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North American E&Ps Forecast to Cut Spending by 10-20%

Depending on their North American natural gas exposure, most of the big exploration and production (E&P) independents will cut their 2009 exploration spending by at least 10-20% this year, IHS analysts estimate.

IHS, which owns Cambridge Energy Research Associates (CERA), sponsored a panel discussion with some of its top analysts last Monday at CERAWeek in Houston. The analysts offered their take on what's ahead for the oil and gas industry in the coming months.

North American E&Ps are facing spending cuts for the first time in years, and the uncertainty in the financial markets is leading most to weigh their investment decisions carefully, said Bob Fryklund, IHS vice president of global exploration and production. Particularly hard hit are "companies with a high unconventional weighting that may also include oilsands. The cuts will be even more dramatic for smaller- to medium-sized independents, which may see spending declines of 20-50%."

One success story that continues to provide good news, Fryklund said, is North America unconventional gas. Most promising -- for now -- is the Haynesville Shale in Louisiana. IHS, he said, agrees with the experts that the emerging play holds an estimated 20 Tcf of gas. Also on the radar to gain more traction this year is the Marcellus Shale in the Appalachian Basin.

But to develop the promising unconventional gas plays, prices have to rise and costs have to come down. That combination may take a while, said Candida Scott, senior director of CERA's cost and technology business.

"With demand on the decline and falling commodity prices, it would seem natural that costs for energy projects would follow suit," Scott said. "While there is some adjustment in costs, we do not expect to see a drop in construction costs equivalent to the recent drops in oil and steel prices. Investors are reviewing spending decisions and trying to determine how much costs will fall before approving new projects."

One thing companies don't want to lose with the budget cuts is personnel, said Scott. "They realize the bind they got into when they laid off so many skilled workers during previous downturns and they want to avoid making the same mistakes."

Andy Byrne, senior equity analyst for IHS Herold, said there's no question that cost pressures and low prices have severely impacted the industry.

"This is a double whammy on evaluations for companies in the E&P group," said Byrne. "With prices being low and costs remaining stubbornly high, many companies are going into survivor mode. Adding reserves through acquisitions is likely the way to go for some companies. For firms seeking to add reserves, 2009 is shaping up to be a better year to drill for oil on Wall Street than it is to explore for oil and drill it themselves. With commodity prices so low, it is cheaper for companies to buy reserves than to rent a drilling rig and find and extract the oil."

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