A dwindling number of attractive drilling targets in the United States and a tough financial environment were the leading reasons exploration and production (E&P) companies said they planned to spend less next year in the United States, according to an annual survey by Lehman Brothers.

Domestic E&P spending is forecast to fall next year by 0.7%, according to 231 production companies, which contrasts somewhat with the predictions in a report released last week by John S. Herold Inc. (see Daily GPI, Dec. 13).

Meanwhile, worldwide E&P spending is expected to increase by 4.2% in 2003 to $132.4 billion compared to $127.1 billion in 2002, according to 323 E&P companies surveyed. International E&P expenditures are expected to rise 5.5%, survey results said.

While the increase in worldwide spending is expected to be significant compared to the 1.2% drop this year, it still would be less than expected, Lehman Brothers said. Budgets are based on an average expected oil price of $23.22 (West Texas Intermediate) and an average gas price of $3.42/MMBtu (Henry Hub).

Lehman Brothers said the surprising cutback in the United States was attributed mainly to the majors, who estimated a 1.1% decline, while the independents forecast a 0.4% drop in spending in 2003 compared to 2002. Producers continue to spend more of their budgets overseas.

The majors that are expected to reduce U.S. spending include ConocoPhillips (-10%), Royal Dutch Shell (-9%), TotalFinaElf (-29%), Marathon (-7%), Occidental (-8%). ExxonMobil (+4%) and BP (+5%) plan to increase spending.

The independents are using conservative price forecasts and are looking at little upward change in cash flow, Lehman analyst said. “[M]any independents are limited by their balance sheets. The merchant gas companies are all forecasting lower spending, and a lack of quality prospects appears to be playing a major role.”

The large merchant operators that estimated declines include Williams (-30%), El Paso (-9%) and Dominion (-14%). And the larger independents who plan to spend less in the United States include the following: Kerr McGee (-5%), Unocal (-18%), Noble (-17%), Nexen (-31%), J.M. Huber (-16%), Pogo (-5%), Spinnaker (-17%), Swift (-17%).

U.S. spending by Anadarko, ChevronTexaco and Devon Energy was expected to be flat, and spending increases were planned by Burlington (+43%), Forest (+28%), Ocean (+23%), Pioneer (+9%), Apache (+7%) and EOG (+9%).

In contrast, spending in Canada is expected to grow by 7.2%, according to 78 companies in the survey. “While companies in Canada are impacted by similar factors as those operating in the United States, cash flows are generally up more due to the natural gas orientation of the region, and the geology is seen as more attractive.” The analysts said the companies budgeting spending increases in Canada include Burlington Resources, Canadian Natural Resources, Encana, ExxonMobil, Nexen, Penn West Petroleum, Petro Canada and Shell Canada.

The key determinate of E&P spending in 2003 was “prospect availability,” which received 55% of the responses. In the last survey, it was mentioned by only 39% of the respondents, and the price of natural gas was the most important factor.

Lehman analysts also said the percentage of spending on offshore E&P is expected to increase in 2003 to 46% of total spending compared to only 37% last year. “The significantly greater size of offshore oil and gas deposits continues to attract operators versus the smaller reservoirs found on land.” However, spending on deepwater E&P is expected to decline, with only 19% of the companies increasing their deepwater budgets compared to 31% in 2002.

©Copyright 2002 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.