Robert J. Beck
Economics Editor
G. Alan Petzet
Senior Staff Writer
U.S. oil and gas companies plan to boost domestic capital and exploration spending in 1990 following a drop in outlays in 1989.
Oil & Gas Journal's annual survey shows the industry plans to spend a total of $31.4 billion on U.S. projects in 1990, up 13.1% from estimated 1989 spending.
OGJ figures indicate that downstream spending will exceed upstream spending for the first time since 1971, even though higher oil and gas prices in 1989 have stimulated upstream outlays planned for 1990.
Exploration and production outlays are projected to be $15 billion, up 6.9% from 1989, while downstream spending will be $16.4 billion up 19.3%. Downstream spending includes record marketing outlays of $2.996 billion.
Spending by U.S. companies outside the U.S. and Canada will increase 13.5% to $11.638 billion following a 13.2% gain in 1989.
Many U.S. based international companies are investing a larger share of their capital budgets in non-U.S. projects.
Oil and gas industry spending fell from a record $82.9 billion in 1981 to $23.7 billion in 1987. The 1987 figure was the lowest spending level since $21.8 billion in 1976.
Spending in the U.S. rebounded in 1988 to $28.7 billion with increases upstream and downstream, but weak oil and gas prices that year led to a decline in spending in 1989, when outlays slipped 3.1% to $27.8 billion.
A sharp drop in upstream spending in the U.S. led the 1989 decline.
Downstream spending continued to gain on the strength of improved downstream earnings.
Adjusted for inflation, spending in 1989 was at about the same level as in 1972. Inflation adjusted outlays in 1987 were the lowest level since 1971, the lowest year since OGJ began surveying.
U.S. E&P SPENDING
The 6.9% increase in planned U.S. exploration and production spending this year compares with an 8.6% drop in 1989.
Upstream spending peaked in 1981 at $57.8 billion. With declines in oil and gas prices, investment slipped during 1982-87 to $12.7 billion in 1987.
More than 75% of the $45.1 billion drop in spending was in the upstream sector.
A rebound in oil prices in 1987 led to increased outlays in 1988, and E&P spending climbed to $15.4 billion. But the reverse followed as weak oil prices in 1988 led to a decline in exploration and drilling activity in 1989 and a drop in spending to about $14.1 billion.
Bonus payments for leases on the Outer Continental Shelf rose sharply in 1988 to $1.217 billion on renewed interest in gas drilling. However, OCS lease bonus spending fell to an estimated $646 million last year and is expected to be only $650 million this year.
Upstream spending excluding OCS lease bonus payments peaked in 1982 at $52.9 billion and fell to $12.2 billion in 1987. It rose to $14.1 billion in 1988 and fell to $13.4 billion last year. Plans call for outlays of $14.4 billion this year.
UPSTREAM PERSPECTIVE
If U.S. upstream spending matched the 1982 level, an additional 108,000 wells could be drilled at today's average cost of about $375,000/well.
That many wells could go a long way toward slowing the decline in U.S. crude oil production.
With increased 1990 outlays for exploration and drilling activity, the numbers of active rigs and well completions are expected to be up.
This is consistent with OGJ's Forecast/Review prediction that the rig count will average 950 and 31,700 wells will be completed in 1990 (OGJ, Jan. 29, p. 64).
Last year the active rig count averaged 869 and an estimated 29,300 wells were completed.
OGJ's 1989 capital spending survey was a better indicator of industry activity than the Forecast/Review prediction (OGJ, Feb. 20, 1989, p. 13).
The spending survey indicated a drop in well completions to an estimated 28,260 wells in contrast to the prediction of 36,500 well completions.
There often is a substantial difference between budgets and ultimate outlays. The prediction was based on a survey of operators' drilling intentions as the year began.
In recent years operating companies have tended to closely monitor prices early in the year and be conservative about committing funds to projects. Early 1990 oil prices are well above those of a year ago.
U.S. DOWNSTREAM SPENDING
The expected 19.3% jump in downstream spending this year will follow an increase of 3.2% to $13.7 billion in 1989.
Downstream spending in 1990 will be 56.7% higher than the recent low in 1986.
U.S. downstream spending peaked in 1981 at $25.2 billion, fell sharply to $10.4 billion in 1986, and has been climbing steadily since then.
Most of the increased outlays have been for refining, marketing, and petrochemicals.
Refining outlays are projected to rise 26.4% in 1990 to $4 billion. Spending was up 10.2% last year at $3.2 billion.
Much of the spending is for upgrading, improvements to meet changing market needs, and revamps to meet environmental requirements.
However, with increased product demand some thought has been given to adding capacity.
Utilization of U.S. distillation capacity has averaged more than 85% during the past year. And for certain products it is probably closer to industry total capacity.
Even though there is not an immediate need for more capacity, tight supplies may become more common.
Some of the initial increase will come from restarting shut-in capacity and possibly adding product capacity at existing plants.
The combination of increasing product demand and relatively low crude oil costs has boosted refining margins the last few years. This also has contributed to increased investment in the refining and marketing sectors.
MARKETING, PETROCHEMICALS
Record spending on U.S. petroleum products marketing stems from increased competition and the changing needs of consumers.
OGJ projects 1990 marketing outlays at $3 billion, up 14.7% from the 1989 figure.
Capital spending on U.S. petrochemical facilities jumped 57.2% to $2 billion in 1988 and another 38.3% to $2.7 billion in 1989.
However, petrochemical margins have been dropping recently, and there is some fear excess capacity will develop.
Petrochemicals' rate of expansion is expected to slow a bit in 1990. Spending plans for 1990 call for outlays of $2.704 billion, down a bare 0.3% from last year.
Spending on U.S. transportation activity is expected to jump 64.7% in 1990 to $3.2 billion. Much of the increase will be in outlays for gas pipelines, which are projected to be up 104.5% to $1.982 billion.
Plans call for 3,226 miles of gas pipeline to be laid in the U.S. in 1990 (OGJ, Feb. 5, p. 17).
Spending on crude oil and products pipelines will be up 10.9% to $500 million, and outlays for other transport will be up 36.7% at $681 million.
Nonpetroleum capital spending is expected to rise 6% in 1990 to $3.5 billion. Last year spending for these activities fell 4.3% to $3.3 billion.
OVERSEAS SPENDING
U.S. companies plan to boost upstream spending and maintain downstream spending outside the U.S. and Canada.
Overseas spending by 28 companies responding to the OGJ survey will increase 13.5% to $11,6 billion.
They plan upstream outlays of $7.9 billion, up 21.4% from 1989. Last year spending in this sector was up 12.2% at $6.5 billion.
Exploration and drilling outlays will rise 19.8%, and production spending will increase 23%.
International downstream spending for these companies is expected to be at about the same level as last year. This follows a 15% increase in 1989.
Downstream spending was $3.284 billion in 1988, $3.777 billion in 1989, and is planned at $3.775 billion in 1990.
During the past couple of years overseas E&P spending by U.S. companies has been going up faster than their spending in the U.S.
The companies' 1990 overseas E&P spending this year will be 36.3% higher than in 1988, while their U.S. E&P spending in 1990 will be 2.3% lower than in 1988.
Downstream spending is going up faster in the U.S. for these companies. Downstream outlays will be 23.2% higher than in 1988 in the U.S. and 15% higher than in 1988 overseas.
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