There has been a huge increase in exploration and production”overspending” in the U.S. and Canada this year because of enormousgas price increases, and that probably will continue into 2001,said Salomon Smith Barney (SSB) E&P analysts in their 19thannual worldwide E&P spending survey.

Six months ago, producers told SSB their North American E&Pspending would grow by about 25% this year. That number has nearlydoubled to a 40.5% increase compared to spending in 1999. InCanada, E&P spending is up more than 50% over last year.

Spending is expected to slow down considerably in 2001. SSBanalysts Geoff B Kieburtz and Mark S. Urness predict a 19.1%increase next year in North America based on their survey results.However, it still will be the second-highest growth in more than 15years. There is expected to be a 19.3% expansion in the UnitedStates and an 18.8% expansion in Canada. The U.S. rig count isforecast to climb 31% next year to an average of 1,200 rigs, andthe Canadian rig count is forecast to increase by 14% to 390 units,SSB said in its latest rig forecast.

Furthermore, “the persistence of robust natural gas prices atlevels well above what respondents are using for planning preservesthe potential for spending to exceed the forecast,” SSB said.”Commodity price assumptions, although higher, remain well belowcurrent futures prices. The average natural gas price assumptionused by respondents for short-term North American planning purposeshas continued to climb and is now at $3.86/Mcf for Henry Hub and$3.42/Mcf for longer-range planning. Despite the significantincrease in the planning assumptions, they remain well below the12-month Nymex futures strip,” the analysts noted.

For planning purposes, the average of respondents’ oil priceassumptions jumped above $25/bbl for the near term and rose tonearly $23/bbl for the longer term. Among the largest oilcompanies, long-term oil price expectations remain below$18.50/bbl.

Worldwide E&P spending is expected to grow next year by thelargest amount in more than two decades,” SSB analysts said.Outside North America, spending is forecast to grow 20.1% in 2001after a sluggish 8.2% increase in 2000.

The survey, which relied on responses from 234 worldwide oil andgas companies, “reinforces our view that the oil service industryis in transition from recovery to a period of sustained growth,”Kieburtz and Urness said. “Following a robust 18.5% increase in2000 led by North America, E&P spending is forecast to grow by19.7% in 2001 and to broaden into international markets.” WorldwideE&P expenditures by the 234 companies in the survey areexpected to increase by almost $20 billion to $113.5 billion in2001. Of the planned spending for 2001, about 62% likely will bedirected outside North America, 11% in Canada, and 27% in theUnited States.

In the United States, the 154 independent producers surveyedplan a 20.4% increase in 2001 expenditures, to $16.9 billion from$14.1 billion in 2000. Spending by this group is expected to riseby 48.4% in 2000 versus 1999, a much larger increase than the 15.3%growth forecast in SSB’s December 1999 survey and even the 30.3%growth in its June 2000 forecast.

“Further illustrating the U.S. gas drilling frenzy, the 11 firmsdesignated as major oil companies plan to increase U.S. spending by17.9%, after a 23.8% increase during 2000,” SSB said. The majorsplanning the largest U.S. spending increases are OccidentalPetroleum and BP, while three companies — Texaco, Total Fina Elf,and USX-Marathon — expect spending to be about flat with 2000.Aggregate U.S. spending is forecast to rise 19.3% in 2001, to $29.7billion from $25 billion, compared to a 36.6% increase in 2000 fromextremely depressed levels. Of the 165 respondents planning U.S.spending, just 22, or 13%, anticipate lower year-over-yearspending, SSB said. Despite this fact, however, just 19% expect tooutspend cash flow in 2001, compared to the past 10 years’ averageof 45%. “This paints a picture of extremely healthy E&P cashflows and tightness in worldwide oilfield service and equipmentmarkets.”

In Canada, 77 companies plan an 18.8% increase in 2001 E&Pexpenditures, to $13.1 billion from $11 billion. Canadian spendingis now forecast to have risen by 50.1% in 2000, nearly twice the30.6% rate estimated in SSB’s midyear survey. The 2001 spendinggrowth plans appear to be broad-based, with just 11 respondents, or14%, planning spending declines and a further 11 increasing budgetsby more than $100 million. Among the largest planned increases areat Gulf Canada, Anadarko Petroleum, Imperial Oil, Husky Oil,Canadian 88, and Exxon Mobil, SSB said.

Despite the worldwide spending increases, however, a “scarcityof attractive drilling prospects has become a significantindustrywide problem, particularly in North America,” SSB said.

“Finally, with the sharp increase in North American gas drilling— indeed, approximately 80% of domestic rigs drilling are seekingnatural gas, up from 60% in late 1997 and 40% in 1991 — theavailability of attractive shallow drilling prospects appears to bedrying up. Due to high depletion rates and a scarcity of qualifiedgeologists, geophysicists, and petroleum engineers, this couldbecome a serious problem in coming years, in our opinion.”

For a copy of the spending report, contact Salomon Smith Barneyat (212) 816-3139.

Rocco Canonica

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