Robert J. Beck
Economics Editor
Joan Bonfield Biggs
Statistics Editor
The petroleum industry plans to cut U.S. capital and exploration spending in 1992 after boosting outlays the past 2 years.
Oil & Gas Journal's annual capital expenditure survey shows U.S. companies plan to spend $32.5 billion on domestic projects this year, compared with $34.6 billion in outlays in 1991.
Capital s ending in 1991 was up a modest 1.7% from 1990. And 1990 spending posted an increase of 15.7% from the year earlier.
Outlays in 1991 were down substantially from expectations at the start of the year. OGJ's survey showed U.S. companies planned to boost domestic spending 13.4% to $39.6 billion last year (OGJ, Feb. 18, 1991, p. 21).
However, those plans were changed during the year. Budgets were cut $5 billion to reflect a new assessment of industry profits because of low natural gas prices and uncertainty over oil prices.
U.S. downstream spending in 1992 will exceed upstream spending for the third consecutive year. Downstream spending moved ahead of upstream outlays in 1990 for the first time since 1971. During the last several years a sharp drop in drilling has reflected reduced upstream outlays. At the same time, plant upgrading, renovation, and environmental requirements boosted downstream outlays.
SPENDING BY SEGMENTS
U.S. exploration and production spending,in 1992 will fall 12.4% from the 1991 level to $14.3 billion. That's the lowest level since 1987.
Downstream spending will slip only 0.3% to $18.2 billion. Record outlays are budgeted for refining, expected to increase 8.3% to $6.2 billion this year.
Spending on petrochemicals slipped in 1991 and will fall again this year. Concerns over excess capacity and the slump in the U.S. economy are the major reasons for the downturn. Spending this year is planned at $2.4 billion, down 6.3% from 1991. Petrochemical outlays fell 19% last year to $2.5 billion. .S. companies continue to shift more outlays outside the U.S. and Canada. Spending outside North America advanced sharply last year, and plans call for an increase again this year, particularly upstream. However, the rate of increase has slowed because of the poorer economic outlook for the industry.
A similar pattern of spending showed up in a survey by Salomon Bros. Inc. (OGJ, Jan. 27, p. 43).
E&P outlays will fall victim to weak prices for oil and gas.
The average wellhead price for U.S. crude was an estimated $16.54/bbl in 1991, down 17.4% from $20.03/bbl for 1990. Prices in 1990 were inflated toward the end of the year due to the Middle East crisis. The average wellhead price the last week of 1991 was down almost 35% from a year earlier.
Wellhead gas prices also are down sharply from levels of previous years. The average for 1991 was an estimated $1.55/Mcf, down 9.4%. And the futures price in early January was almost 30% below year ago levels.
NON-NORTH AMERICAN OUTLAYS
The rate of growth in spending on non-North American projects has exceeded spending growth in the U.S. and Canada the past several years.
Last year non-North American spending by a group of 36 U.S. companies increased 16.7%. That was in contrast to increases of only 3% in total U.S. spending and 2.8% in Canadian spending. This group of companies spent a combined $17.8 billion in 1991 outside North America, compared with $15.2 billion in 1990.
This N,ear the 36 companies plan to increase non-North American spending 3% to $18.3 billion. This is in contrast to a reduction in outlays in the U.S. and Canada. Spending plans in 1992 represent an increase of 20.2% from 1990.
The increase in 1992 spending by this group will all be upstream, which will advance 4.7% to $13 billion.
Total upstream spending plans for the U.S. show a 12.4% drop.
Upstream spending outside of North America by this group was $12.4 billion in 1991 and $10.6 billion in 1990.
Upstream spending outside North America will be up 22.5% from the level in 1990. E&P spending in the U.S. will be down 14% in 1992 from 1990's level.
Total non-North American downstream spending by this group will be off 0.8% this year at $5.3 billion. It was $5.4 billion last year and $4.6 billion in 1990. Downstream spending in 1992 outside the U.S. and Canada will be up 14.9% from 1990. Downstream spending in the U.S. will be up only 4.7% over the same two years.
TREND IN TOTAL OUTLAYS
OGJ surveys show that total capital spending on U.S. projects in 1992 will be at the lowest level since 1989. Spending weakness began to show up last year.
The U.S. industry's total capital spending hit a high of $83 billion in 1981. It then fell to a recent low of $25.2 billion in 1987. The 1987 figure was the lowest level since $21.8 billion in 1976.
The trend in total spending had been moving up in 1988-91. There was a slight dip in 1989 as E&P outlays fell substantially following a drop in crude prices in 1988. Capital and exploration spending moved up to $30.7 billion in 1988, slipped to $29.4 billion in 1989, then rose to $34 billion in 1990 and $34.6 billion last year.
Adjusted for inflation, spending in 1992 will be at about the same level as 1989 and only about 8% above the 1987 low. Inflation adjusted spending in 1987 was at the lowest level since 1971, the first year for OGJ's capital spending survey.
U.S. E&P ACTIVITY
Part of the drop in U.S. upstream spending is a substantial cut in outlays for Outer Continental Shelf lease bonuses. Bonus payments are expected to slip to $255 million in 1992 from $373 million in 1991 and $584 million in 1990. OCS lease bonuses paid by the U.S. industry were as high as $6.7 billion in 1981.
U.S. E&P spending excluding lease bonuses will total $14 billion in 1992, down 11.9% from $16 billion in 1991. Upstream spending excluding the OCS lease bonus payments peaked in 1982 at $52.9 billion. Drilling and exploration outlays accounted for $44.3 billion.
Drilling activity reflects the decline in upstream investment. The number of active rigs hit a peak in 1981, averaging 3,970 for the year. With declining prices the number of active rigs slipped steadily to an average 1,980 in 1985. A sharp drop in crude oil prices in 1986 resulted in a corresponding drop in activity, and the average fell to 964 active rigs.
Weak crude oil prices along with increased taxes and operating costs have eroded the economics of drilling. The active rig count hit a recent low of only 860 on average for 1991.
The rig count is expected to slip again in 1992. The weekly count of active rigs plunged to 653 the week of Jan. 31, the lowest level since Hughes Tool Co. began keeping track in 1942. OGJ forecasts that the U.S. rig count will average only 810 for year (OGJ, Jan. 27, p. 66).
Well completions also are expected to fall in 1992. OGJ projects well completions at 24,920, down from an estimated 27,400 in 1991. Well completions peaked at 89,234 in 1981.
If U.S. upstream spending was at the record level of 1982 a total 98,500 wells could be drilled, assuming an average cost near the current $400,000/well. This would be 73,460 wells over the OGJ forecast for 1992.
NON-E&P SPENDING
The decline in planned U.S. nonE&P spending in 1992 follows 5 consecutive years of increases in this category.
In 1991 U.S. non-E&P outlays were up 5% at $18.3 billion.
Non-E&P spending in the U.S. 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. Thereafter, improved market conditions and restructuring steps to cut costs enabled companies to boost outlays.
Increases in outlays for refining, marketing, and petrochemicals accounted for 76.4% of the increased non-E&P spending in 1986-91.
Much of the recent spending and outlays planned for 1992 are for upgrading refineries to meet changing product demand and for equipment to comply with new environmental rules.
There may be some capacity added in certain sites, but industry's total capacity may decline. Some refiners are shutting down plants because of the rising cost of environmental compliance.
American Petroleum Institute data peg the U.S. refinery utilization rate at an average 85.9% in 1991, down from 87.1% in 1990 because of a drop in product demand caused by the recession.
U.S. operable refining capacity edged up 0.5% in 1991 to an average 15.709 million b/d. API also lists this as the current U.S. operable capacity. The latest API survey shows total capacity slipping to 15.704 million b/d by the end of March 1992.
The refining industry had been able to sustain good profit margins in recent years, and this helped support continued increases in spending in this sector. In addition, a shift in demand toward a higher proportion of light products required some investment in upgrading.
Margins were sustained because feedstock costs fell more than product prices. Refiners' average cost for crude oil fell 14.4% in 1991 to an estimated $19.03/bbl. Average price of motor gasoline for resale fell 11.5% to -$0.6956/gal. And the average resale price for No. 2 fuel oil fell 12.4% to $0.61/gal.
For the first 11 months of 1991 the average cash operating margin for Gulf Coast refineries rose to $1.98/bbl from $1.89/bbl in the same period the year before.
Marketing capital spending will be down this year, falling 5.7% to $2.6 billion. Last year marketing spending rose to a record high, increasing 2.4% to $2.8 billion.
Intense competition and a shifting consumer preference toward convenience stores has sparked marketing outlays in recent years.
The U.S. petrochemical industry has posted lower profits recently because of reduced demand because of recession. The industry also has had problems with excess capacity, which has increased competitive pressures and reduced profits. These factors have led to a reduction in capital outlays for this sector.
Petrochemical outlays in 1987 were $1.3 billion. They rose 57.2% in 1988, 38.4% in 1989, and 15.1% in 1990 to a record $3.1 billion.
During this period the petrochemical sector was posting record profits.
TRANSPORTATION
Spending on U.S. transportation will fall S. 1 % in 1992 to $3.5 billion. Transportation spending rose 22.5% last year to $3.8 billion.
Outlays for gas pipelines will represent 64.6% of total transportation spending, down from 72.2% last year. Gas pipeline spending will be down 17.8% to $2.3 billion. Outlays last year were $2.8 billion, up 39.8% from 1990.
Spending on crude oil and petroleum product pipelines will total $468 million this year, up 22.8% from last year's outlays but down from $500 million in 1990. Plans call for 3,757 miles of gas pipeline and 1,336 miles of crude oil and product pipelines to be laid in the U.S. in 1992 (OGJ, Feb. 10, p. 19). That is down from plans a year ago, which called for 4,858 miles of gas pipeline and 956 miles of crude and product pipeline.
Capital spending for other forms of transportation will increase 14% to $781 million. This compares with an increase of 5.9% in 1991 to 5685 million.
COMPANY PLANS
Among companies announcing capital and exploration budgets for 1992, Amoco Corp. plans to spend $3.7 billion, down 11% from estimated 1991 spending of $4.16 billion. Expectations of lower crude oil prices this year was one reason for the reduced budget.
Amoco Chairman Laurance Fuller said, "We are not looking for year to year real increases in oil or gas prices in the short term. In fact, we expect the average price of West Texas intermediate crude to be down slightly in 1992 compared with the average 1991 price."
Amoco's exploration and production spending is budgeted to decline 18% from 1991 spending. The upstream sector will continue to receive more than 50% of the total.
Fuller said, "We are optimistic about this sector of our business. During 1992, we will be spending money on some key strategic projects. We also will defer some projects that can be put off until later years."
Amoco's refining, marketing, and transportation budget is up 31% from 1991 estimated spending. Most of the increase will fund projects enabling production of cleaner gasoline and low sulfur diesel fuel and meet environmental rules already in place.
Amoco's total spending for environmental projects will climb to about $675 million, up 88% from estimated environmental outlays in 1991.
ARCO announced a 10% reduction in its capital and exploration budget. The 1992 budget is $2.4 billion, compared with an estimated $2.7 billion spent in 1991.
In early 1991 ARCO spent $600 million to buy leases in Midway-Sunset field in California. The 1992 budget does not include acquisitions.
ARCO Chairman Lodwrick Cook said, "The reduction in our planned capital spending reflects the recent reorganization of Lower 48 oil and gas operations and Arco Chemical Co. scaling back its capital program.
"Nevertheless, the 1992 program continues our strong emphasis on exploration and development projects in Alaska and overseas. This capital program includes substantial commitments in our downstream operations to meet clean air requirements and to comply with upcoming environmental rules."
About $1.32 billion, or 55%, of ARCO's budget is targeted for exploration and production. Of that amount, billion, $820 million will be spent in the U.S. - $470 million in the Lower 48 and $350 million in Alaska.
USX approved a 1992 Marathon Group capital and exploration budget of $1.44 billion, a 31% increase from 1991 spending of $1.1 billion. About 64% of the total will go for exploration and production. And almost 69% of the E&P spending will be outside the U. S.
Victor G. Beghini, president of Marathon Oil Co., said, "While our exploration success overseas, along with our acquisition of major concessions, is contributing to our shift in focus, the increased overseas spending is also driven by a series of negative factors.
"We are being attracted overseas by improving tax regimes and concession terms at a time when U.S. industry is faced with an uncertain legislative regulatory future. The failure of our government to open the most promising domestic acreage, both offshore and in Alaska, is forcing us to look overseas for new opportunities."
The Marathon group is allocating $273 million to environment related projects. This compares with $102 million spent in 1991. Most will be go for construction of units at Marathon refineries to meet federal low sulfur diesel rules.
Phillips Petroleum Co. plans to spend $1.35 billion in 1992, down 16% from 1991 estimated outlays. The 1992 budget includes $185 million to rebuild polyethylene production units at the Houston chemical complex. The 1991 outlays included $215 million for this project.
Phillips' exploration and production will continue to be funded at about the same level as last year-$595 million for 1992, compared with $600 million spent in 1991. A growing portion of outlays for E&P will go for overseas activities. International projects will be allocated 58% of the total 1992 E&P budget, compared with 48% of the 1991 expenditures.
The E&P budget includes $135 million for exploration, most of which is to be spent on prospects near existing operations, that have potential for rapid development. About one third of the exploration funds will be directed toward potential large reserve, high reward frontier prospects.
More than 75% of Phillips' downstream spending in 1992 is earmarked for projects authorized during or before 1991. Of the total capital budget, about $200 million will go to environment related projects, either for specific environmental requirements or as part of the total cost of other projects. More than 25% of the downstream capital budget is being directed to environment related projects.
Phillips's chemicals budget for 1992, including rebuilding the Houston plant, will be $380 million, down from $339 million in 1991.
Kerr-McGee Corp. set its 1992 budget at $355 million, down 31% from capital spending and acquisitions of $514 in 1991. The 1991 outlays included acquisitions of $101 million and completion of several large projects.
About $220 million of Kerr-McGee's 1992 budget will be spent on upstream projects, compared with $331 million in 1991. About 45% of this year's E&P budget will be devoted to major projects in the North Sea.
Kerr-McGee's refining and marketing budget is $35 million, down from $54 million in 1991. The chemical budget also is $35 million for 1992, down from spending of $89 million in 1991.
Union Texas Petroleum has a 1992 budget of $315 million, down from $387 million spent in 1991. Most of this year's spending will be on projects outside the U.S.
Union Texas plans to spend $155 million to complete redevelopment of Piper oil field in the U.K. North Sea and development of Saltire field. Another $51 million will be spent on other U.K. exploration and development projects. Union Texas also plans to spend $75 million on Indonesian exploration and development and $16 million in Pakistan. Spending on petrochemicals will be reduced to $5 million from $14 million in 1991.
Cabot Oil & Gas Corp. plans to spend $44 million this year.
It plans to drill about 93 gas wells. The drilling program will concentrate mainly on development and infill wells in the Appalachian basin of West Virginia and Pennsylvania and in the Anadarko basin of Oklahoma, Southwest Kansas, and the Texas Panhandle.
Cabot expenditures will include $7.6 million for exploration and $4.6 million for modernization of central computer systems.
Cabot Chairman Charles P. Seiss Jr. said, "The program is structured to allow the company to maintain reserves and production with spending closely balanced with discretionary cash flow. This level of drilling will enable our company to maintain its healthy base of gas reserves and preserve our asset value in the midst of a very difficult industry climate."
Dekalb Energy Co., Denver, said its capital and exploration spending this year will be about $31 million, down about 35% from 1991. Dekalb will focus mainly on Canadian exploration, along with gas exploration in the Sacramento Valley of California, Williston basin of North Dakota, and development of certain properties offshore.
Oneok Inc., Tulsa, reduced its 1992 drilling budget to $8 million from $16 million. Chairman J.D. Scott said, "This is only a pause. With more promising pricing signals, we'll step up the pace of exploring and utilize our inventory of development well locations identified through the exploration strategy we adopted 2 years ago."
Copyright 1992 Oil & Gas Journal. All Rights Reserved.
