U.S., non-U.S. outlays to rise in '98, but oil price plunge clouds spending outlook

Robert J. Beck
Associate Managing Editor-Economics

• How U.S. spending has varied [86,096 bytes]
• Where funds will go for 1998 U.S. projects [73,067 bytes]
• Non-North American spending plans of 32 U.S. and Canadian Companies [75,329 bytes]
• Canadian spending plans [73,660 bytes]

Capital spending by oil and gas companies in and outside the U.S. will rise in 1998, but that forecast may be jeopardized by the continuing plunge in oil prices.

For operations in the U.S., oil and gas company capital spending is expected to move up in 1998 for the fourth year in a row. If the money is spent, it will be the highest industry investment level since 1985. However, with oil prices plummeting in recent months, there is substantial doubt that the initial budget amounts will be spent. Some companies have already announced cuts in their capital spending plans (see related story, p. 42).

Plans currently call for higher downstream outlays but slightly lower upstream spending this year in the U.S. Oil & Gas Journal's annual capital expenditure survey shows companies plan to spend a total of $46.1 billion on U.S. projects in 1998, up 4.8% from about $44 billion in 1997.

Downstream spending in the U.S. is planned to increase 17.2% this year to a total of $18.2 billion, following a 0.2% drop in 1997. U.S. upstream outlays are set to slip 2% to $27.9 billion. This follows a sharp increase of 33.3% last year, when exploration and production spending jumped to $28.4 billion. Total U.S. oil and gas industry capital spending hit a high of $83 billion in 1981. Falling oil prices and slumping company revenues and profits led to a sharp decline in industry spending, which hit a recent low of $25.2 billion in 1987. Since then, industry capital spending has been less volatile, and outlays have averaged $33.8 billion/year.

Companies in recent years also have boosted investments outside the U.S., spurred by the surge in economic growth and oil demand. In addition, strong oil and gas prices and increased volumes have boosted company cash flow and profits the last few years, fueling increased spending. However, the near-term outlook has now been clouded by economic turmoil in a number of Asian countries and the recent collapse of oil prices.

Prices

The level and volatility of oil and gas prices strongly influences industry spending plans.

Continued strong demand for natural gas and low storage levels early in the year helped to boost natural gas prices in 1997. The price of U.S. natural gas futures averaged $2.46/MMBTU in 1997, down from $2.52/MMBTU in 1996. Gas prices began to weaken late in 1997, falling through November-December after peaking at $3.51/MMBTU at the end of October. By yearend, the price had fallen to $2.27/MMBTU. The slide continued this year, to $2.09/ MMBTU at the end of January.

Warmer than normal winter weather and competitive pressure from falling oil prices has put downward pressure on natural gas prices early this year. It is now expected that natural gas prices on average will be slightly lower in 1998 than in 1997.

Weakening worldwide demand for petroleum products, coupled with a significant boost in OPEC and non-OPEC supply, have led to a sharp drop in oil prices. Prices began to weaken in fourth quarter 1997. The average world export price for crude oil fell from $18.86/bbl in October last year to $16.50/bbl in December and $14.10/ bbl in January this year. For all of last year, the world export price averaged $18.38/bbl, down 8.3% from $20.04/ bbl in 1996. The price for next-month U.S. crude oil futures fell from $21.27/ bbl in October last year to 16.84/bbl in January. The price slid to $14.18/bbl as of Mar. 11.

According to the International Energy Agency (IEA), world oil demand moved up an estimated 1.8 million b/d to an average of 73.5 million b/d for 1997. IEA originally projected similar strong demand growth in 1998 but has been adjusting the projections lower as the economic problems in Asia continue. IEA now is calling for world demand to average 75.1 million b/d in 1998, up 1.6 million b/d from 1997.

U.S. upstream spending

Budgets for U.S. exploration and production call for a 2% drop in spending in 1998-at $27.9 billion, the highest level since 1985.

U.S. E&P spending in 1997 jumped 33.3% to $28.4 billion and was significantly higher than the plans reported by OGJ a year ago (OGJ, Feb. 17, 1997, p. 34). Last year, industry plans were for E&P spending of $20.1 billion, up 10.5%.

There was a sharp increase in Outer Continental Shelf (OCS) lease bonus payments in 1997, up 41.8% to $1.245 billion. A year earlier, U.S. Minerals Management Service (MMS) had estimated OCS bonus payments of only $710 million in 1997. A string of deepwater discoveries have boosted interest in Gulf of Mexico leases. This year, MMS estimates payments of $960 million, down 22.9% from 1997 (see related story, p. 32).

The increase in oil and gas prices in 1996-97 provided funds for increased drilling activity and production projects. Oil and gas wellhead revenues during the last 2 years were at the highest level since 1985.

Capital spending on U.S. exploration and drilling jumped 32.9% in 1997 to $22.7 billion. A year ago, the increase was projected at only 12%. This year, plans call for a decline in exploration and drilling spending of 1% to $22.5 billion.

Capital spending on U.S. production and new enhanced recovery projects increased 32.9% in 1997 to $4.5 billion. Spending is expected to slip 1% in 1998 to $4.4 billion.

U.S. E&P spending peaked at $57.8 billion in 1981. Following the plunge in oil prices, E&P outlays dipped to $14.2 billion in 1987. Over the past 10 years, E&P spending has shifted with changes in oil and gas prices. In that time, outlays have ranged from a low of $12.8 billion in 1992 to $21.3 billion in 1996.

The level of spending is reflected in the U.S. rig count and well completions. The Baker Hughes (formerly Hughes Tool) tally of active rotary drilling rigs in the U.S. hit its peak in 1981, averaging 3,970. The rig count then plummeted to a modern-era record low of 717 in 1992. There has been a modest recovery in the past 4 years, and the Baker Hughes count averaged 945 in 1997.

The number of U.S. well completions peaked in 1981 at 89,234. Well completions for 1997 are estimated at only 26,850 wells. OGJ predicts that rig activity and well completions will slide in 1998 due to lower levels of oil and gas prices and wellhead revenues. OGJ has forecast rig activity averaging 900 and well completions at 25,900 in 1998 (OGJ, Jan. 26, 1998, p. 80).

The level of spending is not expected to fall as sharply as the level of activity, due to the increase in drilling costs. Increased outlays for seismic activity and a shift to gas well drilling and deeper wells has pushed up average well costs.

U.S. non-E&P spending.

U.S. non-E&P spending is projected to increase significantly in 1998, moving up 17.2% to $18.2 billion. This follows a drop in non-E&P spending of 0.2% in 1997 to $15.5 billion. Increased spending is expected in almost all categories including refining, marketing, petrochemicals, and pipelines. There will be modest declines in capital spending for other transportation equipment.

Last year, substantial declines in refining and petrochemical spending were the main reasons for the drop in non-E&P capital outlays. Non-E&P spending in the U.S. peaked in 1981 at $25.2 billion. Falling oil prices reduced available funds, and spending in this category fell to $10.4 billion in 1986. Improved market conditions and restructuring to cut operating costs have enabled companies to boost non-E&P outlays in recent years.

Spending on pipelines was up 45.8% in 1997 at $2.56 billion. Total pipeline spending is expected to increase another 23.5% in 1998 to $3.16 billion. Plans call for 3,104 miles of natural gas pipeline and 2,498 miles of crude oil and products pipeline to be laid in the U.S. in 1998 (OGJ, Feb. 19, 1998, p. 37). This is up from 2,728 miles of natural gas pipeline and 1,924 miles of crude oil and petroleum product pipeline to be laid in the U.S. in 1997 (OGJ, Feb. 10, 1997, p. 34).

U.S. refining capital spending fell 21.1% in 1997 to $3.102 billion. Spending in this sector is expected to rebound this year, increasing 24.1% to $3.85 billion. Planned outlays for 1997 are for adding to existing capacity, upgrading refining facilities, and installing equipment to meet changing environmental standards. Capital spending for refining peaked at $6.1 billion in 1992 as outlays for environmental projects peaked.

Capital spending on marketing facilities will increase 16.8% to a record high $3.46 billion in 1998. Changing market strategies and locations, restructuring, intense competition, and a shifting consumer preference for convenience stores has pushed up marketing outlays in recent years.

Capital spending on petrochemical facilities is projected to increase in 1998, rising 14.4% to $3.2 billion. Spending in this sector fell 17.3% last year to $2.8 billion. Worldwide, the petrochemical industry has a history of increasing capacity sharply in response to higher demand, and that has produced periods of excess capacity and sagging earnings. And those capacity cycles have also led to sharp swings in outlays.

Capital spending for transportation equipment other than pipelines is expected to fall 1.2% in 1998 to $713 million compared to an increase of 9.9% in 1997 at $722 million. Spending in this sector is sensitive to changes in the location of petroleum product demand and changes in the volume of imports. Capital spending in the U.S. on non-petroleum activities will increase 12.9% in 1998 to $3.9 billion. Non-petroleum spending by industry companies increased 15.3% in 1997 to $3.4 billion. Spending in these areas is greatly influenced by recent cash flow levels.

Capital spending in Canada

Total capital and exploration spending plans for the Canadian petroleum industry show a slight decline of 0.8% in 1998 to $11.9 billion (U.S.)

Last year, Canadian capital spending increased 19% to $12 billion. The sharp increase in 1997 was marked by significant increases both upstream and downstream.

There have been significant increases in Canadian E&P spending the past few years. Canadian gas production has increased significantly to provide both greater exports to U.S. markets and to support rising domestic demand. But slowing growth in gas demand in the U.S. and lower oil and gas prices will rein spending this year.

Exploration and production spending in Canada is projected to fall 6.9% in 1998 to $8.9 billion. This follows an increase of 11% last year, when E&P spending was an estimated $9.5 billion.

The number of active rotary drilling rigs in Canada increased to an average of 375 in 1997 from 270 in 1996 and 229 in 1995. The rig activity last year was the highest since 1980, when it was a record 401. The number of active rigs in Canada averaged only 97 in 1992. The growth in drilling activity continued into the first part of 1998. In February this year, there was an average 507 rigs working up from 409 a year earlier. However, OGJ projected a slight decline in Canadian well completions for this year, down 5.2% to 14,425 wells in 1998 (OGJ, Jan. 26, 1998, p. 80).

Canadian downstream spending is expected to increase sharply in 1998, up 22.4% to $3.1 billion. Canadian refining spending will be up 16.4% at $370 million. Petrochemical spending will also climb in 1998, up 74.7% to $131 million. Marketing outlays are projected to be off 4.6% in 1998 at $330 million compared with an increase of 7.5% in 1997 to $346 million.

In 1998, spending for Canadian crude oil and petroleum product pipelines is expected to increase sharply to $1.204 billion from $495 million in 1997 and only $22 million in 1996. Outlays for Canadian natural gas pipelines will drop to $396 million from $739 million in 1997. A total of 2,637 miles of new pipeline construction is planned for Canada in 1998 (OGJ, Feb. 9, 1998, p. 37). This is up from 1,857 miles planned last year (OGJ, Feb. 10, 1997, p. 35).

Spending on all other types of transportation will move up 29.1% to $102 million from $79 million in 1997. Spending on mining and other energy projects, which includes oilsands development, are planned to move up 19.9% in 1998 to $392 million. Outlays in this sector were up 16.4% in 1997 at $327 million. Canadian oil and gas industry capital spending on all other activities is also planned to be up in 1998, at $162 million compared with $144 million in 1997.

Spending outside U.S., Canada

U.S. and Canadian companies will continue to invest significant funds in projects outside the U.S. and Canada.

A recent trend in worldwide increases in economic activity and oil demand is stimulating these investments. Over the past decade, there has been a noticeable shift in industry capital expenditures, to areas outside of North America.

The OGJ survey collected data from 32 U.S. and Canadian companies that are planning expenditures outside of North America. These companies plan to spend a total of $27.7 billion in 1998, up 12.9% from $24.5 billion in 1997. Upstream spending is planned to be up 12% in 1998 at $20.6 billion. Non-E&P spending is expected to move up 15.7% to $7.1 billion. The increase in non-E&P outlays will be due to substantial increases in refining, petrochemical, and marketing capital spending. Refining outlays by this group are expected to move up 13% to $1.3 billion. Petrochemical spending will be up 46.6% at $1.9 billion. Marketing spending is expected to be up 10.8% in 1998 at $2.9 billion. All other international outlays by this group of companies is planned to slip to $988 million from $1.056 billion in 1997. Other spending totaled $1.127 billion in 1996.

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