Study Predicts Capital Spending Decline
Last year set a 1990s record for exploration and production
capital spending, but the five-year trend of capital spending
increases may end this year with the first decline since 1992.
That's one finding of Global Upstream Performance Trends, a review
of domestic and international results for 131 publicly traded
companies by Arthur Andersen and John S. Herold.
Last year's increase in spending was due in part to increasing
investment in the deep-water Gulf of Mexico, said Brian J. Lidsky,
executive vice president of John S. Herold. "Herold expects this
higher level of spending in the Gulf to bear fruit in the form of
at least 25% average annual gains in production from the deep-water
Gulf over the next five years."
While the report cited increasing exploration and production
expenditures from 1992 to 1997, it also noted the domestic gas
production replacement rate of 106% in 1997 continued to decline
from the five-year high of 136% set in 1995. "Downward gas reserve
revisions of more than 100 Bcf each by EEX, Amoco, Unocal, Mobil,
TransTexas and Pioneer Natural Resources were largely responsible
for the decline," Lidsky said. "From the drillbit only, U.S. gas
reserve additions net of revisions did not even meet production,
leaving the production replacement rate at 94%. However, this is up
5% from the 1996 level of 89%."
Domestic gas reserves increased less than 1% to 106.7 Tcf at the
end of last year, mainly due to downward reserve revisions of 1
Tcf. Production continued its long-term upward trend, rising 2% to
11.6 Tcf, half the 4% average annual growth rate from 1993 through
For the first time, last year large independents spent more than
the majors on total domestic capital expenditures. Independents
topped the majors' total by almost 5%, $16.6 billion compared to
$15.8 billion. This was attributed mainly to an increase of $2.8
billion in the large independents' proved property acquisitions to
$5.7 billion, compared to a rise of $860 million in the majors'
proved property acquisitions to $1.4 billion. The large
independents also increased their U.S. exploration spending 54% to
$2.7 billion, their development spending 30% to $6.5 billion, and
their domestic unproved property acquisitions by 66% to $1.7
billion. Majors still were bigger by far outside the U.S. Large
independents' international capital spending grew 67% to $16.4
billion, still less than half of the majors' international capital
spending of $36.8 billion, which represented a 9% increase over
On the international acquisitions front, Canada accounted for
46% of activity. Canadian acquisition costs increased 35% to
$4.25/Boe, which puts them on a par with domestic acquisition
costs. However, American companies are still finding value in
Canada due to the country's weak dollar and the fact that some
upstream Canadian companies are undervalued in the stock market.
This is evidenced by Devon Energy's plan to acquire Canada's
Northstar Energy, which was announced Tuesday. Lidsky noted
American companies are seeing a need to increase their Canadian
supply holdings in light of pipeline projects planned to bring
Canadian gas into the United States. "I think U.S. oil companies
are looking to capture a piece of that market," he said.
Joe Fisher, Houston
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