Herold: Upstream investment in US, Canada drops as industry focuses elsewhere

Upstream capital investment has declined more than 20% in the US and nearly 10% in Canada since 2000, but double-digit increases were reported in Africa and the Middle East, John S. Herold Inc. reported.

Oct. 2, 2003

3 min read

By OGJ editors
HOUSTON, Oct. 2 -- Upstream capital investment has declined more than 20% in the US and nearly 10% in Canada since 2000, but double-digit increases were reported in Africa and the Middle East, John S. Herold Inc. reported.

Herold and Harrison Lovegrove Co. Ltd., London, reviewed more than 200 companies for the annual Global Upstream Performance Review.

"North American upstream spending plunged in 2002," the report said, attributing this to the high cost of replacing oil and natural gas reserves in the US and Canada.

Regional investments
"Capital is increasingly being directed to regions that have more significant growth opportunities and higher profit margins, even if these regions also have higher perceived economic or political risks," said Arthur L. Smith, chairman and CEO for the Norwalk, Conn.-based John S. Herold, a specialized research and consulting firm.

Proved acquisition spending in the US and Canada last year dropped 50% from the $36.4 billion spend in 2000.

"Meanwhile, grassroots exploration activity has soared in frontier areas, most notably in Africa and the Middle East, where spending jumped 68% since 2000 to $8.4 billion. In Europe, upstream capital expenditures rose 45% since 2002, the report said.

"Economic and political chaos in several key producing countries was manifested in a dramatic and troublesome fall off in reserve replacement rates in South [America] and Central America," the report said. The region's upstream investment has declined since reaching $15 billion in 1999.

The Asia-Pacific region, which the report defines as including Russia, has experienced a trend of increasing investment.

"It will surprise some that, since 1998, this region has produced the most robust profitability while enjoying a steadily climbing production profile, an increasing reserves-to-production ratio and extremely competitive reserve replacement cost," the report noted.

Merger and acquisition activity
Sluggish economic conditions worldwide contributed to making 2002 "one of the bleakest years in recent history for global M&A activity," the report said. "On the bright side, however, energy was somewhat of a haven, with dollar volume in M&A topping all other industries (despite plunging one-third from the previous year) and accounting for more than 15% of total worldwide M&A transaction value."

Martin Lovegrove, managing director of Harrison Lovegrove, said, major deals between major oil companies was "relatively subdued in 2002."

"With the renewed emphasis among energy sector executives on creating value rather than production growth objectives, 2003 has already been marked by a sharp increase in reasoned divestiture activity as companies realign assets, and we expect this high level of activity to continue into 2004."