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Study Predicts Capital Spending Decline

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 1996.

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 1996.

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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