SALOMON BROS. SEES MODEST GAIN IN E&P SPENDING

Breakout of Exploration/Production Spending (91887 bytes)

The petroleum industry plans a moderate increase in world spending for oil and gas exploration and production this year.

The latest semiannual survey by Salomon Bros. Inc. shows E&P outlays will top $58 billion, up almost 6% from 1994 (OGJ, Jan. 9, Newsletter).

The gain is modestly greater than the expected 2.4% increase in 1994 over 1993, the New York investment firm's figures show.

However, the spending mix will change significantly. In store is a 7.5% increase for spending outside North America after a 3.6% decline in 1994. North American spending will grow only 3.1% this year after an estimated 11% jump in 1994.

In particular, U.S. independents and Canadian operators plan very modest spending increases for 1995 after dramatic growth in 1994. U.S. majors plan modest increases after trimming outlays in 1994 from 1993 levels.

Salomon Bros. conducted its latest survey last month. Results are based on responses from 316 companies, the company's largest survey in 13 years of polling. Some responses, mostly those from major operators, covered outlays in all three of the survey's regions: U.S., Canada, and outside North America.

December surveys are updated every July.

The list of companies surveyed varies slightly from year to year, particularly for U.S. independents. So it is not statistically accurate to compare year to year estimates, Salomon Bros. cautioned.

Reported spending excludes large purchases of reserves or other companies when possible.

U.S. OUTLAYS

Industry's World E&P Spending (9497 bytes)

The 191 independents Salomon Bros. surveyed plan a 4% increase in their U.S. spending to $8.04 billion, up from $7.73 billion expected for 1994. A combination of more than a 20% spending growth in 1994 and concern over softer natural gas prices is the main driver of the slowdown, the firm said.

Among companies planning significant increases are Burlington Resources, Zilkha Energy, Santa Fe Energy Resources, Apache, Vastar, Barrett Resources, and Columbia Gas. Signification spending cuts are planned by Anadarko, Union Pacific Resources, Snyder Oil, Cabot Oil & Gas, and Newfield Exploration.

The survey of 15 major companies with significant U.S. activity plan a slightly more modest increase of 3.2% in U.S. E&P expenditures-to $8.64 billion from $8.37 billion in 1994. This reverses an estimated 6.7% decline in major companies' U.S. spending in 1994.

Royal Dutch/Shell, Texaco, and Amerada Hess plan spending increases of at least 10%. Pennzoil, Exxon, Unocal, Phillips, and Dupont/Conoco, on the other hand, plan to trim U.S. spending.

U.S. E&P spending by independents and majors will rise 3.6% in 1995 to $16.68 billion. That compares with an estimated gain of 3.7% in 1994.

CANADA

In Canada, 111 companies plan a 1.9% increase in E&P spending to $6.75 billion. That is a marked slowdown in feverish activity that began during 1993.

Similar to U.S. independents, spending increases of more than 30% in 1994, concern about natural gas prices, and scarce money are the main factors behind a flatter outlook.

Sizable spending increases are on the agenda for Imperial Oil, Norcen, Mobil, Shell Canada, CS Resources, and Canadian Occidental. Those plans are largely offset by planned reductions by companies such as Renaissance Energy, Home Oil, Morrison Petroleums, Mark Resources, Poco Petroleum, Chauvco Resources, Noranda, and Canadian Natural Resources.

OUTSIDE NORTH AMERICA

The 117 companies Salomon Bros. surveyed for plans in arenas outside the U.S. and Canada plan a 7.5% increase to $34.65 billion in E&P expenditures for 1995.

That marks a significant turnaround from the estimated 3.6% decline in spending currently estimated for 1994 vs. 1993. It also suggests a return to the 1988-92 trend toward international activity, Salomon Bros. said.

Strong increases are planned by YPF, Agip, Royal Dutch/Shell, Texaco, Exxon, Petrofina, Maraven, Deminex, and Phillips, while large decreases in spending are planned by Elf and Chevron.

PRICES, MARKETS

Salomon Bros.' survey showed companies are basing their 1995 E&P budgets on an average price of $17.55/bbl for West Texas intermediate crude for the year, essentially flat with the estimate a year earlier.

The average natural gas price assumption on the Texas Gulf Coast is $1.80/Mcf in 1995, down from $2.14/Mcf a year ago.

If WTI prices averaged $21/bbl in 1995, 57% of all companies would increase their E&P spending. About half (48%) would cut spending if oil prices averaged $15/bbl.

If natural gas prices averaged $2.20/Mcf, 54% of companies would increase their E&P spending. However, if natural gas prices averaged only $1.60/Mcf, 53% would reduce spending.

Confidence in the U,S. natural gas market weakened significantly in 1994, Only 27% of all companies believe natural gas markets are in balance year round, down from 45% a year ago.

ACTIVITY TRENDS

Industry plans a renewed emphasis on drilling for oil rather than gas this year.

Of companies shifting emphasis, 63% will do more oil drilling in the coming year. In 1994, the shift toward gas was less pronounced than expected, with only 54% increasing natural gas drilling vs. the 78% indicated in the prior survey.

An anticipated shift toward exploration in 1994 was even more pronounced than expected, with 41% of all companies increasing exploration spending vs. only 23% increasing development spending. The outlook for 1995 is for more of the same, by about the same percentages.

The trend toward increased offshore spending continued in 1994, although less dramatically than expected. Of all companies, 30% increased offshore spending vs. only 13% that moved toward onshore work. The trend appears to be about the same toward offshore in 1995.

Major companies increased the share of spending that was directed toward E&P in 1994. About 35% of the majors increased the mix toward E&P, while none reduced the percentage. In 1995, the split is about equal between companies planning to increase or decrease (27% vs. 36%).

Seismic was again the most often cited technological trend having a significant effect on E&P. The trend toward increasing the portion of E&P budgets directed toward seismic will continue, with the companies raising the portion of seismic expenditures outnumbering those reducing it by four to one.

Lease acquisitions represented a larger share of E&P budgets in 1994, as expected. The trend will continue in 1995 but at a more modest pace.

Production facilities and pipelines accounted for a larger share of E&P budgets in 1994 at 36% of the companies vs. only 9% where the percentage fell. In 1995, 30% of companies will increase the share of budgets spent on these items vs. 15% where the percentage will drop.

Workover and well service also grew as a fraction of E&P budgets at 32% of companies vs. only 7% where the percentage declined in 1994. Only 22% of companies expect to increase the percentage of these activities in 1995.

The percentage of companies that view the economics of drilling as superior to buying reserves remained at a record level, 81%.

Despite the favorable view toward drilling, 69% of the surveyed companies are seeking to buy reserves, flat with the percentage in 1993. Last year's preference for gas has softened.