U.S. E&P sector growth seen as robust in 1997

U.S. exploration and production companies expect their sector of the industry to sustain robust growth in 1997.

That can be seen in the results of an annual survey of expectations among U.S. oil and gas companies by Arthur Andersen LLP.

The poll of 92 E&P companies showed an optimistic outlook for continued strength in oil and gas demand and prices, which will underpin increased exploration and development spending and healthy employment gains (OGJ, Dec. 16, 1996, Newsletter).

"The results of this year's survey confirm our earlier observations that the industry is returning to health, particularly compared with recent years when companies had to grapple with issues of survival, rather than how to manage growth," said Victor A. Burk, managing director of energy services for Arthur Andersen. "The leading indicators in the survey-expected demand growth, pricing trends, capital spending, and employment-reflect companies' confidence that they are well-positioned to take advantage of the strong growth that is returning to the U.S. exploration and production industry."

Demand, price outlook

Survey respondents were upbeat about U.S. oil and natural gas markets, as well as the potential for major new U.S. discoveries.

Fifty-five percent of the companies polled expected oil demand to rise 2-4% for the rest of the 1990s, while 14% forecast oil demand growth of 4-8%. Underscoring the increasing optimism, 71% of the survey respondents believed significant U.S. oil reserves remain to be discovered vs. only 55% last year. The deepwater Gulf of Mexico has the highest potential for new discoveries, said 66% of the companies, while 62% of the survey respondents also rated Alaska as having high potential for crude oil discoveries.

Prices need to be higher than $20/bbl to spur significant additions to the U.S. reserve base, 72% of the companies believe vs. only 43% last year. According to 21% of the survey respondents, prices must average $20-25/bbl to provide a sufficient incentive; 36% said $25/bbl was the necessary price threshold; and 15% felt prices must exceed $25/bbl to prompt major U.S. reserve expansions.

But many companies participating in the survey expressed confidence that U.S. prices would stay at or above $20/bbl for the next few years. Survey respondents forecast an average annual median price of $20/bbl for West Texas intermediate in 1997-98, rising to $20.90/bbl in 1999, $21.78/bbl in 2000, and $22.50/bbl in 2001.

Gas prospects

In the natural gas arena, 56% of the survey respondents predicted a demand increase of 2-4% for the rest of the 1990s, while 21% projected growth of 5-8%.

Natural gas for electric power generation will lead demand growth, said 40% of the companies.

At the same time, 93% of survey respondents feel that significant U.S. natural gas reserves remain to be discovered, with 83% ranking the deepwater Gulf of Mexico and 47% ranking the overall Outer Continental Shelf Gulf as having high potential.

But companies are not as confident that natural gas prices will stay at levels needed to support major expansions in U.S. reserves, the survey indicated. Thirty-seven percent said an average wellhead price of $2.50/Mcf will be required for significant reserve additions, while 26% felt a price higher than $2.50/Mcf is needed. However, companies in the survey forecast a median Gulf Coast wellhead price of only $2.10/Mcf in 1997 and rising to $2.30/Mcf in 2001.

"There is obviously a disparity between price expectations and the price levels needed to add significant...reserves," Burk said. "How this disparity is resolved will have a major impact on natural gas demand growth and investment decisions by exploration and development companies."

E&D spending up

More companies will increase capital spending on U.S. exploration and development in 1997 than the year before, the survey indicated.

Seventy percent of respondents reported plans to increase U.S. exploration spending in 1997, up from 43% in last year's survey. Seventy percent of the companies also reported plans to hike U.S. development spending, up from 55% last year.

Continuing last year's trend, most companies-54% this year vs. 51% in 1995-plan to balance exploration efforts between oil and gas; of the rest, 34% will focus mainly on gas and 12% mainly on oil.

But non-U.S. E&D spending will not increase as much in 1997 as in 1996, the survey showed. Only 32% of the companies in this year's survey reported plans to hike non-U.S. exploration spending in 1997 vs. 48% last year. Thirty-six percent of companies plan higher non-U.S. development spending, compared with 52% last year. However, most companies also said they would hold the line on non-U.S. E&D spending in 1997, with 65% reporting no changes in planned exploration spending and 63% reporting no changes in planned developing spending outside the U.S.

Employment gains

Participants in the survey were more optimistic than last year about prospects for increased employment, both at their companies and industry-wide.

A solid 51% of respondents said they expect hiring at their companies to rise in 1997, while last year, only 36% predicted such increases. Another 34% predicted no change in company hiring plans for 1997, while 15% forecast decreased employment.

Prospects are even brighter for the longer term, the survey indicated, with 66% of respondents projecting increased employment at their companies in 2000. Another 23% expected no change in employment, and 11% predicted a decrease in employment at their companies in 2000.

Meanwhile, 47% of those surveyed said they expect increased employment throughout the industry next year, up from 10% in last year's survey. And nearly half, 47%, forecast that industry-wide employment would be higher in 2000 than today, up from only 22% last year.

Current concerns

Despite a high level of optimism overall, the U.S. E&P industry has some significant concerns for the coming year, the survey showed.

Sixty-five percent of the companies surveyed said they expect a shortage of U.S. offshore rigs in 1997, while 20% anticipate a shortage of onshore rigs.

The potential for natural gas supply disruptions is also high on the list of concerns. Last year, only 4% of the companies surveyed predicted significant disruptions or curtailments during the winter heating season. This year, the proportion of respondents forecasting disruptions jumped to 37%, with more than half-52%-expecting supplies to be short in the U.S. Northeast. About 25% expect disruptions to occur in the U.S. Midwest.

For the first time, the high cost of environmental compliance was cited by companies as the leading problem facing the U.S. E&P industry. By contrast, pollution control requirements and costs ranked third, behind price uncertainty for oil and gas, on this list of problem areas a year ago. In this year's survey, 63% of respondents predicted that environmental regulations would hike their companies' costs of business by 5-10% for the remainder of the 1990s, while 21% predicted that pollution control costs would jump by 11-20%.