U.S. INDUSTRY TO HOLD 1994 SPENDING AT THE 1993 LEVEL

Robert J. Beck
Economics
Editor

A sharp cut in spending on pipelines will hold U.S. petroleum industry budgets at about 1993 levels for domestic projects this year.

Excluding pipeline outlays, industry spending for capital and exploration items will advance.

Oil & Gas Journal's annual budget survey shows U.S. companies plan to spend $31.3 billion on U.S. projects in 1994, down only 0.7% from 1993. Spending last year was down by the same percentage from 1992's $31.7 billion.

Total outlaws, excluding pipelines, will be $28.4 billion, up 5.8% from 1993. In 1993 spending excluding pipelines was $27.3 billion, down 1.2% from 1992.

Industry's total spending hit a high of $83 billion in 1981. It then fell to the recent low of $25.2 billion in 1987. This was a decline in outlays of $57.8 billion, or 69.7%, in 6 years. Spending in 1987 was the lowest since the $21.8 billion of 1976.

Adjusted for inflation, spending in 1994 will be the lowest since 1987. During 1986 94, industry's inflation-adjusted annual total outlays have been at the lowest levels since 1973. This is reflected most vividly in the depressed level of upstream activity.

Downstream spending in 1994 will exceed upstream spending for the fifth straight year. Downstream spending exceeded upstream outlays in 1990 for the first time since 1971.

A sharp drop in drilling lowered upstream outlays during the past several years. At the same time, spending for upgrades, renovation, environmental compliance, marketing, and transportation bolstered downstream budgets.

E&P spending in 1994 will increase 6.2% from the 1993 level, moving up to $14.8 billion. For the past 8 ears, E&P spending has been fluctuating with a slight but not steady downward trend. During 1987 94, annual E&P outlays varied from a low of $12.8 billion in 1992 to a high of $17.5 billion in 1988.

Total downstream spending will fall 6.1% this year to $16.5 billion as a result of reduced pipeline spending. Pipeline budgets in 1994 are $2.4 billion, down 42.9% from 1993. Excluding pipelines, downstream spending will rise 5.3% to 14.1 billion.

Refining capital spending will inch up 0.9% to $5.4 billion for 1994.

Spending on petrochemicals will rebound after falling in 1991 93. Improved U.S. economic growth spawned plans to boost petrochemical outlays this year. Petrochemical budgets amount to $2.5 billion, up 8.6% from 1993.

PRICE INFLUENCE

Crude oil and natural gas prices will strongly influence industry spending programs during 1994.

Oil prices slipped the latter part of 1993 and remained depressed during the first part of this year. Due to the price weakness, most companies will closely review their spending plans throughout the year and base outlays on price expectations at the time of final spending authorization. Many of the plans were formulated based on relative stability in prices that occurred in 1991 92 and into 1993.

Offsetting the pessimism flowing from the slip in crude oil prices have been relatively high prices for natural gas.

A survey by Salomon Bros., New York, showed most companies have not assumed the current weakness in oil prices will persist for long or that it will mean significantly lower natural gas prices. But if lower oil prices persist, budgets will be cut sharply.

The average price for U.S. crude oil was an estimated $14.34/bbl for 1993, down 10.3% from 1992. Prices were weaker during the second half of the year, when budgets are set in place. The price averaged $15.51/bbl during first half 1993 and $13.17/bbl in the second half.

By contrast, the 1993 average U.S. wellhead price of natural gas was an estimated $2.02/Mcf, up 16.1% from a year earlier. That followed a 6.1% increase in 1992. Prices have remained strong of late, encouraging gas exploration and development.

Salomon Bros. said, "Oil and gas companies significantly shifted their budgets to natural gas in 1993. A continued substantial shift to natural gas is indicated in 1994."

OGJ expects gas prices to rise again in 1994, stimulated by increased consumption. However, there also is a good possibility of weaker oil prices as members of the Organization of Petroleum Exporting Countries struggle with the problem of growing worldwide excess crude productive capacity.

There was a sharp drop in total U.S. budgets in 1992, followed by a modest decline last year. Plans call for a small dip in 1994. Total industry outlays fell 12.1% in 1992 to $31.7 billion. This was due mainly to a 26.6% plunge in upstream spending, which fell to $12.8 billion.

Industry spending slipped a modest 0.7% to $31.5 billion last year. And spending is projected to fall another 0.7% to $31.3 billion this year. However, if realized, total spending in 1994 will still be up 24.3% from the recent low in 1987.

U.S. UPSTREAM

U.S. E&P budget plans call for a spending increase of 6.2% in 1994, moving up to $14.8 billion. E&P spending in 1993 increased 8.6% from $12.8 billion in 1992.

The results for 1993 were consistent with the plans reported by OGJ in last year's survey (OGJ, Feb. 22, 1993, p. 19). A year ago, the OGJ survey showed industry planned to boost E&P spending by 5.8%.

E&P outlays, including Outer Continental Shelf lease bonuses, dipped to $14.2 billion in 1987. Spending in this segment jumped to $17.5 billion in 1988, but fell again to $15.5 billion the next year.

Upstream spending then moved up to $16.6 billion in 1990 and $17.5 billion in 1991 before falling sharply in 1992 to $12.8 billion. E&P spending moved up 8.6% in 1993 to $13.9 billion.

E&P activity and spending has been volatile. Upstream spending peaked in 1981 at $57.8 billion. A sharp drop in oil and gas prices led to a steep decline in E&P investment in 1982 87.

Drilling activity reflects the decline in upstream spending. The number of U.S. active rigs hit a peak in 1981, averaging 3,970 for the ),ear. With declining prices, the number of active rigs slipped steadily. A plunge in crude oil prices in 1986 resulted in an extended drop in drilling activity, and the rig count fell to a present day record low of 717 in 1991.

The count is expected to increase in 1994 but still remain at a depressed level. OGJ forecast that the active rig count will average 810 for this year, an increase of 7% (OGJ, Jan. 31, p. 53).

Well completions are expected to be up slightly from 1993. OGJ predicts 1994 well completions at 26,840, compared with 25,850 in 1993. Total well completions peaked at 89,234 in 1981.

If U.S. upstream spending was at the record set in 1982, 103,000 wells could be drilled, assuming an average cost close to the current cost of $385,000/well. This would produce 76,000 well completions more than the OGJ forecast for 1994.

Outlays for OCS lease bonuses have fallen significantly. Bonuses fell to only $91 million in 1993 and are estimated at only $119 million in 1994. Bonuses were as much as $6.7 billion in 1981.

U.S. DOWNSTREAM

Planned 1994 U.S. non E&P spending will be down 6.1% at $16.5 billion. This follows a decline of 6.9% in 1993 to $17.6 billion after 5 consecutive years of increased spending in this sector.

Non E&P U.S. spending peaked in 1981 at $25.2 billion. With falling crude oil and product prices and diminishing cash flow, spending fell to $10.4 billion in 1986. In the following years, improved market conditions along with restructuring to cut operating costs enabled companies to boost outlays. In addition, there have been big outlays to meet new environmental rules.

Rising budgets were accented by substantial increases in outlays for refining, marketing, and petrochemicals. Increases in those sectors accounted for 76% of the increased non-E&P spending in 1986 91.

Refining capital spending is planned at $5.4 billion in 1994, up 0.9% from last year but down from the record high $6.1 billion spent in 1992.

Capital spending for marketing is planned to be up slightly this year, increasing 0.2% to $2.28 billion. Last year's spending of $2.27 billion was down 10.7% from $2.5 billion in 1992. The record high was $2.8 billion in 1991.

Restructuring, intense competition, and a shifting consumer preference toward convenience stores have pushed up marketing outlays in recent years.

Spending on U.S. petrochemicals will rebound this year, increasing 8.6% to $2.5 billion. This follows declines of 8.5% in 1993, 1.7% in 1992, and 19% in 1991.

Petrochemical spending moved up sharply in 1987 90. Outlays in 1987 were only $1.3 billion. Spending jumped 57.2% in 1988, 38.4% in 1989, and 15.1% in 1990 to reach a record high of $3.1 billion in 1990. During that period the steady growth in economic activity boosted product demand. And during that period the petrochemical sector was posting record profits to help support the increased investment.

In recent years the petrochemical industry has booked substantially lower profits due to reduced demand linked to a slowdown in economic activity. The industry also experienced problems due to excess capacity, which increased competitive pressures and reduced profits. Those factors led to a reduction in capital outlays.

In recent years much of the spending in petrochemicals has been for environmental projects related to the Clean Air Act.

Total spending on U.S. transportation will fall sharply in 1994, decreasing 33.5% to $3.3 billion. Transportation spending moved up 4.2% last year to $4.9 billion.

The largest part of transportation spending is for gas pipelines. In 1994 outlays for gas pipelines will represent 47.1% of the total. It was 55.4% in 1993 and 69.7% in 1992.

Gas pipeline spending will fall 43.4% in 1994 to $1.5 billion. This is down sharply from $2.7 billion and $3.3 billion in 1992.

Planned spending on crude oil and petroleum product pipelines also shows a drop in 1994, falling 41.8% to $853 million. Last year, outlays were $1.5 billion, up 88% from 1992.

Plans call for 2,460 miles of natural gas pipeline and 1,731 miles of crude oil and petroleum product pipeline to be laid in the U.S. in 1994 (OGJ, Feb. 7, p. 23). This is down significantly from a year ago, when construction plans called for 3,751 miles of gas pipeline and 3,004 miles of crude and products (OGJ, Feb. 8, 1993, p. 25).

Capital spending for other forms of transport equipment will increase 20.6% in 1994 to $878 million. This compares with an increase of 11.7% in 1993 to $728 million.

Increased oil imports are a major factor boosting other transport outlays. With increased imports there will be additional investment in tankers. With increased demand, there also will be increased investment in road and rail vehicles.

Capital spending in U.S. nonpetroleum sectors will rise 11.5% in 1994 to $3.1 billion. Last year, such outlays fell to $2.8 billion from $3 billion in 1992.

OUTSIDE NORTH AMERICA

U.S. companies continue to invest substantially outside the U.S. and Canada, but a slight decline is in store this year. Plans call for a slide in upstream spending, partially offset by an increase in downstream outlaws. The drop in spending appears to be related to lower oil prices and the sluggish pace of economic growth and oil demand in many areas outside North America.

During the latter part of the 1980s and through 1991 there was a noticeable shift in budgets by many larger U.S. companies away from the U.S. to other areas. The spending reallocation to areas outside the U.S. slowed in 1992 and appears to have been reversed in 1993 and 1994.

OGJ's survey of spending plans outside North America collected data from 37 U.S. companies.

Non U.S. upstream spending by those companies is planned to be down 4.5% in 1994 at $11.7 billion. Spending in this category fell 7.9% last year to $12.2 billion.

By contrast, upstream spending in the U.S. was up in 1993, and plans call for another increase in 1994. Downstream spending patterns were similar for U.S. and non U.S. areas. Excluding pipelines, downstream spending in 1993 fell 9.6% in the U.S. and 8% outside the U.S. Plans for 1 an increase of 5.3% in the U.S. and 5% outside the U.S.

The Salomon Bros.' survey showed somewhat similar results. It found that 164 independent companies plan to increase U.S. E&P spending 18% to $5.516 billion, and 20 majors plan to boost such spending 4% to $10.75 billion. The survey also showed E&P spending outside North America by all companies surveyed will be down 0.4% at $32.569 billion in 1994.

COMPANY PLANS

A number of U.S. companies, including several majors, have disclosed their spending plans for 1994. However, companies expressed concern due to the fall in oil prices. Many are reexamining their budgets.

Most companies rely heavily on cash flow rather than debt for spending plans. Cyrus Tahmassebi, chief economist for Ashland, says, "Anytime there is pressure on cash flow, delays or cutbacks in spending come under consideration."

Other Investment concerns flow from low oil prices. Such prices make it harder for operators to find partners to tap oil prospects. And investors know lower prices can reduce spending and slow the growth of a company.

Other notes of caution were expressed.

Texaco Inc. Chairman Alfred deCrane said his company could adjust its budget by cutting or delaying spending in some areas if prices remain low for a long time.

Mobil Corp. expects its 1994 capital and exploration spending to increase to $4.2 billion from 1993's $3.6 billion, which was down from $4.5 billion in 1992.

Mobil Chairman Allen E. Murray said, "The increase in 1994 reflects a strong balance sheet and continued optimism about attractive opportunities for growth. We also continue to work to get more out of our existing assets. However, Mobil remains flexible, and the budget can be revised if the business environment warrants changes during the year."

Murray also said, "Spending this year will continue to be focused in the international area, where opportunities to find and develop resources are greater and product demand growth is higher. In 1994, international expenditures are expected to account for nearly 65% of Mobil's total, about the same as 1993."

E&P outlays are estimated at $2.6 billion, up $600 million from 1993. This reflects a $200 million increase for exploration expenses, including activity in Malaysia, Kazakhstan, and Viet Nam, and a $400 million increase in production spending.

Spending for Mobil Chemical is projected to be $300 million, the same as last year. In addition, investments in equity companies are expected to total $200 million in 1994, up $100 million from last year, which reflects increased spending for Qatargas LNG.

ARCO unveiled a $1.9 billion budget for 1994. This is down from the company's 1993 spending of $2.1 billion.

ARCO completed a number of international development projects in 1993, including two gas fields in Indonesia, two gas fields in the U.K., and a coal mine in Australia. In 1993, 67% of outlays, or $1.4 billion, went upstream.

ARCO Chairman Lodwrick M. Cook said, "With the 1994 capital spending program, we are maintaining our emphasis on exploration and development projects, particularly overseas and in Alaska, although spending levels will be down from 1993. Of necessity we are also increasing spending in the downstream businesses such as refining and transportation to meet environmental regulations."

About 60%, or $1.1 billion, of ARCO's 1994 outlays will go for oil and gas exploration, development, and production.

ARCO's spending on operations outside North America is estimated at $515 million compared to $630 million in 1993, as work continues on projects such as development of a gas field in the South China Sea.

Spending in Alaska is expected to be $300 million, compared with $415 million in 1993. Spending for U.S. Lower 48 oil and gas operations is budgeted at $330 million, compared with $333 million last year.

Facing deadlines in clean air rules in 1995 and 1996, ARCO will spend $430 million on refining and marketing projects in 1994, with most of the expense going for modifications to its Los Angeles refinery. In 1993, refining and marketing spending totaled $345 million.

ARCO Chemical's 1994 capital program is projected at $210 million of the total ARCO budget, compared with $180 million in 1993. ARCO holds an 83.4% interest in ARCO Chemical.

Shell Oil Co.'s capital and exploration budget for 1994 is $3.1 billion, up $800 million from estimated 1993 outlays. About $1.5 billion is allocated for exploration and production, an increase of $300 million from 1993.

Oil products division outlays are expected to increase to $1.1 billion from an estimated $700 million last year.

Shell's program reflects an increase in exploration and production spending in the Gulf of Mexico. The oil products projected increase stems from upgrading of Shell's Martinez, Calif., refinery and increased spending for environmental projects.

Occidental Petroleum Corp. cut its 1994 capital spending program by $130 million to $750 million to reflect the effects of lower crude oil prices and pressure on chemical prices. The budget continues ox),'s focus on international oil and gas exploration and production with 70%, or $525 million, going to the oil and gas division.

Kerr McGee Corp. set its budget at $430 million, about the same as 1993 spending. Included in 1994 plans are $310 million for exploration and production, of which $60 million will go for the company's share of development costs in the South China Sea's Liuhua field. The budget includes $50 million for chemical operations, $30 million for coal operations, and $30 million for refining and marketing.

Sun Co. plans a 1994 spending program of $790 million. The plan earmarks $290 million for income growth projects, mainly in branded marketing, logistics, chemicals, and international production. These projects include the modernization of branded service stations, benzene extraction, cyclohexane manufacture, and potential acquisition of oil reserves.

The 1994 program includes $115 million for projects in Sun's refinery operations and branded marketing outlets to meet compliance requirements.

Sun estimated 1993 capital s ending at $600 million, compared get of $730 million. The reduction reflected the deferral of some projects, now included in the 1994 program.

Sun's capital spending for maintenance and compliance with current regulations is projected to remain at $270 million in 1995 and decline to $245 million in 1996.

USX approved a Marathon group 1994 budget of $895 million, down 12% from 1993 spending. The decrease is due mainly to the substantial completion of major multiyear projects.

Phillips Petroleum Co. set its 1994 budget at $1.188 billion, about the same as the estimated $1.193 billion spent in 1993. About 75% of the budget is for upstream projects.

Phillips Chairman C.J. Silas said the company's key areas of capital spending in 1994 will be meeting safety and environmental needs, replacing oil and gas reserves, increasing NGL throughput, and boosting downstream profits.

Exploration and production spending is expected to total $725 million, down 10% from 1993. However, the 1993 figure included a $126 million final payment on LNG tankers. Excluding that payment, the 1994 spending will be 6% higher than last year.

Spending on non U.S. production is planned at $381 million, compared with an estimated $280 million in 1993. Major non U.S. projects include several field development programs in the North Sea and Xijiang field off China.

About $231 million will go for U.S. production projects, including Garden Banks development in the Gulf of Mexico. This is down from $360 million in 1993.

The exploration budget of $113 million is being allocated mainly for projects near existing operations that have the potential for rapid development. Half of the funds will go for U.S. and half for non U.S. projects. Nearly 50% of the U.S. outlays is for subsalt projects in the Gulf of Mexico. Key exploration wells are set for Alaska, Australia, Norway, the U.K., Nigeria, Tunisia, Papua New Guinea, Italy, and Egypt.

Spending on gas and gas liquids will be $147 million, up 21% from 1993. About $100 million will go for NGL and raw gas throughput.

Downstream spending of $296 million will be up 20% from last year. About 40% of it is for projects designed to increase profits, including technology improvement projects in aromatics and polypropylene.

The downstream budget allocates $72 million for chemicals, $94 million for plastics, and $130 million for refining, marketing, transportation and other areas.

Unocal Corp. plans 1994 spending of $1.46 billion, up 17% from 1993. However, investments could be scaled back to the 1993 level if crude prices remain at current low levels. The focus of the new budget is on development of gas reserves in North America and Southeast Asia.

Richard J. Stegemeier, Unocal chairman and chief executive officer, said, "Cash flow and expense management are our top priorities, especially with $16/bbl crude oil prices in the spot market. While our capital budget planning was based on a spot price of $18/bbl for benchmark West Texas intermediate Crude oil, we plan to keep our capital spending in line with a spot price of $15 16/bbl for at least the first 6 months of this year."