Andersen says N. American drilling will continue climbing in 2002
North American exploration and development drilling likely will continue increasing into 2002, barring a large drop in commodity oil and gas prices for an extended period, officials said Tuesday at Andersen -- the industry consulting firm formerly known as Arthur Andersen -- in Houston.
HOUSTON, July 31 -- North American exploration and development drilling likely will continue increasing into 2002, barring a large drop in commodity oil and gas prices for an extended period, officials said Tuesday at Andersen -- the industry consulting firm formerly known as Arthur Andersen -- in Houston.
Major and independent oil and natural gas producers show "a renewed interest in exploration and production investments in North America," said Victor Burk, managing partner for the energy and utilities industry, at a press briefing for the company's annual report on global exploration and production trends. The US and Canada accounted for 44% of all exploration and development spending last year by 155 publicly traded producers, up from 34% in 1999, he said.
However, the ramp up in North American drilling activity "is testing the capacity of the contract drilling and oilfield services sectors in terms of availability of equipment and people, resulting in increased prices," Burk said.
Meanwhile, he said, "Mergers and acquisitions will continue to be a strategy for many companies to create value, increase production and reserves, and achieve cost savings. But the dollars spent on proved property acquisitions will decline relative to the 'mega deals' of 1999-2000."
The biggest increase in US upstream capital spending last year was for proved property acquisitions, which jumped 256% to $27.8 billion -- "almost matching exploration and development spending for the first time," Burk reported. Large transactions by BP PLC, Phillips Petroleum Co., Occidental Petroleum Corp., and Anadarko Petroleum Corp. accounted for three-quarters of that acquisition activity, he said.
Acquisitions of proved properties in Canada also increased by 58% to $6 billion last year, while in the rest of the world proved property acquisitions declined by 51%.
The 155 surveyed companies posted a combined record after-tax profit of $89 billion from their total exploration and production activities last year. That represents a 125% increase in earnings on a 63% rise in revenue to a total $271 billion, Burk said.
Their total capital spending for exploration, development, and acquisitions of proved properties worldwide increased 30% to $124 billion last year. "But that overall number conceals some interesting regional trends," said Burk.
Upstream capital spending increased most in the US, up 132% to $55.8 billion last year, he said. Canadian capital expenditures also were up 69%, "presumably driven by natural gas drilling," Burk said.
Total North American upstream capital spending by the surveyed companies jumped 116%, compared to a 14% decline in their upstream capital spending outside North America, he reported.
Total exploration and development spending by the surveyed companies increased 24% around the globe last year. But the biggest jump again was in North America, where high commodity prices boosted exploration and development spending by 72% in the US and 77% in Canada. Such spending in the rest of the world was essentially flat, up only 1%, Burk said.
Nevertheless, he said, "Last year was the first in the past 5 in which US exploration and development spending fell below 50% of the companies' pretax operating cash flow (revenue less production costs)." US exploration and development spending amounted to 44% of total pretax operating cash flow among the surveyed companies last year, down from more than 100% in 1998. Exploration and development spending in the other international markets averaged 52% of the companies' 2000 pretax operating cash flow.
The increase in exploration and development activity since the last half of 1999 has produced the highest reserve levels both in the US and worldwide since 1996, said Burk.
Oil reserves last year increased 7% worldwide and 19% in the US. Natural gas reserves were up 9% worldwide and 18% in the US.
"For only the second time in 5 years, survey companies replaced more than 100% of their US production through the drill bit -- 130% of oil production and 128% of gas production," said Burk. In 1997, the survey companies replaced 121% of their US oil production and 109% of their US gas production.
Last year, the surveyed companies replaced through the drillbit 96% of their oil production and 133% of their gas production around the globe. From all sources, that replacement rate was 186% for oil and 223% for gas.
"Upstream investment performance measures improved in every measure in the US, but deteriorated on all but one measure worldwide. Nevertheless, the cost to find and develop reserves outside the US remained lower than in the US," Burk said.
Despite increased activity, Burk said he sees none of the "excessive and speculative spending" that normally marks a boom-bust cycle within the industry. Instead, he sees the industry "reacting vigorously and efficiently" to changes and opportunities within the oil and natural gas markets.
"Although we can be virtually certain these trends do not signal the beginning of a period of predictability in energy markets," Burk said, "we can see signs that companies are positioning themselves better to manage successfully and sustainably through the cycles."
The companies surveyed for the Andersen report have proved oil and gas reserves in excess of 5 million boe. Those companies account for an estimated 87% of total US reserves of oil and natural gas liquids, as well as 68% of total US natural gas reserves.
The group includes 34 companies headquartered outside the US. And for the first time it also includes three publicly traded Chinese oil companies that only a few years ago were state-owned, Burk said.
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