Andersen: Upstream spending to improve into 2001

Aug. 7, 2000
Spending for oil and gas exploration and production should improve through the last half of this year and into 2001-after plummeting 22% to $62 billion worldwide in 1999, including a 29% drop in US upstream spending to $25 billion-Arthur Andersen reported in its annual global E&P trends report.

Spending for oil and gas exploration and production should improve through the last half of this year and into 2001-after plummeting 22% to $62 billion worldwide in 1999, including a 29% drop in US upstream spending to $25 billion-Arthur Andersen reported in its annual global E&P trends report.

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So far, operators have been hesitant to increase capital spending despite a trend of improved revenues, profits, and cash flow that began last year (Fig. 1).

"While oil and natural gas prices have recovered and are at their combined highest level in history, exploration and development spending has not recovered at the same rate, and E&P company stock prices have lagged the price recovery by even more," said Victor A. Burk, managing director of Andersen's energy industry group.

In the growing interindustry competition for capital, energy companies are going to have to prove their ability to create value with all of their assets, he told reporters at a recent press conference in Houston.

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Worldwide revenues from oil and gas production increased 25% to $149 billion last year-"an almost complete turnaround from 1998's 24% drop," Burk said. Of the 163 publicly traded oil and gas companies surveyed by Arthur Andersen, only 18 reported losses in 1999 (Fig. 2).

Each of those 163 companies has oil and gas reserves of at least 5 million boe, and their combined reserves represent about 86% of all US reserves of oil and NGL as well as 64% of total US natural gas reserves. Of those companies, 39 are based outside the US, including some of the largest integrated firms.

Among the group as a whole, worldwide and US production costs were down 4% in 1999, to the lowest levels in 5 years at $3.73/boe and $3.62/boe, respectively. Their worldwide reserve replacement costs dropped 24% to $4.26/boe last year. US replacement costs plummeted 45% to $4.99/boe, cracking the $5 barrier for the first time since 1995, Burk reported.

Spending declines

Despite market improvements, worldwide upstream capital spending declined 5% to $92 billion in 1999, with decreases recorded in virtually all categories. Global exploration spending plunged 34% to $13.4 billion, the largest decline among all categories of 1999 spending.

The companies spending most on global exploration last year included ExxonMobil Corp., $1.4 billion; Royal Dutch/Shell Group, $1.1 billion; BP Amoco PLC (now BP), $848 million; Chevron Corp., $682 million; and Unocal Corp., $600 million. But the three biggest spenders also accounted for the biggest decreases in exploration spending last year. Royal Dutch/Shell cut its exploration budget by $874 million, with BP down by $675 million and ExxonMobil by $599 million.

Global development spending for the group of 163 companies dropped 20% to $41.3 billion in 1999, said Arthur Andersen. The biggest spenders in that category were ExxonMobil, $5.8 million; Royal Dutch/Shell, $3.8 billion; BP, $2.9 billion; TotalFinaElf SA, $2.4 billion; and ENI SPA, $2 billion.

But again, the three biggest spenders also had the biggest reductions, including BP, down $1.9 billion; ExxonMobil, $1.3 billion; and Royal Dutch/Shell, $746 million.

The lone increase in global spending was in the category of proved property acquisitions, up 72% to more than $30 billion, largely from deals made outside the US by Repsol-YPF SA, Norsk Hydro ASA, and Talisman Energy Inc., said Burk.

In US operations, unproved property acquisitions were down a whopping 67% to $1.4 billion last year, with Occidental Petroleum Corp. showing the biggest single decrease of $1.7 billion. The biggest spenders in that category were Coastal Corp., $152 million; Ocean Energy Inc., $116.4 million; and Devon Energy Corp., $95 million.

US exploration spending dropped 36% to $4.8 billion. The leading exploration spenders for the year were Chevron, $325 million; Unocal, $324 million; and Shell, $324 million.

US development spending fell 28% to $11.6 billion in 1999. The leading spenders in that category included ExxonMobil, $1.3 billion; BP, $1.2 billion; and ARCO (since acquired by BP), $875 million.

Production, reserves

World oil production among the 163 companies surveyed increased 2% to 6 billion bbl in 1999, with ExxonMobil leading the pack with 892 million bbl total.

By the end of the year, the companies' total oil reserves increased 6% to 68.9 billion bbl virtually worldwide, except for a 2% decline in Canada and a 4% reduction in the Asia-Pacific region. Extensions and discoveries increased 14% to 4.6 billion bbl last year, following a 24% decline to 4 billion bbl in 1998.

The surveyed companies increased global gas production by 5% to 26.6 tcf in 1999. Again, ExxonMobil was the biggest producer at 4.2 tcf.

The group's worldwide gas reserves increased 6% to 351.6 tcf, despite decreases in Canada and the Asia-Pacific region. But extensions and new discoveries were down 11% to 24.6 tcf overall.

Worldwide replacement of oil production among the companies rose to 92% last year, but their gas production replacement rate dipped to 98%, the lowest in 5 years.

US production, reserves

US oil production among the surveyed companies continued to decline, down 5% for the year, with BP Amoco the single biggest producer at 275 million bbl.

US oil production replacement rates plummeted to 69% from 93% in 1998, for the lowest level in 5 years. The group's US gas production replacement rate also declined, to 88% for the year.

But US oil reserves among the companies had increased 1% to 18.2 billion bbl by the end of the year. Oil field extensions and discoveries were up 11% among the group to a total of 806.7 million bbl.

After 2 consecutive years of downward reserve divisions in the US, the survey companies reported upward reserve revisions of 733.8 million bbl in 1999.

Among the companies, US gas production remained flat at 11.3 tcf last year, with ExxonMobil the biggest producer at 1.1 tcf.

Yearend US gas reserves among the group were up 2% to 104.9 tcf-a 7% gain from the total reported 5 years ago. But new gas discoveries and extensions were down 9% on the year to 9.5 tcf.