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U.S. E&P Spending Forecast to Jump 9.6% in 2012

A sharp drop in natural gas prices and recent weakness in oil prices haven't stalled too much U.S. exploration and production (E&P) spending, which is expected to jump by 9.6% to $143 billion this year, according to 239 domestic producers surveyed by Dahlman Rose & Co.

"Spending in the United States is expected to receive a boost from the supermajors and large, oil-weighted independent E&P companies," according to Dahlman Managing Director Jim Crandell. U.S. producers six months ago indicated that they would increase spending 11% this year for E&P, mostly for oil drilling, which would offset lower spending on natural gas projects (see NGI, Jan. 9).

That's still the case, but oil and liquids drilling has fallen in the onshore more than planned, according to "The Original E&P Spending Survey: 2012 Midyear Update." The analysis is put together by Crandell, who initiated the semiannual survey in 1982 of global integrated oil companies (IOC), national oil companies and independents. The report is considered the only one of its kind to list capital spending estimates of every company surveyed; 463 are included in the latest survey, which is the largest one ever completed.

Total global E&P capital spending should grow by 11% this year to $595 billion, with "moderate improvement" in the United States and Canada. International E&P budgets are up from 9.3% six months ago, "driven largely by increased spending growth among Asia/Pacific and European companies and by North American independents. This would represent the third straight year of growth in international spending and the largest year-over-year growth since the recovery began in 2010."

The 2012 mid-year update "indicates that, while the smallest spenders of E&P dollars have pulled back slightly on planned exploration expenditures, larger independents and integrated companies have actually boosted their spending," Crandell said of U.S. E&Ps. "This supports our observation that spending in the U.S. is being increasingly driven by the large independents and integrated companies as they invest more heavily in unconventional shale plays through large drilling programs and acquisitions.

"These companies are able to withstand a downturn in commodity prices, which we think will reduce the volatility of the U.S. E&P spending cycle. As a result, we think the U.S. spending cycle will begin to resemble the longer cycles of the international business."

Drilling in oil and liquids-rich unconventional plays in the U.S. onshore "are driving growth, along with a recovery of drilling in the Gulf of Mexico, particularly in deepwater," Crandell said. "Dry gas drilling is expected to continue to decline due to the ongoing weakness in natural gas prices, and wet gas drilling should be impacted by weak natural gas prices. Should natural gas prices remain in the $2.75-$3.00 range and oil in the $80/bbl range West Texas Intermediate (WTI), we estimate the rig count will exit 2012 at 1,850 rigs."

For North America's operators, analysts expect "smaller gains than our year-end survey showed for 2012 upstream capital spending." However, Canadian E&P spending this year now is forecast to grow by 6%, compared with an original estimate of 5%.

"While our numbers show only modest slippage in North American exploration and production spending growth in 2012, prices for the commodities are near the levels where more extensive cutbacks could be made," said Crandell. "On the oil side, the average budgeted price of oil for WTI crude oil is above the current price and the current price is near where many companies indicate they will cut back."

Crandell highlighted 17 big explorers' U.S. spending plans for 2012 compared with a year ago. Of the selected producers, Apache Corp. has increased its domestic capital spending by 64% from 2011, while BHP Billiton Ltd.'s is up 57%, ConocoPhillips' has risen 43%, and Pioneer Natural Resources budget is 23% higher. However, Ultra Petroleum Corp. has slashed its budget year/year by 58%, while WPX Energy's is down 34%; Encana Corp.'s is off 28%, and Plains Exploration & Production Co. is 12% lower than in 2011.

Overall, North American independents' spending is 20% higher this year than in 2011, more than any other producer group. European producer spending is up 17%, while Asia Pacific spending is 19% higher. Africa E&P is 10% higher than in 2011, while large IOCs are spending 8% more. Latin American and Middle Eastern E&P budgets both are up 9% year/year.

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