U.S. INDUSTRY HIKES BUDGET SECOND CONSECUTIVE YEAR

U.S. oil and gas companies plan to boost domestic capital and exploration spending for the second consecutive year in 1991.

Oil & Gas Journal's annual survey shows U.S. companies will spend a total of $39.6 billion on U.S. projects in 1991, up 13.4% from estimated 1990 spending.

That compares with an 18.7% jump in estimated outlays for 1990 vs. 1989.

Downstream spending in 1991 will exceed upstream spending for the first time since 1971. This was expected to happen last year (OGJ, Feb. 19, 1990, p. 21) but there was a surge in spending in both categories, and E&P spending was $17.7 billion in 1990 compared with downstream spending of $17.2 billion.

In 1991 E&P outlays are projected to climb 11.2% from 1990 levels at $19.7 billion. Downstream spending will move up 15.7% this year to $19.9 billion.

Record outlays are budgeted for refining at $5.8 billion and for petrochemicals at $3.3 billion.

Even with the sizable increase in U.S. spending, companies' are continuing to shift more of their budgets to investment outside the U.S. That trend is being led by upstream spending, which was also seen in a Salomon Bros. Inc. survey (OGJ, Jan. 21, p. 24).

Despite the surge in oil prices in fourth quarter 1990 as a result of the Persian gulf crisis, most companies surveyed by Salomon Bros. said the crisis was not a factor in their spending plans.

However, Chevron Corp. Chairman Ken Derr, in announcing an $800 million increase in capital spending in 1991 (OGJ, Jan. 21, p. 24), said, "We are reinvesting our profits in attractive projects in the U.S. and around the world that will help reduce U.S. energy vulnerability."

Likely to get a big chunk of Chevron's 1991 E&P budget is the Kutubu oil project in Papua New Guinea, which will lift that country into the ranks of crude exporting nations by the mid-1990s.

Chevron's $5.1 billion 1991 capital program compares with spending of $4.3 billion in 1990 and $4 billion in 1989. Its spending totaled $1.5 billion in fourth quarter 1990.

OGJ survey results also mirror announced spending plans by U.S. and Canadian companies. All spending plans in this and the accompanying story on Canadian spending attributed to specific companies come from company announcements, not the OGJ survey.

NON-NORTH AMERICA OUTLAYS

The trend among U.S. companies committing an increasingly bigger share of capital spending for projects outside North America will continue in 1991.

The growth rate in spending on non-North American projects has exceeded spending growth rates in the U.S. and Canada the past several years.

According to OGJ's survey, spending outside the U.S. and Canada by a group of 35 U.S. companies is projected to rise 22.4% in 1991 to 6 billion. This follows an increase of 23.9% in 1990. The increase will be mainly in upstream activities.

The share of those companies' budgets applied to spending outside the U.S. and Canada also continues to reflect a slow but steady increase. Those firms plan to devote 29.6% of their total spending on non-North America projects. The share was 28% in 1990 and 27.2% in 1989.

PRICE FORECAST

There is considerable uncertainty about the direction of crude and product prices in the rest of 1991. Many analysts expect lower crude prices this spring and summer.

Because of industry price volatility since 1986, many companies have tended to closely monitor prices and release funds only if price expectations are consistent with budget assumptions. Correspondingly, there remains much uncertainty about outlays.

Capital spending generally tends to follow cash flow, which in turn tracks prices for crude, natural gas, and petroleum products.

The average wellhead price of U.S. crude oil rose 26.1% in 1989 to $15.86/bbl. The average wholesale price of No. 2 fuel oil increased 19.5% to 56.5/gal. In 1990, total industry capital spending increased 23.9%.

The average wellhead price of crude in the U.S. reached about $19.75/bbl in 1990. The average wholesale price of No. 2 fuel oil climbed to about 67/gal. Correspondingly, capital spending plans call for a boost in spending of 22.4% this year.

Enserch Corp. expects improved cash flow in 1991 to warrant a big jump in planned capital spending to $308 million from estimated spending of $221 million in 1990.

"More than 95% of the increase and about two thirds of next year's budget represents planned spending for Enserch's petroleum exploration and production business in anticipation of improved production levels and higher average prices of oil, natural gas liquids, and natural gas compared with those in 1990."

Enserch plans E&P outlays of $205 million in 1991, up more than 60% from 1990 spending. About 25% of its 1991 E&P budget is earmarked for Gulf of Mexico oil and gas development.

CAUTION WARRANTED

However, concern over short term price volatility translates into caution for many companies' spending plans.

Amoco Corp.'s planned 10% increase in spending, says Chairman Richard M. Morrow, is based on a long range view of the world oil business. It assumes oil prices in the low $20s/bbl.

"I cannot remember a time when the short term price outlook was more uncertain, with prices fluctuating wildly depending on developments in the Middle East," he said.

Murphy Oil Corp.'s capital program is based on an average WTI price of $18.75/bbl. It said, "Curtailments will be made," if the average realized price falls well below that mark during the year.

The 16% increase in Louisiana Land & Exploration Co.'s 1991 capital and exploration budget from its original 1990 budget is "opportunity driven," says Chief Executive Officer H. Leighton Steward.

"Our planning is based upon the expectation that oil prices will retreat to more moderate levels once the current crisis in the Middle East is resolved."

Steward also pointed out that deferrals of projects originally scheduled for 1990 were partly responsible for the year to year increase in planned spending.

"At this point we expect that actual 1990 expenditures will be 15-20% less than our original 1990 budget. Most of this shortfall is the result of delays in projects where LL&E is not the operator."

Steward added that LL&E will carry on an "aggressive exploratory drilling program in the Gulf of Mexico, selected domestic onshore basins, and certain high potential foreign areas."

Environmental outlays will continue to take a big slice of company budgets.

Amoco expects to boost outlays on environmental projects by 150% to $350 million. Such spending includes refinery upgrades to produce reformulated gasoline and to cut diesel sulfur limits to meet U.S. air quality goals.

OUTLAY OUTLOOK

According to OGJ's survey, total industry capital spending in 1991 will be at the highest level since 1985.

Oil and gas industry spending fell to a recent low of $25.2 billion in 1987 from a record $82.9 billion in 1981. The 1987 figure was the lowest industry spending since $21.8 billion in 1976. Spending moved up in 1988, but crude prices fell sharply that year. That was followed by a slide in 1989 spending, pulled down by a plunge in E&P outlays.

The annual average U.S. active rig count dropped to a modern record low in 1989 of 869. E&P expenditures fell 11.1% in 1989 to $15.5 billion, and total outlays fell 4.2% to $29.4 billion.

Spending for non-E&P operations hit a recent low of $10.4 billion in 1986. Improved downstream earnings helped boost outlays in that sector in 1987-89.

Adjusted for inflation, spending in 1991 will be at about the same level as 1974. Inflation adjusted spending in 1987 was at the lowest level since 1971, the first year of OGJ's capital spending survey.

U.S. E&P SPENDING

This year's increase in planned 1991 U.S. E&P spending compares with a 14.2% increase in 1990.

Last year's jump in U. S. E&P spending compares with an OGJ survey projection of a 6.9% increase. That was partly attributable to higher than expected crude prices. In turn, the U.S. active rig count jumped up to an average 1,010.

U.S. upstream spending peaked in 1981 at $57.8 billion. A sharp decline in crude and gas prices then slashed investment as upstream spending slipped each year during 1982-87, falling to a low of $14.2 billion in 1987.

A rebound in oil prices in 1987 led to increased outlays in 1988, and E&P spending moved up to $17.4 billion. The following year that trend reversed, with lower oil prices in 1988 spurring a drop in E&P activity as spending fell to $15.5 billion in 1989.

Outlays for Outer Continental Shelf lease bonus payments are expected to jump to $970 million this year after rising only 2.6% in 1990 to $663 million.

Upstream spending excluding lease bonus payments is planned at $18.7 billion in 1991, up 9.8% from last year. Overall E&P spending peaked in 1982 at $52.9 billion but fell to $13.7 billion in 1987.

UPSTREAM ACTIVITY

Increased 1991 E&P spending is expected to be reflected in an increase in the U.S. active rig count and in well completions.

OGJ recently projected an 8.9% increase in the rig count to 1,100 and a 6.7% rise in well completions to 35,972 in 1991 from OGJ's 1990 forecast. Well completions as reported were 30,249 in 1989 and 33,713 in 1990.

If U.S. upstream spending matched the 1982 record level, assuming an estimated average U.S. cost of $375,000/well, another 68,000 wells could be drilled beyond the 39,172 wells OGJ forecasted (OGJ, Jan. 28, p. 64).

Of its total $3.3 billion capital spending plan, Shell Oil Co. has set aside about $2 billion for U.S. oil and gas E&P, a $200 million increase. Of that total, about half is earmarked for Gulf of Mexico E&P. Much of the increase will be absorbed by Shell's $1.3 billion deepwater Auger field project off Louisiana in Garden Banks Block 426. It expects to install a tension leg platform in 2,952 ft of water and begin producing 40,000 b/d of oil and 150 MMcfd of gas in 1993.

Equitable Resources Inc., Pittsburgh, has budgeted $117 million for 1991, of which $64 million is earmarked for E&P-an increase of $4 million from 1990's level-mostly in the U.S. Its total budget is up 8.5% from 1990 spending.

Equitable plans to spend $49 million to develop Appalachian basin reserves. The remainder of its E&P budget will go for expanded drilling in the Rocky Mountains, Gulf of Mexico, and Colombia.

NON-E&P SPENDING

The planned 15.7% increase to $19.9 billion in U.S. non-E&P spending in 1991 follows a 23.7% jump in 1990. U.S. non-E&P spending peaked in 1981 at $25.2 billion then plunged to $10.4 billion in 1986.

Non-E&P spending in the U.S. has moved up steadily since 1986, paced by sharp increases in outlays for refining, marketing, and petrochemicals. The increase in these categories accounted for about 69% of the increase in non-E&P spending in 1986-91.

A 31.5% hike in refining outlays for 1991 compares with a 39% jump in 1990 spending of $4.4 billion.

Much of that will go for upgrading plants to meet changing product demand and for equipment and process changes to meet new environmental requirements.

In addition, there will be spending for capacity additions to meet expected future increases in product demand and alleviate the tight supply situation for some products.

U.S. refinery utilization rates averaged 86.3% in 1989 and 87.3% in 1990, according to American Petroleum Institute. For some products, industry is near 100% capacity utilization, and a surge in demand could rapidly lead to supply shortfalls. Capacity additions probably would entail a combination of restarting shut-in capacity and adding incremental capacity at some plants.

Improved refining profits stemming from strong product demand and high utilization rates in recent years has supported continued strong investment in this sector.

Marketing spending is expected to be off slightly in 1991, down 5.7% at $2.5 billion. Last year, marketing outlays were up 3.4% at a record $2.7 billion. Stiff competition and changing consumer preferences have boosted marketing expenditures in recent ears.

Sun Co. Inc. has allocated 40% of its $875 million spending program to U.S. refining and marketing. The balance of its budget breaks out as 30% to Suncor-its 75% owned Canadian integrated subsidiary-15% to E&P outside North America, 10% to coal, and 5% to other projects.

Sun Chairman Robert McClements Jr. said, however, he is prepared to cut capital spending if a U.S. economic recession or drawn out Middle East crisis dampens cash flow.

PETROCHEMICAL

Capital spending on petrochemical operations is projected to move up 4.7% in 1991 to $3.3 billion. This follows an increase of 15.1% last year.

Petrochemical outlays in 1988 moved up 57.2% to $1.96 billion and another 38.4% in 1989 at $2.7 billion.

However, the petrochemical industry is beginning to grapple with lower demand as a result of slowing economic growth and surplus capacity for some key products. This has caused earnings to slump, in turn slowing capital investment plans.

Phillips Petroleum Co. allotted $345 million of its total $1.5 billion spending plan for chemical operations investment. Part of that will go for construction of a 1.5 billion lb/year ethylene cracker at its Sweeny, Tex., complex.

It is scheduled for start-up during mid-1991.

TRANSPORTATION

Total spending on U.S. oil and gas transportation operations is planned to increase 32.5% in 1991 to $4.1 billion.

This follows a jump of 63.1% in 1990. Planned outlays in this sector in 1991 are up 116.1% from the level of 2 years earlier.

Natural gas pipelines will account for a big chunk of that increased spending. Outlays for gas pipelines are expected to rise 39.8% in 1991 to $2.8 billion. Gas pipeline spending soared 104.5% in 1990.

Enserch budgeted $79 million for its natural gas transmission and distribution business in 1991, up from $73 million in 1990. About $8 million of that will go to complete its Bethel salt dome storage facility southeast of Dallas. Another $8 million is earmarked for laying a 26 mile, 20 in. pipeline to expand its Lone Star Gas Co. system and boost deliverability to the North Dallas area.

Spending on crude and product pipelines is projected to fall 23.8% to $381 million in 1991.

Current plans call for 4,858 miles of gas pipeline and 955 miles of crude and product pipeline to be laid in the U.S. in 1991 (OGJ, Feb. 11, p. 23).

Spending on other transportation operations is expected to be up 53.6% to $994 million in 1991, compared with an increase of 29.9% in 1990.

Capital outlays by U.S. companies for nonpetroleum sectors will move up to $4.2 billion in 1991, an increase of 8.1%. Last year spending for these other activities was up 10.1%.

NON-U.S. SPENDING

Capital spending outside the U.S. and Canada will continue to climb faster than U.S. spending, with the majority of the non-North America increase focused on upstream activities.

Spending outside the U.S. and Canada by the companies surveyed will move up 22.4% in 1991 to $16.6 billion. That compares with outlays of $13.6 billion in 1990 and $11 billion in 1989.

This group of companies plans 1991 upstream spending outside North America of $11.8 billion, up 29.8% from 1990. Last year spending in this category was up 30.7%.

Exploration and drilling outlays are projected to rise 20.9% to $5.1 billion, and production spending will be up 37.5% at $6.6 billion.

The growth in non-North American downstream capital spending will be much slower by comparison. Spending in this area will move up 7.6% in 1991 to $4.9 billion, compared with a 12.3% hike in 1990.

Planned 1991 E&P spending outside the U.S. and Canada will be up 69.6% from levels in 1989. Over the same period, total U.S. spending will be up only 27%.

By contrast, downstream spending is moving up faster in the U.S.

Planned total downstream outlays in the U.S . for 1991 will be up 43.2% from 1989. For the surveyed companies, 1991 downstream outlays outside the U.S. and Canada will be up 20.8% from 1989.

Amoco plans to hike foreign E&P spending 28% and overall E&P outlays by 11%.

Global Marine Inc., Houston, noted its contract drilling business will benefit from the trend toward international E&P.

Global Marine Chairman C. Russell Luigs noted that his company's customers have announced plans to increase 1991 E&P outlays by about 15% from 1990 levels, with most of the increase going to international activities.

"We expect that these E&P expenditures will occur as long as oil price expectations remain above $18/bbl," he said. "With 70% of Global Marine's fleet outside the U.S. Gulf of Mexico, we are well positioned to benefit from this strengthening in international drilling."

About 60% of Conoco Inc.'s planned $2 billion in 1991 capital outlays will be spent on projects in Norway, Ecuador, the U.K. North Sea, and Indonesia. Conoco will spend another $90 million on double hulled tankers it expects to have delivered this year from South Korean shipyards.

Conoco will hike total spending by 25% this year from 1990.

Of the $332 million it plans to spend on E&D in 1991, Kerr-McGee Corp. has earmarked about 40% to fund oil and gas projects in the North Sea, said Chairman Frank A. McPherson. "We are also increasing capital expenditures in Canada and in the Gulf of Mexico."

Kerr-McGee's total E&D budget is 31% higher than in 1990, and its overall capital budget of $536 million reflects an increase of 6% from last year.

Murphy Oil has set aside most of its planned 20% increase in 1991 spending for development of recent oil and gas discoveries in Ecuador, the Gulf of Mexico and western Canada, and for increased capacity at its Meraux La., refinery.

Some of Murphy's budget hike will also be spent on more sophisticated processing at all three company refineries and to speed testing of other prospects near recent exploratory wells.

Copyright 1991 Oil & Gas Journal. All Rights Reserved.