Lehman Bros.: E&P spending to see slower growth

Dec. 12, 2006
After "extremely strong growths" of 20% in 2005 and 30% in 2006, global exploration and production spending is expected to rise at a slower rate of 9% to $300 billion in 2007, with more emphasis on international rather than US projects, said analysts at Lehman Bros. Inc., New York.

By OGJ editors
HOUSTON, Dec. 12 -- After "extremely strong growths" of 20% in 2005 and 30% in 2006, global exploration and production spending is expected to rise at a slower rate of 9% to $300 billion in 2007, with more emphasis on international rather than US projects, said analysts at Lehman Bros. Inc., New York.

That's based on the company's latest E&P Spending Survey of some 300 public, private, and government-owned oil and gas companies, "the largest ever" such study since Lehman Bros. began the semiannual surveys in 1982, said James Crandell, oil service analyst at the firm.

Price determinants
Natural gas prices are still the key determinant for E&P spending in 2007, followed by cash flow, prospect availability, oil prices, and drilling costs, said Angeline M. Sedita, contract drilling analyst at Lehman Bros.

E&P budgets for 2007 are based on commodity price assumptions of $55.50/bbl for crude and $6.70/Mcf for gas. "Importantly, the average price where the companies would reduce E&P budgets is about $42/bbl for oil and $4.80/Mcf for natural gas," Sedita said. "In the event of a decline to an average price of $50/bbl, just 26% said they would cut spending. At an average gas price of $5.50-6/Mcf, 35% of the companies said they would reduce spending."

She said, "There still is some concern about rig availability, although less than last year, with 60% of the companies surveyed saying they're concerned about rig availability. This compared with 85% a year ago, as more land rigs have entered the market." Drilling costs are expected to be up modestly in 2007, but at a slower pace than in 2005-06.

"Survey results indicate the long-term up-cycle in worldwide exploration expenditures and drilling activity, currently in its fifth year, is very much intact but with some important changes," Crandell said in a Dec. 11 telephone conference with financial analysts.

Among those changes is a new choice for the most important technology for E&P companies. "For years 3D and 4D seismic was viewed as the most important technology. But this year, fracturing and stimulation technology took the No. 1 spot as unconventional gas drilling increased in the US," Sedita said.

"Interestingly, 75% of the companies view international exploration and production to be good or excellent. About 65% see the US as good or excellent. But only 50% see the economics as good or excellent in Canada," said Sedita. "Still an overwhelming percentage of the companies in all regions believe the economics of drilling are more favorable than purchasing reserves. However, 55% of the companies are still actively seeking to purchase new reserves."

She said 75% of the surveyed companies expect to spend equal or less than their cash flow in 2007. In the previous survey, 33% of the companies expected to spend more than their cash flow on E&P in 2006, while nearly 50% said they would spend less. An "overwhelming percentage" of the companies plan on spending a greater percentage of their offshore budget in deep water, Lehman Bros. reported.

International spending
The surveyed companies said they plan to increase their international E&P spending by 13% to $200 billion in 2007, after a 28% growth in 2006. US spending will grow by 5.1% to $75 billion in 2007, following a 40% boost in 2006.

Canadian spending will be down 8% next year, however, compared with a 19% increase in 2006. "Deteriorating economics are more pronounced in Canada," Crandell said. He also noted "the impact of Anadarko [Petroleum Corp.] leaving the region" and "relatively large declines" in the operations of other large companies such as Apache Corp.

Canadian Natural Resources Ltd. recently agreed to buy Anadarko Canada Corp. for $4.24 billion, but Anadarko maintains interests in the Mackenzie Delta and other Canadian arctic frontier properties (OGJ Online, Sept. 14, 2006). In 2005 Apache and ExxonMobil Corp. completed a series of agreements for transfers and joint ventures across a broad range of properties in Western Canada, the Permian basin, Louisiana, and the Gulf of Mexico Outer Continental Shelf.

Companies significantly overspent their budgets in 2006, particularly on international projects, where 60% of the surveyed companies said they spent more than 10% over their original E&P budgets.

National oil companies will lead the 2007 increase in international spending with the largest spending growth among the Russian oil companies, Crandell said. The five largest Russian companies are expected to hike their international spending by an average of 42% to $24.3 billion, he said.

Other companies estimated to have double-digit gains in international E&P spending include: Chevron Corp., up 34%; Apache, up 20%, India's state-owned Oil & Natural Gas Corp. and Petroleos Mexicanos, up 11% each; Petroleo Brasileiro SA (Petrobras), up 18%; Repsol YPF SA, up 19%; Woodside Petroleum Ltd., up 62%, PetroChina Co. Ltd., Statoil ASA, and Royal Dutch Shell PLC, each up 10%.

However, several other companies are moderating those international gains with "either small declines or small increases," Crandell said. Among those are: Anadarko, flat; BHP Billiton Ltd., up 4%; BP PLC, down 2%; ConocoPhillips, up 5%; ExxonMobil, up 7%; Eni SPA, up 8%; Petroleos de Venezuela SA, up 1%; and Total SA, up 7%.

US spending
The surveyed companies plan a substantial slowdown in the growth rate of their US E&P expenditures in 2007 due to concerns about cash flow and a perception of lower gas prices. Companies responding to the survey said their plans are based on an average gas price of $6.72/Mcf in 2007, "and that's going to increase concern regarding project economics," Crandell said.

Repsol YPF, Eni, Murphy Oil Corp., and Quicksilver Resources Inc. will be making some of the larger cuts in US E&P spending, he said. Other companies indicating "above-average declines" in US spending include Anadarko, Cabot Oil & Gas, Marathon Oil Corp., Newfield Exploration Co., and Plains Exploration & Production Co.

Drilling economics are seen as attractive in the industry; but the percentage is down from last year, said Lehman Bros. analysts. "For the long term, E&P companies were very positive on the outlook for oil and natural gas. Over half view the long-term real price of oil at $50-70/bbl, with half expecting the price to be $50-60/bbl for the long term and half expecting crude to be $60-70/bbl. Companies also are overwhelmingly bullish on natural gas with roughly 85% of respondents saying long-term outlook for natural gas drilling is good or excellent," Sedita said.