Upstream spending defies industry decline

June 21, 1999
Petroleum company performance measures* [117,224 bytes] Capital spending on worldwide exploration and development rose steadily during 1994-98, despite a decline in return on capital employed that began in 1996 and reached a dismal 3.1% last year vs. 9% in 1997. This is one of the conclusions of Ernst & Young LLP's annual industry performance analysis, the results of which were released recently.
Capital spending on worldwide exploration and development rose steadily during 1994-98, despite a decline in return on capital employed that began in 1996 and reached a dismal 3.1% last year vs. 9% in 1997.

This is one of the conclusions of Ernst & Young LLP's annual industry performance analysis, the results of which were released recently.

The spending trend defies changes in other key industry tracking measures as well, says Ernst & Young. Industry-wide employment has declined 13% in 4 years, for example, with independents shedding a staggering 50% of their workers.

These results are based on financial and operating data from 23 of the largest integrated and independent petroleum firms. The major integrated companies included in the EnergySmart 99 analysis were: Amerada Hess Corp., BP Amoco plc, ARCO, Chevron Corp., Conoco Inc., Exxon Corp., Mobil Corp., Marathon Oil Co., Murphy Oil Corp., Phillips Petroleum Co., Royal Dutch/Shell, Texaco Inc., and Unocal Corp. The independents studied were: Apache Corp., Anadarko Petroleum Corp., Burlington Resources Inc., Enron Oil & Gas Co., Kerr-McGee Corp., Noble Affiliates Inc., Occidental Petroleum Corp., PennzEnergy Co., Pioneer Natural Resources Co., and Union Pacific Resources Group Inc.

Key findings

Capital spending on E&D projects has risen 80% over the last 4 years, says Ernst & Young, with spending outside the U.S. increasing at a faster rate than spending on U.S. projects. Independents increased spending more rapidly than the majors; in fact, they doubled their outlays during the period.

Total E&P spending for the group reached $58 billion in 1998 (see chart).

"In contrast, the industry also recorded a record write-off in 1998 of $5.7 billion of assets, or one third of its income," said Ernst & Young, referring to combined results from the group of 23 companies.

On the operations side, the companies have seen a steady decline in U.S. reserves, totaling 6% for oil and 11% for gas during 1995-98. Concurrently, non-U.S. reserves have increased over the period-21% for oil and 17% for gas.

"U.S. gas reserves stand at less than 9 years of current production and continue to decline," said the company. In 1998, the group replaced 65% of its U.S. production while replacing 175% of non-U.S. production.

"The implication of these trends," said Jim Lawnin, senior energy analyst for Ernst & Young, "is that the U.S. will inevitably become more dependent on foreign oil. However, with the deregulation of the electric industry and a continued focus on environmentally friendly fuels, natural gas demand should continue to increase.

"This increase, coupled with a decrease in reserves, should tighten markets and produce price increases for natural gas over the long term."

Other conclusions

Other important conclusions from the EnergySmart 99 results are:
  • U.S. oil reserves are equivalent to 11.1 years of production at current rates.
  • U.S. finding and production costs have both risen for the past 2 years, after several years of decline.
  • The proportion of capital budgets dedicated to non-U.S. investments continues to increase.
  • As a whole, the group of independent firms lost money last year.
"The industry has shifted its focus in the last 2 years from cost control to revenue growth, as evidenced by increased finding costs, production costs, and capital spending," Ernst & Young concluded.

"The recent declines in oil prices will cause companies to reconsider their expansion goals. They will also refocus their efforts on controlling costs and tapering back their capital investments," predicted the firm.

Copyright 1999 Oil & Gas Journal. All Rights Reserved.