When the going gets tough, the tough turn to gas. That’s oneconclusion that can be drawn from results of Arthur Andersen’s 11thannual U.S. Oil and Gas Industry Outlook Survey. While 70% of the83 companies responding to the survey said they plan to cutexploration spending or hold it at current levels in the comingyear, gas will get a bigger share of the attention. Nearly half ofthe respondents (49%) plan to focus on gas exploration, an increaseof 20% from a year ago. Another 39% of respondents said they willbalance efforts between oil and gas.

Respondent companies merely plan to go where they think themoney will be. They expect oil to average $16 a barrel next year,20% below last year’s expectation for 1999, but gas prices areexpected to remain within about 4% of last year’s forecast for thenext four years. Companies’ $2.25/Mcf estimate for 1999’s averageHenry Hub spot price is just 2% below last year’s forecast for1999. Survey respondents expect Henry Hub spot prices to average$2.25 in 1999, $2.30 in 2000, and $2.49 by 2003. Over the next fiveyears, respondents’ median forecast represents a 2.6% averageannual rise in gas prices at the Henry Hub. Majors, largeindependents and other independent respondents followed similarpatterns in their five-year price outlooks for both oil and gas,with all yearly forecasts falling within an average of plus orminus 3% of the entire group’s consensus, said Victor A. Burk,Arthur Andersen managing director for the energy industry, at thefirm’s annual Energy Symposium last week in Houston.

Domestic gas demand is expected to increase an average of 2 to4% annually, according to 55% of respondents, and 89% believe thereare significant gas reserves yet to be discovered in the UnitedStates. Still, producers generally aren’t willing to go look forthe gas unless they get their price. Prices must average $2.50/Mcffor significant increases in the reserve base, according to 43% ofrespondents. Another 36% say prices above $2.50/Mcf are requiredfor significant reserve growth, Andersen found.

Only 29% of respondents plan to increase domestic explorationspending, and 80% of majors and 56% of large independents plan toreduce U.S. exploration spending. However, 46% of respondents planto increase domestic development spending, including one-third oflarge independents and 54% of other independents. Domesticproducing property acquisitions are expected to rise at 53% of theresponding companies, and 29% said activity will remain unchanged.The United States remains the most attractive location forexploration and development among all respondents, followed byCanada and the Middle East.

“The events of the last few months have certainly altered theenvironment within which the oil and gas industry operates,” saidBurk. “The new conditions pose serious strategic and operatingchallenges to some companies, particularly those that are highlyleveraged, have high cost structures, or are depending on a projectthat has become uneconomic at low prices.

“Ironically, these conditions also create a time of opportunityfor other companies, particularly those with strong balance sheetsand access to capital. It will be a time for those companies to buyproducing assets, expand strategic positions and even acquire othercompanies at favorable values.”

Given that and the energy industry news of the last few weeks,at least one Andersen study finding can’t be considered a surprise.An overwhelming 81% of survey respondents expect more mergers,acquisitions, and divestitures in 1999. Finally, while Andersensent questionnaires to more than 200 domestic exploration andproduction companies, only 83 responded. Hopefully the roughly 59%who didn’t are not so depressed they’ve stopped opening their mail.

Joe Fisher, Houston

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