Domestic oil and gas exploration and development (E&D) spending is expected to be flat (up 0.2%) this year as mid- to large-cap independents struggle with high debt-to-capitalization ratios and continue to divert capital to Canada and overseas for better rates of return. Most other operators (majors and small independents) show slight domestic budget increases, according to a spending survey of 190 E&P companies by Friedman, Billings, Ramsey & Co. (FBR).

However, FBR said that there is a strong possibility that producers will increase their worldwide budgets in response to higher prices and boost spending across the board in the second half of the year.

“In a somewhat surprising result, the majors plan to increase domestic spending by 1.4% during 2003 compared to an expected 0.9% decline for the independents,” FBR said. “We attribute this result to the high debt levels at many small and mid-size E&P companies, combined with increased spending by the majors just to keep production levels flat.”

In the United States, FBR said it expects spending to continue to be directed toward exploitation of low-risk, near-field reserves, particularly in the Gulf of Mexico, and a continued focus on gas development projects. FBR said survey respondents are using average oil gas price expectations of $21.40/bbl for West Texas Intermediate crude oil and $3.26/MMBtu for Henry Hub delivered natural gas.

FBR said it expects producers to continue moving toward the easier-to-find and cheaper-to-drill prospects outside the United States. “We expect independents and majors alike to continue shifting capital from U.S. projects to Canadian and international markets, a trend that has developed over the last several years in response to the declining quality of new U.S. prospects.”

Canadian E&D spending is expected to grow faster than any other location, up 8.9% this year to $11.9 billion from $10.9 billion in 2002. A total of $12.6 billion was spent in 2001. The growth in Canada this year should be driven by the independents, which plan a 10.3% increase, FBR said, versus the 5.5% increase planned by the majors. “Much of the increase represents a shift of investment by large U.S. independents, which are having difficulty growing production in the United States.”

Worldwide E&D spending is expected to increase by 4.8% to $136 billion, which will come on the heels of a 3.6% spending increase in 2002. International E&D spending is expected to be up 6.1% driven by national oil companies and a growing base of independents.

“Although conservatism is warranted when dealing with the commodity markets, we believe that current high cash flow generation will induce operators to begin increasing budgets above current estimated,” FBR added. “We also believe that these increases will occur primarily in the second half of next year and that they could amount to $5-8 billion of additional E&D spending, representing a 4-6% increase over current 2003 spending estimates.”

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