Producers continue to report record high cash flow on strong oil and natural gas prices, but most of the free cash isn’t going toward new exploration projects, which is a troubling sign, said experts in Houston this week at the Deloitte 2004 Oil & Gas Conference.

John Tasdemir, a research analyst with Raymond James & Associates said that the higher oil and gas prices have led to increased drilling, but the reserves have not been as abundant for exploration and production (E&P) companies.

“We’re chasing much smaller reserves,” said Tasdemir. “Production is not keeping pace.”

Energy consultant Matthew Simmons of Simmons International said he has been “generally encouraged” by some of the discoveries in the deepwater and overseas, but more changes have to be made to implement a workable U.S. energy policy that would encourage and sustain exploration.

“E&Ps are not using their spare cash to grow reserves,” said Simmons. “They have plowed through all of the conventional things,” but, “you can’t grow without spending capital.” Still, he added, “this is not a money issue. This is a risk issue. If these companies had fantastic projects, they’d be out there doing it.”

To encourage more spending, Simmons said Congress has to implement a “sound energy policy” to remove some drilling restrictions. “We have a better chance [with the re-election of President Bush] to get an energy bill passed in the first 60 to 90 days of the new Congress. Unfortunately, there’s not a lot you could put in an energy bill that will make a big difference in four or five years.” Simmons added, “We’ve backed ourselves into a corner, but we need to follow an energy policy.”

Sarah Emerson, the director of petroleum for Energy Security Analysis, also expects Congress to pass an energy bill in the new year. However, she said the legislation likely to be enacted is “all about supply, supply supply.” Instead, she said, price volatility issues should be focused on “to make us look at the demand side.”

Emerson also is keen on new technologies to improve supply. “I’m not willing to bet against technology yet,” she said. “We can’t ignore the potential for change. This is a very dynamic industry.”

©Copyright 2004 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.