CAPITAL FLIGHT FROM NORTH AMERICA

July 29, 1991
The outlook seems to darken daily for the North American exploration and production business. In a midyear look at oil company budgets for upstream operations, Salomon Bros. confirms the shift away from the U.S. and Canada. Companies surveyed by the New York financial firm plan to spend 13.9% more on worldwide exploration and production in 1991 than they did last year. But 24% of the companies in the survey are underspending their budgets in the U.S., and 20% report Canadian spending levels

The outlook seems to darken daily for the North American exploration and production business.

In a midyear look at oil company budgets for upstream operations, Salomon Bros. confirms the shift away from the U.S. and Canada. Companies surveyed by the New York financial firm plan to spend 13.9% more on worldwide exploration and production in 1991 than they did last year. But 24% of the companies in the survey are underspending their budgets in the U.S., and 20% report Canadian spending levels below plan.

CANADIAN TROUBLES

In Canada, low crude oil and natural gas prices combine with finding costs high by world standards to squeeze returns and discourage investment. Oil sands projects are in trouble. Exploration has ceased in the Canadian Beaufort Sea and stalled off eastern Canada. Production is declining in the mature producing region of western Canada. The country may become a net oil importer next year and remain so at least until Hibernia oil field comes on stream late in 1996 and oil sands projects revive.

Canadian Petroleum Association wants Alberta to help by basing royalties on operating profits instead of revenues. Independent Petroleum Association of Canada wants flat royalty cuts, which the province has rejected fearing big revenue losses. Alberta has provided royalty relief to some types of production, such as that from horizontal wells. It certainly should consider the CPA suggestion to help a crucial industry likely to remain in the doldrums until prices improve.

Low prices, especially for gas, are chasing drilling investments away from the U.S., too. But there's another culprit: popular antagonism toward oil and gas drilling and production that seems, if anything, to have intensified since the Persian Gulf war. Many Americans outside traditional producing areas simply don't like petroleum operations and consider it a natural right not to have any close by.

A discouraging record results. Chevron Corp. and partners will bring giant Point Arguello oil field onto production at less than 25% of its potential after years of regulatory hassle. Mobil Corp., despite huge outlays for environmental studies and promises of unprecedented operating precautions, may never drill its big gas prospect off North Carolina thanks to local opposition. Florida politicians want to block Outer Continental Shelf drilling off most of the state's shoreline, even on existing leases, whether or not leaseholders receive compensation. Congress seems as indisposed as ever to lease the Arctic National Wildlife Refuge Coastal Plain and most of the OCS. Endless lawsuits and bureaucratic problems hamper leasing of federal land onshore.

Atop this national sour mood toward oil is a tax and royalty system that chews up drilling capital. Is it any wonder so many U.S. companies are looking for more hospitable places in which to conduct business?

A LOGICAL STOP

A logical stop for drilling money and equipment emigrating from the U.S. and Canada would be Mexico, with its world class exploration and development prospects, copious need for revenue, and hope for more oil production. Alas, just as the U.S. abhors the sight of drilling and production equipment, Mexico can't abide private drilling capital. For nationalistic reasons, North America's No. 2 oil producer would rather borrow whatever drilling funds it can from wary international banks and keep its petroleum resource in the tender hands of the state.

North America treats drilling investments a variety of ways. And oil companies in growing numbers are finding better deals on other continents.

Copyright 1991 Oil & Gas Journal. All Rights Reserved.