Worldwide exploration and production (E&P) spending will boast another year of double-digit growth in 2008, but only modest upstream increases are forecast in the United States, and Canada's will fall 12%, according to a survey by Lehman Brothers.

Lehman's survey of 344 producers found that worldwide E&P expenditures are forecast to jump 11% to $369 billion in 2008 from $332 billion in 2007, which would be the sixth consecutive year of double-digit E&P growth. Outside North America, spending will increase by 16% in 2008 to $267 billion.

"Gains continue to be driven by strong increases in international spending," said Lehman analyst Jim Crandell. "Moderate spending growth is expected in the U.S., but reductions are forecast in Canada."

Producers expect to spend more next year because of rising oil prices, but they remain unsure about the direction of natural gas prices. Those surveyed pegged oil prices to average around $67.91/bbl in 2008, which is sharply higher than last year's estimate of $55.65. Natural gas prices were forecast to increase only slightly next year to $6.78/Mcf from $6.70.

Producers also appear more cautious about the long-term prospects for gas drilling in North America. Seventy-seven percent of those responding said the outlook was "good" or "excellent" for increased gas drilling, which is down from 86% last year. Lehman's survey also quizzed producers about the threshold for spending cuts. Of those surveyed, the average price at which companies would reduce their E&P budgets is $50.65/bbl for oil and $5.23/Mcf for gas.

U.S. exploration spending is forecast to rise about 3.5% to $81 billion from $78 billion partly because of the uncertainty of gas prices, the survey noted. Canadian spending, meanwhile, is expected to drop 12% to $20.3 billion from $23.2 billion. Canada's exploration, which has been centered in Alberta, will be hit in part because of the higher royalty tax structure that is expected to take effect in 2009.

Lehman's survey noted that several Canadian producers already have announced budget cuts for 2008, including EnCana Corp. (-27%), Nexen Inc. (-56%), Talisman (-40%) and Canadian Natural Resources (-30%). Some producers also have exited Canada altogether, including Anadarko Petroleum Corp., Pioneer Natural Resources and Plains Exploration & Production, said analysts.

Producers that on average spend less than $100 million annually and the majors, those that spend more than $1 billion a year, are expected to sustain U.S. upstream growth, according to the report. The smaller producers are expected to build their U.S. upstream spending almost 23% in 2008, Lehman found.

Majors projected to increase U.S. upstream spending in 2008 include BP plc (21%), Chevron Corp. (7%), Hess Corp. (15%), Royal Dutch Shell (15%) and Total (25%). The larger independents that are forecast to shrink next year's E&P spending include Chesapeake Corp. (-6%), Marathon Corp. (-12%), Newfield Exploration (-10%), Nexen (-62%), Pioneer Natural (-19%) and Plains Exploration (-14%).

Most North American independents appear to be shifting more funds to international operations. Nexen plans to increase its overseas spending by 102%, while Anadarko's is expected to grow 100%, said Lehman. Other producers likely to spend more overseas include Apache Corp. (15%), Canadian Natural Resources (13%), Noble Energy (33%) and Talisman (27%).

"Whereas last year the growth was the strongest from Russian oil companies and from Middle East and North African national oil companies, this year the strong gains are coming from a variety of sources," Lehman analysts said. For example, Mexico's state-owned Petroleos Mexicanos is expected to increase its exploration spending by 23% in 2008, according to the survey.

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