NEWS Industry's 1996 U.S. budgets rise for second year in a row

Robert J. Beck
Associate Managing Editor-Economics

• How U.S. Undustry Spending Has Varied* [54542 bytes]
  
• Where Funds Will Go For 1996 U.S. Projects [30335 bytes]
  
• Non-North American Spending Plans of 38 U.S. and Canadian Companies* [28501 bytes]

Domestic spending by U.S. oil and gas companies will increase upstream and downstream in 1996 for the second consecutive year.

Oil & Gas Journal's annual survey of capital and exploration budgets shows U.S. companies plan to spend a combined $33.4 billion on domestic projects in 1996. That will be up only 1.7% from the estimated $32.8 billion spent in 1995, when outlays were up 8.2% from $30.3 billion in 1994.

A sharp drop in pipeline projects will rein the increase in U.S. budgets. Spending on natural gas, crude oil, and petroleum product pipelines will slide 32% in 1996 to $2.011 billion. By contrast, such outlays were up 38.8% in 1995.

Excluding pipelines, industry spending will be $31.4 billion this year, up 5.1% from 1995. In 1995, spending excluding pipelines was $29.9 billion, up 5.9% from 1994.

Industry's total spending has held steady during the past 4 years, averaging $31.8 billion/year. This is up significantly from the recent low of $25.2 billion in 1987. Spending planned for 1996 will be up 32.5% from the 1987 level.

Industry's total U.S. outlays hit a high of $83 billion in 1981, when oil and gas prices soared out of sight. Due to falling oil prices, spending then fell to the 1987 low, logging a decline of $57.8 billion, or 69.7%, in 6 years.

For 1988-95, industry spending has been less volatile. Averaging $32.2 billion/year, it ranged from $29.4 billion in 1989 to $36.1 billion in 1991.

During 1986-95, inflation adjusted outlays have been at levels comparable to the early 1970s prior to the rapid runup in oil prices.

Much of the decline in industry investment occurred in exploration and production (E&P) projects. So in recent years, downstream spending dominated.

In 1990, downstream spending exceeded upstream outlays for the first time since 1971. For 6 consecutive years, 1990-95, downstream spending exceeded upstream spending. This was mainly because of a sharp drop in drilling and an increase in plant upgrading, renovation, and environmental compliance.

However, this year the pattern will change. E&P spending will increase 4% to $16.9 billion, while downstream spending will slip 0.5% to $16.5 billion.

Refining spending is planned at $3.6 billion, off 19.7% from 1995, when spending was down 11% at $4.5 billion.

Spending on petrochemicals will advance sharply for the second year in a row, sparked by economic growth and strong product demand. This follows 4 consecutive years of declining outlays.

Petrochemical spending plans this year call for outlays of $3.9 billion, up 33.6% from 1995. Spending last year is estimated at $2.9 billion, up 29.8% from 1994.

U.S. and Canadian companies continue to invest substantially in areas outside North America. Another significant increase upstream and downstream lies ahead this year, drawing its spark from higher average oil prices and a surge in economic growth and oil demand.

Crude oil and natural gas prices will strongly influence industry spending plans during the year.

For U.S. upstream outlays, the most critical factor will be natural gas prices because drilling for gas accounts for a majority of domestic exploration efforts. Natural gas prices slipped significantly in 1995 but were very strong at yearend and at the start of 1996.

Upstream U.S.

Excluding Outer Continental Shelf lease bonuses, planned E&P spending will advance 5.4% in 1996. OCS lease bonuses are expected to drop to $213 million in 1996 from $422 million in 1995.

The level of E&P outlays in 1995 was significantly higher than plans reported by OGJ in last year's survey (OGJ, Feb. 27, 1995, p. 17). In the survey a year ago, the industry planned E&P spending of $15.3 billion, up only 4.2% from 1994. Due to a more optimistic view and stronger prices and demand, industry E&P spending was higher than anticipated.

U.S. E&P spending peaked at $57.8 billion in 1981. Following a plunge in oil prices in the mid-1980s, E&P outlays dipped to $14.2 billion in 1987. Spending then jumped to $17.5 billion in 1988 but dipped again to $15.5 billion the next year. Upstream spending then climbed to $17.5 billion in 1991 on the strength of higher oil prices as a result of the Persian Gulf war.

However, following the end of the conflict, prices fell and E&P outlays fell sharply to $12.8 billion in 1992. On the strength of higher natural gas prices and increased gas drilling, E&P spending moved up to $16.3 billion last year.

OGJ expects drilling activity and well completions to increase in 1996 because of increased oil and gas demand. But the increases will be modest. OGJ has forecast drilling activity involving an average active rig count of 750 in 1996 and well completions moving up to 21,800. (OGJ, Jan. 29, p. 73).

Outlays for OCS lease bonuses have dropped significantly since the early 1980s. Bonuses peaked in 1981 at $6.7 billion, then fell sharply to a recent low of only $96 million in 1992.

Increased drilling for gas in the Gulf of Mexico boosted OCS bonus payments in recent years. Payments totaled $422 million in 1995 and are estimated at $213 million in 1996.

Downstream U.S.

Planned U.S. downstream spending will slip only 0.5% in 1996 to $16.5 billion.

This follows an increase of 6.1% in 1995 to $16.6 billion and a decline of 9.2% in 1994 to $15.6 billion. There were 5 consecutive years of increased U.S. downstream spending in 1987-91, followed by declines in 1993 and 1994.

Non-E&P spending in the U.S. peaked in 1981 at $25.2 billion. Then falling crude oil and product prices shrunk cash flow, and downstream 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 was mandatory spending to meet new environmental rules.

Spending on refining will fall sharply-down 19.7% to $3.629 billion-in 1996, the fourth year in a row for reduced outlays in this segment. Refining spending fell 11% last year to $4.521 billion.

Capital spending in refining hit a record high of $6.1 billion in 1992.

According to the American Petroleum Institute (API) the U.S. refinery utilization rate averaged 91.7% in 1995 and 92.6% in 1994. That is close to maximum sustainable capacity utilization.

Capital spending for marketing will be up significantly this year, increasing 20.3% to $3.061 billion, a new high. The previous record high was $2.77 billion in 1991.

Last year, marketing outlay of $2.545 billion was up 2.9% from $2.473 billion in 1994.

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

Capital spending on petrochemicals will move up sharply for the second year in a row, increasing 33.6% to a new high of $3.892 billion. This follows an increase in petrochemical outlays of 29.8% last year to $2.913 billion. The increases are due mainly to world economic growth and spending on environmental projects.

Capital spending in nonpetroleum activities will increase 8.2% in 1996 to $3.261 billion. Last year, nonpetroleum outlays increased 2.6% to $3.014 billion.

Outside North America

Plans laid by U.S. and Canadian companies call for spending outside of North America to move up considerably more than domestic outlays.

During the latter part of the 1980s and into the early 1990s there was a noticeable shift in capital expenditures, particularly by many larger U.S. companies, away from North America to other areas.

OGJ's survey on international spending collected data from 38 U.S. and Canadian companies. Those companies plan to spend $23.8 billion outside of North America, up 1.7% from 1995. Last year, this group increased outlays 12.6% to $20.6 billion.

Non-North American upstream spending by this group will be up 15% in 1996 at $15.2 billion.

Downstream spending also will move up, increasing 16.9% to $8.6 billion due to increases in refining, petrochemicals, and marketing.

Major companies

Among companies that issued press releases on their capital and exploration spending plans, Chevron said its program for 1996 will be up 5% at $5.3 billion.

Chevron plans to invest about $3 billion in world E&P, up 10% from 1995. About two thirds of that sum will be spent outside the U.S. International operations accounted for about 70% of Chevron's 1 million b/d world liquids production in 1995.

More than $1 billion will go to U.S. E&P, up 21% from 1995. The world E&P program includes major projects in the U.S. Gulf of Mexico, Congo, Angola, North Sea, Canada, and Venezuela.

Chevron plans to invest about $1.5 billion in world refining, marketing, and transportation, down $300 million from 1995. Programs in 1995 included spending to complete major programs at Chevron's El Segundo and Richmond refineries to produce cleaner burning fuels as required by the California Air Resources Board.

Refining, marketing, and transportation spending outside the U.S. will approach $900 million, mainly for continued expansion into growth areas in the Pacific Rim by Caltex.

Chevron also plans to spend more than $500 million in the worldwide chemicals business in 1996, including expansion and modernization of a ethylene plant at Port Arthur, Tex., and a paraxylene expansion at the Pascagoula, Miss., refinery.

Conoco disclosed plans to spend about $2.25 billion in 1996, up 20% from 1995. About $1.45 billion will go for worldwide E&P and gas processing.

Expenditures for refining, marketing, and transportation will total $785 million. Another $25 million is for the company's new power generation business.

Kerr McGee budgeted $400 million for 1996, down about $90 million from 1995. The 1996 budget includes $240 million for E&P, with $150 million targeted for U.S. operations. This is a reduction of $145 million from 1995. Last year's spending included a high level of acquisitions of producing and nonproducing acreage.

Chemical operations will see spending of $110 million, up $40 million from 1995.

Louisiana Land & Exploration has an E&P budget of $206 million for 1996, up $26 million from 1995. Exploration is being increased by more than 30% to $114 million. This includes $88 million for drilling, $21 million for seismic surveys, and $5 million for acreage purchases. About 84% of the exploration budget will be spent on U.S. projects.

"High potential opportunities" will account for more than 35% of exploration spending. This includes at least six South Louisiana 3D wildcats, at least two wells in the Gulf of Mexico subsalt play, and wells in Algeria, Yemen, and Tunisia.

USX-Marathon will operate on 1996 budget of $857 million, up from $721 million spent in 1995. The budget includes $399 million for production activities, $291 million for refining, marketing, and transportation, and $11 million for other items. The world exploration budget of $156 million is up from $150 million last year.

Upstream U.S. capital spending is set at $312 million, including development of the Green Canyon Block 244 area in the Gulf of Mexico. Non-U.S. upstream spending is budgeted at $87 million.

Mobil's 1996 outlays are to be $4.6 billion, up from the 1995's $4.3 billion. In addition, Mobil's cash investment in equity companies is expected to be about $600 million, up from $200 million in 1995.

Spending for E&P is estimated at $2.8 billion, up $100 million from 1995. In the U.S., spending is to be $500 million, down $300 million from 1995. The lower spending is due to fewer opportunities in the U.S. and outlays for the purchase last year of interests in two deepwater Gulf of Mexico leases.

Non-U.S. E&P spending is expected to increase $400 million to about $2.3 billion. This reflects significant outlays in Nigeria, Equatorial Guinea, Indonesia, Norway, and Hibernia oil field off eastern Canada.

Exploration expenses are expected to account for $500 million of Mobil's world total, up about $100 million from last year. This reflects an increased focus on proven hydrocarbon basins with substantial undiscovered potential in areas such as Norway, Africa, Viet Nam, Kazakhstan, and off eastern Canada.

Marketing and refining spending is estimated at $1.4 billion, up $100 million from 1995. Spending in the U.S. is to be about $400 million, down about $100 million from 1995.

Mobil's international spending is expected to be about $1 billion, up $200 million. Major projects include a catalytic cracking unit for the Altona, Australia, refinery, a lubricant plant at the Jurong, Singapore, refinery, capacity additions at several lubricant blending plants, and marketing opportunities in high growth areas around the world.

Murphy Oil Corp. has a 1996 capital budget of $416 million, up 29% from spending in 1995. Allocations to E&P total $324 million, or 78% of the total. Downstream spending is budgeted at $76 million, including $29 million for a distillate desulfurization unit at the company's refinery in the U.K.

The 1996 E&P budget includes $100 million for exploration that will continue to provide exposure to high potential/high risk frontier prospects. Geographically, $64 million of the exploration budget is allocated to the U.S., $10 million to Canada, $17 million to the U.K., and $10 million to other overseas areas.

The 1996 budget includes $224 million for development projects, up 34% from 1995. Murphy said these projects will provide significant new production starting in 1997. Projects include Phase 2 development of Tahoe field in the Gulf of Mexico, Hibernia field off Canada, and Mungo/Monan, Schie- hallion, and Thelma fields in the U.K. North Sea.

Spending in the U.S. will account for $47 million of the development budget, with expenditures of $88 million in Canada and $75 million in the U.K. Continuing development of Block 16 in Ecuador accounts for most of the balance.

Phillips set a capital and exploration budget of $1.4 billion for 1996, slightly less than estimated 1995 spending of $1.465 billion. About 67% of the budget is directed toward upstream projects and gas and gas liquids operations, while 30% is for chemicals and refining, marketing, and transportation. The rest is for corporate and other expenditures.

The E&P budget is $855 million, compared with estimated 1995 spending of $856 million.

In 1996, $539 million will be directed to international production activities, up from $468 million in 1995. Major projects include Ekofisk II development off Norway and Britannia and Armada fields off the U.K. North Sea.

About $212 million is earmarked for North American development, including the Mahogany subsalt project in the Gulf of Mexico.

The E&P budget includes $104 million for exploration, split 51-49 between non-North American and North America projects. Outside North America, wildcats are to be drilled in Algeria, Australia, China, Norway, and the U.K.

Spending for gas gathering, processing, and marketing will be $80 million in 1996 compared with $278 million in 1995.

Natural gas liquids, chemicals, and plastics are budgeted at $240 million in 1996, up 55% from 1995. About 58% of this budget will go to projects that will increase volumes of ethylene, polyethylene, polyethylene pipe, aromatics, and specialty chemicals.

Refining and marketing spending is set at $175 million in 1996, compared with $146 million in 1995. The 1996 budget calls for a 13% decline in refining outlays and a 140% increase in marketing, with emphasis on construction of additional retail outlets. Refining spending will include funding for advanced process control technology projects at the Sweeny and Borger, Tex., refineries.

Sun Co. has a 1996 capital budget of $460 million, up from 1995 spending of $450 million. The 1996 program includes $140 million for income growth projects, mainly in chemicals, branded marketing, logistics, and international production.

The largest scheduled growth project is expansion of propylene production at its U.S. Northeast refineries, expected to be complete by yearend 1996. Other projects include continued investment in Sunoco marketing sites, expansion of Sun's pipeline and terminal capacity, and further development of oil reserves in the U.K. North Sea.

Independents

Among U.S. independent operators, Anadarko Petroleum has a budget of $485 million, up from $331 million in 1995. It plans to accelerate the pace of several long term exploration and development projects in the U.S. and abroad.

The largest budget item involves $226 million for development, up from only $97 million in 1995. Plans call for the fields development in Algeria, the Gulf of Mexico, Permian basin, and Southwest Kansas. A major area of focus is Algeria, where the company plans to spend $94 million to develop oil field discoveries for production in 1997.

Anadarko and its partners also are developing Mahogany field in the Gulf of Mexico.

About $137 million is destined for exploration, mainly in the Gulf of Mexico, Algeria, Alaska, and Indonesia. Exploration spending totaled $98 million in 1995.

Anadarko increased its gas gathering budget dramatically due to acquisition and enhancement of assets in Kansas Hugoton field. The acquisition, expected to close in March, will triple the company's gas gathering capacity.

Oryx Energy set its 1996 budget at $420 million, a 40% increase from spending in 1995. About 75% will go to the U.S., mainly the Gulf of Mexico. About 20% is devoted to exploration, with the remaining 80% planned for development and acquisitions.

Enserch has a $296 million budget for 1996, essentially unchanged from the $297 million it spent in 1995. Spending for E&P is pegged at $187 million, compared with $190 million spent in 1995.

Questar set its 1996 budget at $235 million. The program emphasizes E&P with projected outlays at $96 million, including $9 million for exploration, $30 million for development, and $57 million for reserve acquisitions. In 1995 the E&P group spent $27 million, mainly for drilling.

Mountain Fuel Supply, Questar's gas distribution subsidiary, budgeted $55 million for 1996, compared with $51 million in 1995.

Questar pipeline estimates 1996 capital spending at $41 million, compared with $28 million in 1995.

Triton Energy plans to spend $260 million, up from $178 million spent in 1995. Most of the budget is earmarked to enhance oil productive capacity in Cuisiana field and start of development of nearby Cupiagua field in Colombia. Capital spending will include stepped up exploration, appraisal, and development in the Gulf of Thailand.

Seagull Energy set a 1996 budget of $132 million, up from $85 million in 1995. Almost all of the increase will be for expanded E&P operations. E&P spending is set at $122 million compared with $76 million in 1995. Exploration spending is expected to exceed $46 million, up from $32 million in 1995. Development spending is budgeted at $66 million, up from $32 million in 1995.

Most of the rest of the 1996 capital spending will occur in Alaska, where the company operates the natural gas transmission and distribution entity that serves the Anchorage area.

Plains Resources budgeted $48 million for 1996, a 60% increase from 1995. It will spend about $40 million on development of its Los Angeles basin, Sunniland Trend, and Illinois basin leases. About $5 million will be spent for exploration in South Florida and Terrebonne Parish, La.

Nuevo Energy plans a 60% increase in spending with 1996 outlays at $75 million. In store for 1996 are expenditures of $10 million for 3D seismic surveys and exploratory drilling, $45 million for exploitation efforts in the company's Oak Hill and Austin chalk programs and Yombo field, $4 million for exploration and development of the company's discoveries in the Gulf Coast area, and the remaining $16 million for acquisition of leases in the company's core areas.

Copyright 1996 Oil & Gas Journal. All Rights Reserved.