Last year set a 1990s record for exploration and productioncapital spending, but the five-year trend of capital spendingincreases may end this year with the first decline since 1992.That’s one finding of Global Upstream Performance Trends, a reviewof domestic and international results for 131 publicly tradedcompanies by Arthur Andersen and John S. Herold.

Last year’s increase in spending was due in part to increasinginvestment in the deep-water Gulf of Mexico, said Brian J. Lidsky,executive vice president of John S. Herold. “Herold expects thishigher level of spending in the Gulf to bear fruit in the form ofat least 25% average annual gains in production from the deep-waterGulf over the next five years.”

While the report cited increasing exploration and productionexpenditures from 1992 to 1997, it also noted the domestic gasproduction replacement rate of 106% in 1997 continued to declinefrom the five-year high of 136% set in 1995. “Downward gas reserverevisions of more than 100 Bcf each by EEX, Amoco, Unocal, Mobil,TransTexas and Pioneer Natural Resources were largely responsiblefor the decline,” Lidsky said. “From the drillbit only, U.S. gasreserve additions net of revisions did not even meet production,leaving the production replacement rate at 94%. However, this is up5% from the 1996 level of 89%.”

Domestic gas reserves increased less than 1% to 106.7 Tcf at theend of last year, mainly due to downward reserve revisions of 1Tcf. Production continued its long-term upward trend, rising 2% to11.6 Tcf, half the 4% average annual growth rate from 1993 through1996.

For the first time, last year large independents spent more thanthe majors on total domestic capital expenditures. Independentstopped the majors’ total by almost 5%, $16.6 billion compared to$15.8 billion. This was attributed mainly to an increase of $2.8billion 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 largeindependents also increased their U.S. exploration spending 54% to$2.7 billion, their development spending 30% to $6.5 billion, andtheir domestic unproved property acquisitions by 66% to $1.7billion. Majors still were bigger by far outside the U.S. Largeindependents’ international capital spending grew 67% to $16.4billion, still less than half of the majors’ international capitalspending of $36.8 billion, which represented a 9% increase over1996.

On the international acquisitions front, Canada accounted for46% of activity. Canadian acquisition costs increased 35% to$4.25/Boe, which puts them on a par with domestic acquisitioncosts. However, American companies are still finding value inCanada due to the country’s weak dollar and the fact that someupstream Canadian companies are undervalued in the stock market.This is evidenced by Devon Energy’s plan to acquire Canada’sNorthstar Energy, which was announced Tuesday. Lidsky notedAmerican companies are seeing a need to increase their Canadiansupply holdings in light of pipeline projects planned to bringCanadian gas into the United States. “I think U.S. oil companiesare looking to capture a piece of that market,” he said.

Joe Fisher, Houston

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