While the deep-water Gulf of Mexico continues to be a hot spot for E&P spending in the U.S., analysts are expecting a sharp slowdown in spending growth at most other domestic locations next year, a significant contrast to the record spending growth in the U.S. over the past two years. According to Salomon Smith Barney’s 16th annual survey of worldwide E&P expenditures, there will be a general shift toward greater spending overseas in 1998.

The survey of 202 gas and oil companies shows spending in the U.S. is expected to increase only 6.1% next year compared to a 16-year record 20.7% increase in 1997 and 18.2% in 1996. Despite the slower spending growth in U.S., 63% of the respondents rated the economics of E&P in the U.S. as good or excellent-a notable increase from last year, the investment firm said.

While economics in the U.S. are expected to be favorable, economics overseas apparently are expected to be even better. Spending activity outside North America is projected to grow by 14.4%, indicating a return of the trend toward increased international activity, the firm noted. The clear exception to this is the planned activity in the deep-water Gulf, where spending of some producers is expected to grow by 20% or more.

Total worldwide E&P spending is expected to grow 11% to $94 billion, 58% of which is expected to be spent outside North America. Thirty-one percent is expected to be spent in the U.S. (16% for independent and 15% for the majors) and 11% in Canada. The 124 independents surveyed said they plan an 8.4% increase in expenditures in the U.S. next year, compared with a 25.1% increase in 1997. The 15 majors said they expect to increase U.S. E&P spending by only 3.8% compared to 17.2% last year.

The average assumption for U.S. gas prices climbed to $2.19/Mcf for 1998 from $2.03 for 1997, primarily driven by an increase in U.S. independents’ assumption to $2.22 from $2.02. The majors’ assumption rose to $2.08 from $2.02. Canadian operators are expecting C$1.64, which is up from C$1.56 a year ago. Sensitivity of spending plans to a shift in gas prices remained very modest, Salomon Smith Barney said. Just 27% (down from 35% last year) of respondents said they would raise spending if gas prices averaged $0.30 higher. Likewise, 33% (down from 36% last year) indicated they would lower spending if prices fell by $0.30.

Rocco Canonica

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