 717 in 1992. There has been a modest recovery the past 4 years, with the Baker Hughes count averaging 779 in 1996. The number of U.S. well completions peaked in 1981 at 89,234. Well completions for 1996 are estimated at only 23,340 wells. OGJ expects rig activity and well completions will rise in 1997 as a result of increased oil and gas demand and higher oil and gas prices. OGJ predicts the rig count will average 830 and well completions 24,900 in 1997 (OGJ, Jan. 27, 1997, p. 66).

The level of spending is expected to increase at a relatively faster rate than the level of activity because of increased costs. Increased outlays for seismic activity and a shift to gas well drilling and deeper wells have pushed up average well costs.

U.S. downstream spending

U.S. non-E&P spending is projected to increase slightly in 1997, moving up 4.3% to $15.7 billion.

This follows a drop in spending of 9.9% in 1996 to $15.1 billion. Increased spending on pipelines, marketing facilities, and mining and other energy will boost total outlays. There will be modest declines in capital spending for refining and petrochemical facilities. Substantial declines in pipeline, refining, and petrochemical spending are the main reasons for the decline in 1996 non-E&P capital outlays.

Non-E&P spending in the U.S. peaked in 1981 at $25.2 billion. Falling oil prices reduced available funds, and downstream spending fell to $10.4 billion in 1986. Improved market conditions and restructuring to cut operating costs enabled companies to boost downstream outlays in recent years.

Spending on pipelines was down 23.3% in 1996 at $1.76 billion. Total pipeline spending is expected to increase 14.8% in 1997 to $2.02 billion. Plans call for 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 (OGJ, Feb. 10, 1997, p. 34).

Refining capital spending in 1996 fell 19.8% to $3.932 billion. Spending in this sector is expected to slip marginally again this year to $3.907 billion. Planned outlays for 1997 are for upgrading refining facilities and additional equipment to meet changing environmental standards.

Capital spending in the refining sector hit a record high $6.1 billion in 1992 as outlays for environmental projects peaked.

U.S. refining capacity is being stretched to the limit. However, the construction of new facilities appears almost impossible because of high costs and permitting difficulties related to stricter environmental regulations. Some capacity has been added by renovating and restarting mothballed units or adding units to existing refineries. But the added capacity from these sources is limited. According to the American Petroleum Institute, U.S. refinery utilization averaged 93.2% in 1996 and 92% in 1995. That is close to maximum sustainable capacity utilization.

Capital spending on petrochemical facilities is projected to slip again in 1997, falling 4% to $2.7 billion. Spending in this sector fell 15.8% last year to $2.8 billion. Industry has a history of increasing capacity sharply in response to higher demand and has had periods with excess capacity. Those capacity cycles have led to sharp swings in capital outlays.

Capital spending on marketing facilities will increase 12.2% to a record high $3.27 billion. Changing market strategies and locations, restructuring, intense competition, and a shifting consumer preference for convenience stores has pushed up marketing outlays in recent years.

Capital spending for transportation other than pipelines is expected to fall 6.8% in 1997 to $612 million vs. an increase of 9.1% in 1996 to $657 million. Spending in this sector is sensitive to geographic changes in petroleum product demand patterns and changes in the level of imports. Capital spending by U.S. companies on non-petroleum activities will increase 7.4% in 1997 to $3.2 billion. Spending in these areas depends upon recent cash flow.

Canadian spending

Total capital and exploration spending plans for the Canadian petroleum industry show an increase of 15.4% in 1997 to $13.3 billion. Last year, Canadian capital spending fell 0.3% to $11.56 billion. The decline in 1996 was primarily due to a sharp drop in downstream outlays.

There have been significant increases in E&P spending the past 2 years in Canada. Canadian gas production has jumped to provide greater exports to U.S. markets and support rising domestic demand.

Exploration and production spending in Canada is projected to increase 8% in 1997 to $10.84 billion. This follows an increase of 7% last year, when E&P spending was an estimated $10.04 billion.

The number of active rotary drilling rigs in Canada increased to an average 270 in 1996 from 229 in 1995 and 262 in 1994. In January, there was an average 401 rigs working, up from 344 in 1996. OGJ projected an increase in Canadian well completions this year, up 2.8% to 12,126 wells (OGJ, Jan. 27, 1997, p. 66).

Canadian non-E&P petroleum spending is expected to increase sharply in 1997, increasing 64.1% to $2.49 billion. Canadian refining spending will be down 4.2% at $296 million. Petrochemical spending will also slip in 1997, down 7.7% to $72 million. Marketing outlays are projected to be up 11.9 % in 1997 at $330 million compared with a drop of 8.4% in 1996 to $295 million.

In 1997, spending for Canadian crude and products pipelines is expected to rocket to $440 million from only $22 million in 1996. Outlays for natural gas pipelines will climb to $657 million from $294 million in 1996. A total of 1,767 miles of new pipeline is planned for Canada in 1997 (OGJ, Feb. 10, 1997, p. 35).

Spending on all other types of transportation will move up 18.3% to $97 million from $82 million in 1996. Spending on mining and other energy, which includes oilsands development, is planned to move up 6% in 1997 to $298 million. Outlays in this category were down 1.7% in 1996 at $281 million. Canadian oil and gas industry capital spending on all other activities is planned to be up sharply in 1997 at $304 million from $159 million in 1996.

Non-North American outlays

U.S. and Canadian companies will continue to invest significant funds in projects outside of U.S. and Canada.

As increased global economic activity and oil demand have stimulated investment, there has been a noticeable shift in industry capital expenditures to areas outside North America.

The OGJ survey collected data from 24 U.S. and Canadian companies planning expenditures outside North America of $16.3 billion in 1997, up 11.4% . Upstream spending is projected to rise 11.1% in 1997 to $10.6 billion. Downstream spending is expected to move up 11.9% to $5.6 billion.

The increase in downstream outlays will be due to substantial increases in pipeline, refining, petrochemical, and marketing capital spending. Refining outlays by this group are expected to move up 6% to $1 billion. Petrochemical spending will be up 7.8% at $1.4 billion. Marketing spending is expected to be up 12.4% in 1997 at $2.11 billion. All other non-North American outlays by this group of companies is planned to move up to $791 million from $624 million in 1996. Other spending totaled $952 million in 1995.