Although 1998 saw a 25-year low in world oil prices, capitalexpenditures by major U.S. producers totaled $75.1 billion, thesecond highest level since 1974. Expenditures were up 21% from1997, according to data released by the Energy InformationAdministration (EIA) in “Performance Profiles of Major EnergyProducers 1998.”

Capital expenditures related to mergers and acquisitions, whichtotaled $20.7 billion in 1998, accounted for 57% of the growth inoutlays between 1997 and 1998. Oil and gas production was theprimary investment target among the majors’ lines of business.Capital expenditures for worldwide oil and gas production were$48.4 billion in 1998, up 30% from 1997 expenditures. The majorstended to push ahead with ongoing projects that have relativelylong lead times. For example, the number of development wellscompleted by the majors in Europe (almost all in the North Sea),hit a record high in 1998. Also, the search for new oil and gasfields continued as majors grew exploration expenditures in allregions except Europe.

The majors’ continued upswing in expenditures yielded eightbillion additional barrels of oil equivalent to worldwide oil andgas reserves in 1998, a record amount for the last 25 years.Excluding already discovered reserves gained through mergers andacquisitions, majors added 6.1 billion barrels of oil equivalentthrough the drill bit to worldwide oil and gas reserves, the thirdhighest level over the same period.

However, the 1998 collapse in oil prices had a devastatingeffect on majors’ cash flow and bottom-line financial results.Total net income was down 61% from 1997’s all-time record, and cashflow generated by operations was at the lowest level since the lastoil price collapse in 1986.

Majors’ capital expenditures exceeded cash flow by 56% in 1998.This disparity was highly unusual for this group as capitalexpenditures have generally been less than cash flow, averaging 14%less. They closed the financing gap by increasing debt, selling arecord amount of producing assets, cutting dividends and stockrepurchases, and drawing down cash balances by more than $4billion. The adjustments ran counter to programs of debt reductionand increased pay-outs to shareholders in the 1990’s. Repairs tobalance sheet damage could include cutbacks in capital expendituresdespite the sharp turnaround in world oil prices. Finding costswere up 18% or nearly $1 per barrel in 1998.

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