Exploration and production (E&P) spending continues to look bright for the rest of 2007 — but most of the gains will come outside North America, according to a mid-year report by Lehman Brothers.

E&P expenditures outside the United States will be more robust for the first time in three years, Lehman’s updated survey noted, with U.S. spending expected to slow “substantially” to around $73 billion, which is about 5% higher than in 2006. Lehman had estimated in December that U.S. E&P spending this year would fall around 5% from last year. The anticipated decline was in reaction to reduced price expectations for natural gas, the analyst said.

Factors contributing to the slower rate of growth are “concerns regarding 2007 cash flows and natural gas prices,” the report stated. “With 2007 budgets based on a lower budgeted natural gas price of $6.72/Mcf — down 12% from the prior year — companies are in the aggregate taking a conservative stance toward the inventory excess and its potential effect on natural gas prices.”

Some of the larger North American independents that are estimating spending declines this year are Anadarko Petroleum Corp., Cabot Oil & Gas, EnCana Corp., Marathon Oil, Newfield Exploration and Pioneer Natural Resources.

“While U.S. E&P spending is more sensitive to changes in natural gas prices and independents’ cash flow and thus could go either way versus the estimated 5% growth, we believe that companies overall are basing their forecast on a conservative outlook,” Lehman stated.

Lehman slashed its expectations for Canadian E&P spending in its mid-year update. In December, the analyst forecast Canadian E&P spending to drop about 7.5% in 2007, but it now sees the drop closer to 11%. The latest cut, said Lehman, results from “natural price concerns, deteriorating economics and a decision by some producers to deemphasize the area.”

Worldwide, total 2007 expenditures are estimated at $308 billion for the 350 companies surveyed. In Lehman’s original spending survey in December, 350 E&Ps polled said they planned to spend around $291 billion this year, which would be moderately higher than the $269 billion invested in 2006.

The international E&P spending forecast was increased by Lehman 7% from its December survey. The analyst now expects overseas spending to rise by around 20% this year, well above the 13% predicted six months ago. E&Ps contributing the most to international spending include Russia’s Gazprom, Lukoil, Rosneft and TNK, as well as Chevron Corp., Apache Corp., India’s Oil & Natural Gas Corp. Ltd., Mexico’s Petroleos Mexicanos, Brazil’s Petrobras, Spain’s Repsol and Australia’s Woodside.

Lehman said there still could be upward movement for spending toward the second half of the year. The hope is that “much as in 2006, operators are playing it prudent and may loosen the purse strings as the year progresses.”

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