Survey: Majority Bet on Gas for Tough Times Ahead
When the going gets tough, the tough turn to gas. That's one
conclusion that can be drawn from results of Arthur Andersen's 11th
annual U.S. Oil and Gas Industry Outlook Survey. While 70% of the
83 companies responding to the survey said they plan to cut
exploration spending or hold it at current levels in the coming
year, gas will get a bigger share of the attention. Nearly half of
the respondents (49%) plan to focus on gas exploration, an increase
of 20% from a year ago. Another 39% of respondents said they will
balance efforts between oil and gas.
Respondent companies merely plan to go where they think the
money will be. They expect oil to average $16 a barrel next year,
20% below last year's expectation for 1999, but gas prices are
expected to remain within about 4% of last year's forecast for the
next four years. Companies' $2.25/Mcf estimate for 1999's average
Henry Hub spot price is just 2% below last year's forecast for
1999. Survey respondents expect Henry Hub spot prices to average
$2.25 in 1999, $2.30 in 2000, and $2.49 by 2003. Over the next five
years, respondents' median forecast represents a 2.6% average
annual rise in gas prices at the Henry Hub. Majors, large
independents and other independent respondents followed similar
patterns in their five-year price outlooks for both oil and gas,
with all yearly forecasts falling within an average of plus or
minus 3% of the entire group's consensus, said Victor A. Burk,
Arthur Andersen managing director for the energy industry, at the
firm's annual Energy Symposium last week in Houston.
Domestic gas demand is expected to increase an average of 2 to
4% annually, according to 55% of respondents, and 89% believe there
are significant gas reserves yet to be discovered in the United
States. Still, producers generally aren't willing to go look for
the gas unless they get their price. Prices must average $2.50/Mcf
for significant increases in the reserve base, according to 43% of
respondents. Another 36% say prices above $2.50/Mcf are required
for significant reserve growth, Andersen found.
Only 29% of respondents plan to increase domestic exploration
spending, and 80% of majors and 56% of large independents plan to
reduce U.S. exploration spending. However, 46% of respondents plan
to increase domestic development spending, including one-third of
large independents and 54% of other independents. Domestic
producing property acquisitions are expected to rise at 53% of the
responding companies, and 29% said activity will remain unchanged.
The United States remains the most attractive location for
exploration and development among all respondents, followed by
Canada and the Middle East.
"The events of the last few months have certainly altered the
environment within which the oil and gas industry operates," said
Burk. "The new conditions pose serious strategic and operating
challenges to some companies, particularly those that are highly
leveraged, have high cost structures, or are depending on a project
that has become uneconomic at low prices.
"Ironically, these conditions also create a time of opportunity
for other companies, particularly those with strong balance sheets
and access to capital. It will be a time for those companies to buy
producing assets, expand strategic positions and even acquire other
companies at favorable values."
Given that and the energy industry news of the last few weeks,
at least one Andersen study finding can't be considered a surprise.
An overwhelming 81% of survey respondents expect more mergers,
acquisitions, and divestitures in 1999. Finally, while Andersen
sent questionnaires to more than 200 domestic exploration and
production companies, only 83 responded. Hopefully the roughly 59%
who didn't are not so depressed they've stopped opening their mail.
Joe Fisher, Houston