U.S. E&P SPENDING HIKE SET, BUT...

The U.S. petroleum industry plans to hike exploration and development spending at home and abroad this year.

But new uncertainty about oil and gas prices may cause those plans to be revised, warns Arthur Andersen & Co.

The shaky outlook for 1994 stems from Arthur Andersen's annual industry survey. The latest survey, conducted before the Organization of Petroleum Exporting Countries declined last November to trim oil production levels and thus bolster prices, polled chief executive officers of more than 150 energy industry companies.

Based on pre-November oil and gas prices, 57% of the surveyed companies planned to increase U.S. exploration spending and 68% planned greater U.S. development programs in 1994.

In addition, 48% of the companies planned an increase in non U.S. exploration spending and 53% scheduled expanded non U.S. development work in 1994.

The proportion of companies planning higher E&D spending rose significantly from the previous survey, with large increases due in U.S. and non-U.S. exploration outlays.

THE KEY: PRICE

Price expectations are the most important factors in determining capital spending plans, said Victor A. Burk, managing director of oil and gas industry services for Arthur Andersen.

"For the third consecutive year," he said, "projected natural gas prices were ranked most significant by survey companies. And for the second year, projected crude oil prices ranked No. 2."

Before OPEC's November production decision, surveyed companies expected West Texas intermediate crude prices to average $18.50/bbl in 1994, $21 in 1998, and $25 in 2003, all in 1993 dollars. They expected the Gulf Coast gas price to average $2.15/Mcf during 1994, $2.60 in 1998, and $3 in 2003, again all in 1993 dollars.

Independent producers and drilling contractors were the most optimistic in their price forecast, while reserve engineers, integrated producer/refiners, and banks were most conservative.

Since the OPEC November meeting, crude prices have dropped to less than $15/bbl and natural gas prices have fallen to just under $2/Mcf, "certainly changing the near term outlook for prices," Burk said.

"At current price levels, virtually all companies are rethinking their 1994 capital spending plans in terms of lower priced scenarios.

"Although some companies can support increased capital spending at these price levels, based on operating efficiencies and technology advances, the overall survey responses indicate that if companies expect oil and gas prices to remain at these levels for an extended period, their planned increases in exploration and development will be reduced."

Depending on their judgments of how long the low price cycle will last, companies are likely to reduce their U.S. and non U.S. E&D spending by delaying or dropping certain projects from their 1994 schedules.

FOCUS ON GAS

Arthur Andersen's latest survey reveals a marked shift in emphasis toward natural gas exploration, with 55% of respondents reporting plans to focus their U.S. exploration in the next 3 years on gas. Only 3% will concentrate on oil.

In the preceding survey, 42% planned to concentrate on gas and 9% on oil.

About two thirds of survey respondents predicted average increases of 24%/year in U.S. gas demand for the balance of the 1990s, with the highest potential growth expected in electrical power generation.

A large majority 87% believes there are significant natural gas reserves yet to be discovered in the U.S., with the highest potential in the Gulf of Mexico.

1993's rise in gas prices apparently increased the price level perceived to be necessary to stimulate gas E&D.

Eighty percent of survey companies believes the price needs to average at least $2.50/Mcf to sufficiently spark gas E&D. A year ago, only 56% put their price requirement at $2.50.

Most surveyed companies 54% - believe there are significant oil reserves yet to be discovered in the U.S., with the highest potential in Alaska.

To significantly increase the country's oil reserves base, 77% of survey respondents' companies believe oil prices need to be above $20/bbl. Barely more than half 51% predict U.S. oil demand will increase during the rest of the 1990s, while 46% expect demand to remain relatively unchanged.

EMPLOYMENT AND GROWTH

Before last November's OPEC meeting, the near term employment outlook among survey companies was less pessimistic than a year previously.

Half the respondents, compared with 54% in the preceding survey, expect petroleum industry employment to decrease in 1994, while 22% expect an increase vs. only 14% the preceding time around.

However, if current low prices persist, there could be a larger near term decrease in employment. Longer term, only 43% of survey respondents expect industry employment to increase by 1999, down from a majority 53% of the preceding survey's respondents.

Almost two thirds of respondents - 62% predict an average 1994 U.S. active rig count of 800 900, with a median high estimate of 940 and a low of 800. Baker Hughes Inc's 1993 average as of last Dec. 24 was 756, up from 717 in the same week of 1992.

Executives believe reductions in operating costs offer the best opportunities to enhance the value of their companies, followed by mergers or acquisitions and technology advances. Respondents said further overhead cost reductions offer only a moderate opportunity for value improvement.

PROBLEMS

Respondents said for the first time that uncertain oil prices are their No. 1 problem, followed closely by environmental requirements and colts, uncertain natural gas prices, and the U.S. regulatory environment.

Termed only "moderately significant" problems were exploration constraints, limited tax incentives, lack of a national energy policy, and difficulty in obtaining capital.

Asked to assess six government actions or proposals in terms of the effects on the U.S. exploration and production industry, respondents cited Federal Energy Regulatory Commission Order 636 and the North American Free Trade Agreement as the most positive. They described the Clean Air Act amendments of 1990 and the Revenue Reconciliation Act of 1993 as the most negative.

The National Energy Policy Act of 1992 and the Department of Energy's natural gas and oil initiative were rated as having little effect by 70% of respondents.