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Survey: Majority Bet on Gas for Tough Times Ahead

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

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