PIPELINE PROJECTS FUEL REBOUND IN INDUSTRY'S U.S. SPENDING PLAN

Robert J. Beck
Economics Editor

Industry's capital and exploration spending for U.S. upstream and downstream projects will move up this year.

The advance is due largely to a rebound in outlays for pipeline construction. Reduced spending in this sector drew the blame for a slip in industry's total spending last year (OGJ, Feb. 21, 1994, p. 23).

Oil & Gas journal's annual capital expenditure survey shows U.S. companies plan to spend $32.1 billion on domestic projects in 1995, up 5.3% from 1994. Estimated capital spending last year was down 5.8% from 1993.

U.S. outlays, excluding pipelines, will be $29.2 billion this year, up 3.1% from 1994.

Industry capital and exploration spending has held rather steady during the past 3 years, averaging $31.5 billion. The recent low was $25.2 billion in 1987. Outlays that year were the lowest since the $21.8 billion spent in 1976. Spending planned this year will be up 27.4% from the 1987 level.

Industry's U.S. spending hit a high of $83 billion in 1981, then slid to the 1987 level. This was a decline of $57.8 billion, or 69.7% in 6 years.

Adjusted for inflation, spending in 1994 was the lowest since 1987. During 1986-94, inflation adjusted annual industry outlays have been at the lowest levels since 1973.

This is reflected most vividly in the depressed level of drilling.

During the 1990s, industry spending has been dominated by downstream outlays. Downstream spending in 1995 will exceed upstream spending for the sixth consecutive year. In 1990, downstream spending exceeded upstream outlays for the first time since 1971. Drilling fell while investing in upgrading, renovation, environmental compliance, marketing, and transportation has boosted downstream spending.

Exploration and production spending, including Outer Continental Shelf lease bonuses, will increase 4.2% from the 1994 level, moving up to $15.3 billion.

During the past 8 years, spending on exploration and production has risen and fallen, showing a slight downward trend. For 1987-94 annual exploration and production outlays have fluctuated between the low of $12.8 billion posted in 1992 and the high of $17.5 billion in 1988.

Downstream spending will rise 6.3% in 1995 to $16.8 billion, due mainly to a sharp rise in transportation outlays.

Total transportation spending is planned at $3.8 billion, up 30% from 1994. This is dominated by pipeline spending, which is expected to be up 34.7% at $2.9 billion.

Excluding transportation, downstream outlays will be up only I% in 1995 at $13 billion.

Refining spending will fall a bare 0.2% to $5.1 billion. Spending on petrochemicals will climb 14.3% to $2.6 billion after falling for 4 consecutive years.

U.S. and Canadian companies continue to invest substantially in areas outside North America. Another significant increase upstream and downstream is in store this year, reflecting economics and an increase in oil demand.

1995 budgets reveal a sense of industry optimism for the year. But these are only planned expenditures. Major keys to outlays will be prices for crude oil and natural gas. Any significant change from anticipated prices, particularly a sharp drop, will trigger a major change in spending.

OIL AND GAS PRICES

The most critical factor for U.S. upstream outlays probably will be natural gas prices because gas targets dominate domestic drilling.

Natural gas prices slipped in 1994 and were unexpectedly weak at yearend and the start of 1995.

Because of rising demand, prices were forecast to remain above $2/Mcf in 1994 and be significantly stronger during the heating season. Instead, prices plummeted.

During the first 2 months of 1994 the futures market price for gas averaged $2.31/MMBTU and was as high as $2.5]/MMBTU the first week of February. The price slipped to $1.62/MMBTU in September and never fully recovered during the heating season, averaging only $1.73/MMBTU for the fourth quarter.

Crude oil prices followed a very different path during 1994, starting the year quite weak and firming later.

West Texas intermediate averaged only $14.01/bbl during the first quarter, dipping is low as $13.75/bbl in March. The price for world export crudes averaged $13.32/bbl in the first quarter and fell as low as $13.19/bbl in March.

Increased worldwide consumption of petroleum products and demand for crude oil strengthened crude prices. They rose sharply later in the year.

In July, WTI averaged $18.95/bbl and the world export price $16.97/bbl. Prices weakened a bit toward the end of the year, with WTI slipping to an average $16.44/bbl and the average world export price falling to $15.64/bbl in December.

For all of 1994, WTI averaged $16.43/bbl, down 4.5% from 1993. World export crude prices averaged $15-28/bbl, down 3.4%.

A survey by Salomon Bros., New York, found that companies are basing their 1995 exploration and production budgets on an average WTI price of $17.55/bbl for the year, essentially flat with the estimate a year ago. The average price assumption on the Texas Gulf Coast is $1.80/Mcf in 1995, down from $2.14/Mcf a year ago.

U.S. SPENDING

Spending for U.S. projects has not changed much from year to year during the past 3 years.

Outlays totaled $31.7 billion in 1992, moved up 2% to $32.4 billion in 1993, then dropped 5.8% to $30.5 billion in 1994. Upstream spending rose while downstream spending fell.

Outlays this year are planned to move back up 5.3% to $32.1 billion.

The peak years for U.S. exploration spending were 1981 at $83 billion and 1982 at $80.2 billion. Lower crude oil and natural gas prices caused a sharp drop in outlays, which fell to $25.2 billion in 1987. The most significant drop was in E&P spending, which fell 75% during that period.

Budgets for U.S. E&P call for an increase of 4.2% in 1995 to $ 15.3 billion, including Outer Continental Shelf lease bonuses. Excluding those bonuses, E&P spending will move up 5.4%. OCS lease bonuses will drop to $170 million in 1995 from $331 million in 1994.

Total U.S. E&P spending in 1994 was down 3.3% at $14.672 billion.

Such spending peaked at $57.8 billion in 1981. Following the plunge in oil prices in the 1980s, E&P outlays including OCS lease bonuses dipped to $14.2 billion in 1987.

Spending in this segment jumped to $17.5 billion in 1988 but dipped again to $15.5 billion the next year.

Upstream spending then climbed to $17.5 billion in 1991 on the strength of higher oil prices as a result of the conflict in the Persian Gulf. Following the resolution of that conflict, prices fell and E&P capital outlays slid sharply to $12.8 billion in 1992.

On the strength of higher gas prices and increased natural gas drilling, E&P spending moved up to $15.2 billion in 1993 and $14.3 billion last year.

The decline in spending is reflected in the level of drilling activity.

The number of active rigs in the U.S. hit its peak in 1981, averaging 3,970 for the year. The count of active rigs slipped steadily in the following years as oil prices fell. A plunge in crude oil prices in 1986 led to a sharp drop in drilling, and the active rig count fell to a postwar record low of 717 in 1992.

There has been a small recovery during the past 2 years, spurred by drilling for gas. The rig count moved up to an average 757 in 1993 and 775 in 1994.

Meantime, the number of U.S. well completions also peaked in 1981 at 89,234. Completions then fell with the drop in oil prices and the rig count. Completions for 1994 are estimated at only 21,190 wells.

OGJ expects drilling and well completions to increase in 1995 on the strength of increased oil and gas demand. But the increases will be modest, with little stimulus from increased oil and gas prices.

OGJ has forecast active rigs averaging 790 in 1995 and well completions moving up to 21,950. (OGJ, Jan. 30, p. 74).

Spending will rise more than activity as the cost per well increases. increased outlays for seismic surveys and the shift to gas well drilling and deeper wells have pushed up the average cost per well.

However if U.S. exploration and drilling spending were at the record level of 1982, 94,000 wells would be drilled, assuming an average cost close to the current $470,500/well. This would result in 72,000 more wells in 1995, adding to U.S. oil and gas production

Outlays for OCS lease bonuses have dropped markedly since the early 1980s. Bonuses peaked in 1981 at $6.7 billion, then fell to a recent low of $96 million in 1992.

Natural gas plays in the Gulf of Mexico boosted OCS bonus payments in recent years.

Bonuses totaled $331 million in 1994 but are estimated at only $170 million in 1995.

Results of OGJ's capital spending survey are somewhat similar to Salomon Bros.' survey of E&P spending. The New York firm's survey showed planned 1995 E&P spending in the U.S. up 3.6% from 1994. Spending by majors was estimated to be up 3.2% and independents spending up 4% this year.

Salomon Bros.'survey carried a cautionary note on its forecast for North American E&P outlays: "Lower natural gas prices could make this forecast too optimistic."

U.S. DOWNSTREAM

Planned U.S. non-E&P spending will be up 6.3% at $16.8 billion in 1995. This follows declines of 8% in 1994 to $15.8 billion and 9.2% in 1993 to $17.2 billion.

Prior to 1993 there was a string of increased U.S. downstream spending in 1987-91.

Non-E&P spending in the U.S. peaked in 1981 at $25.2 billion. With falling crude and product prices and diminishing cash flow, spending fell to $10.4 billion in 1986.

In the following years, improved market conditions along with restructuring to cut operating costs allowed companies to boost outlays. In addition, there has been some mandatory spending required to meet environmental standards.

Capital spending on all forms of U.S. transportation is expected to be up 30.1% in 1995 at $3.78 billion. That will follow a decline of 35.4% in 1994 to $2.9 billion.

Capital outlays for natural gas pipelines in 1995 are forecast at $1.86 billion, up 37.6% from 1994. Crude and products pipelines spending will be up 29.9% at $1.01 billion, while spending on all other forms of transportation will rise 21% to $906 million.

A decline of less than 1 % in capital spending will make 1995 the third year in a row with lower refining outlays. Spending in this sector last year was down 5.3% from 1993.

Capital spending in refining hit a record high of $6.1 billion in 1992, then slipped to $5.37 billion in 1993.

U.S. refining capacity may continue to decline even though the current utilization rate is very high. Some U.S. refiners are considering shutting in capacity because of rising costs of environmental compliance. Future additions to capacity will most likely include restarting shut in capacity and/or adding units to plants. Construction of grassroots refineries is almost impossible due to high costs and difficulty of obtaining permits due to stricter environmental regulations.

The American Petroleum Institute reported the U.S. refinery utilization rate averaged 92.7% in 1964 and 91.5% in 1993. That is close to sustainable capacity utilization.

Capital spending for marketing is planned to be up slightly this year, increasing 6.6% to $2.64 billion. Last year, marketing spending of $2.25 billion was down 1.4% from 1993. The record high was $2.77 billion in 1991.

Restructuring, intense competition, and a shifting consumer preference toward convenience stores has pushed up marketing outlays in recent years.

An advance in capital spending on petrochemicals in 1995 will follow 4 straight years of declines. Spending last year was $2.25 billion, down 1.4% from a year earlier.

Petrochemical spending moved up sharply in 1987-90. Outlays in 1987 were only $1.3 billion. Spending moved up 57.2% in 1988, 38.4% in 1989, and 15.1% in 1990 to reach a record high of $3.1 billion in 1990.

Steady growth in economic activity boosted product demand, and the industry expansion was financed by record profits from petrochemical sales.

Spending in this sector fell in the early 1990s as the petrochemical industry posted lower profits due to reduced product demand stemming from a slowdown in economic activity Excess worldwide capacity increased competitive pressures and reduced profits. Plans call for 2,537 miles of natural gas pipeline and 2,525 miles of crude oil and petroleum product pipeline to be laid in the U.S. in 1995 (OGJ, Feb. 6, p. 23). This is up significantly from plans a year earlier that called for 2,460 miles of gas pipeline and only 1,731 miles of crude oil and product pipeline to be laid in the U.S. during 1994.

Capital spending by U.S. companies in nonpetroleum activities will fall 11.4% in 1995 to $2.74 billion. Last year, nonpetroleum outlays increased 11.6% to $3.1 billion.

OUTSIDE NORTH AMERICA

During the latter part of the 1980s and into the early 1990s there was a noticeable shift in capital spending, particularly by many of larger U.S. companies, away from North America to other areas.

The OGJ survey of international spending collected data from 36 U.S. and Canadian companies.

Non-North American upstream spending by those companies is planned to be up 11 % in 1995 at $13.36 billion. Exploration and production spending by this group fell 10.6% last year to $12.03 billion. Downstream spending also is expected to move up in 1995, increasing 16% to $7.96 billion. Downstream outlays last year fell 1.1% to $6.87 billion.

The increase in downstream spending this year will flow from the refining, petrochemical, and marketing sectors. Transportation and nonpetroleum spending will be down significantly.

Refining outlays by this group are scheduled to more up 20.4% to $2.9 billion. Refining spending inched up 1.6% in 1994 to $2.41 billion.

Planned 1995 petrochemical spending is up a resounding 71.5% at $1.02 billion. Last year's outlays were down 8.7% at $596 million.

Marketing spending will be up 17.8% at $2.64 billion. Spending in this sector was up 1.6% last year at $2.41 billion.

Transportation outlays by this group will be down 36.2% in 1995 at $302 million. Spending in this sector fell 29.7% last year to $473 million.

Nonpetroleum outlays are expected to be down 4.3% in 1995 at $1.1 billion. Last year they were up 12.4% to $1.15 billion.

The Salomon Bros. survey for E&P spending outside North America showed somewhat similar results. The survey found that 117 companies plan to boost non-North American outlays by 7.5% in 1995 to $32.2 billion.

The spending increase outside North America contrasts with the planned increase of only 3.6% in U.S. E&P spending and the 1.9% increase in Canadian E&P outlays.

MAJOR COMPANIES

A number of U.S. companies, including several majors, have disclosed their capital and exploration budgets for 1995.

Mobil Corp.'s budget is $4.1 billion, up slightly from 1994's $3.8 billion. E&P spending will be an estimated $2.4 billion, up $200 million from 1994. In the U.S., spending is expected to be $600 million, the same as last year. Included are funds for continued development of Mobile Bay gas leases off Alabama.

Total international spending is scheduled to increase $200 million to about $1.8 billion. This reflects expenditures in Nigeria, the North Sea, Indonesia, and Hibernia oil field off eastern Canada.

Mobil Chemical's spending is projected at $300 million, up $100 million from last year, as spending gets under way on projects to double production of paraxylene.

In addition to the $4.1 billion budget, Mobil's cash investments in equity companies are expected to be about $200 million this year, up from nearly $100 million in 1994. Included are funds for an LNG project in Qatar.

ARCO announced a $1.9 billion budget for 1995, an increase from $1.65 billion in 1994. It plans to spend $1.2 billion, or more than 60% of its budget, on oil and gas exploration and development. This is up from $1 billion in 1994.

Refining and marketing outlays will be $280 million, down from $375 million in 1994. Spending last year included modifications for federal clean fuels mandates and much of the work required to meet 1996 California standards.

ARCO Chemical Co.'s 1995 capital program claims $195 million of the parent company's budget, compared with $185 billion in 1994. ARCO holds an 82.3% interest in the chemical company.

Chevron Corp. outlined a $5.1 billion spending program for 1995, up 5% from last year. It plans to spend about $2.7 billion on worldwide E&P, unchanged from last year. About 70% of this will be outside of the U.S. in core operations and newly opened "areas of opportunity." U.S. E&P spending of about $800 million will be the same as 1994.

Chevron's worldwide refining, marketing, and transportation spending plans are set at $1.9 billion, up 5% from 1994. U.S. outlays will decline slightly from the $900 million spent last year, the peak spending year for facilities to comply with the Clean Air Act amendments of 1990.

A large portion of the 1995 outlay will complete a major capital program to manufacture clean fuels at the Richmond and El Segundo refineries as required by the California Air Resources Board.

Outside the U.S., refining, marketing, and transportation spending this year will amount to $1 billion, with Caltex accounting for 90% of the total. Chevron owns 50% of Caltex, whose key projects include continuing construction of a Thailand refinery, scheduled to start operations in mid 1996, and expansion and upgrading at refineries in Singapore and Korea, scheduled to be on line by the end of 1995.

Texaco Inc. plans to boost spending in 1995 by more than 20% to $3.3 billion, compared with $2.7 billion in 1994. About 55% is targeted for international development and 45% for U.S. programs.

Upstream expenditures are channeled toward a worldwide "risk balanced" exploration program, while expanding production in core areas. Texaco sold interests in 300 scattered underperforming U.S. fields in 1994.

Downstream investments will include expansion in Pacific Rim countries through Caltex, capitalizing on broader marketing alliances, such as the joint venture in Norway, Denmark, and the Baltics with Norsk Hydro, and accelerating marketing with companies such as Subway, Taco Bell, and McDonalds to support codevelopment projects in Texaco convenience stores.

Phillips Petroleum Co. set a budget of $1.4 billion, an 18% increase from an estimated $1.188 billion spent in 1994. Nearly 75% of the budget will go to upstream projects.

The E&P budget is $859 million, an increase of 14% over the $755 million spent in 1994. This year, $480 million will go to international production related activities, up from $377 million in 1994. Major projects include the North Sea and Offshore China.

About $261 million is targeted for U.S. development drilling and production projects, including the Garden Banks development in the Gulf of Mexico.

Conoco's 1995 budget of $2 billion is up 20% from 1994.

About $1.3 billion is for worldwide exploration, production, and natural gas processing operations, of which $400 million is to be spent on exploration. About two-thirds of the budget is for international projects, and nearly $700 million will be spent in the U.S. A record level of $700 million is destined for refining, marketing, and transportation.

Upstream projects include development of giant Heidrun field off Norway, which will begin production this summer.

A major downstream project includes a partnership with Petronas to start construction of a refinery in Malaysia in 1995. This is a part of a strategy to develop integrated refining and marketing operations in the rapidly growing Asia-Pacific region.

Kerr-McGee Corp. set a 1995 budget of $420 million, about the same as the 1994 capital program. Included in the 1995 budget are $315 million for E&P, of which $140 million is for further development of the South China's Sea Liuhua field and projects in the Gulf of Mexico; $80 million for chemical operations, and $25 million for coal operations.

Unocal Corp. unveiled a 1995 budget of $1.4 billion, up 10% from 1994. Roger C. Beach, Unocal CEO, said spending could range from $1.3 billion to $1.5 billion, depending on commodity prices and the progress of various projects.

About $855 million, or 61 % of the total, will go to worldwide petroleum exploration and development. This is up from $795 million in 1994.

Louisiana Land & Exploration Co. will operate on a budget of $214 million. Included is $97 million for exploration, $95 million for development, $12 million for refining and processing, and $13 million for seismic programs.

INDEPENDENTS' PROGRAMS

Anadarko Petroleum Co. has a budget of $314 million, down from $423 million in 1994. The cut is in anticipation of lower gas prices for the year.

About $78 million is for exploration in North America and Indonesia. Exploration spending was $196 million in 1994.

About $121 million is for development drilling projects under way in the Gulf of Mexico and Algeria, as well as continued expansion of waterfloods in Kansas and West Texas. Development spending was $129 million in 1994.

Consolidated Natural Gas Co. is operating on a 1995 budget of $444.6 million, up from $436.4 million in 1994. Exploration and production spending is set at $169.4 million, up from $166.4 million. Natural gas transmission outlays are set at $91.8 million, down from $107.4 million. And natural gas distribution spending will be $163.4 million, up from $138.9 million.

Questar set its 1995 budget at $232 million, down from a record $297 million in 1994. The 1995 spending emphasizes exploration and production with outlays at $92 million, including $52 million for exploratory and development drilling and other exploratory costs.

Santa Fe Energy set a 1995 budget of $190 million, up 50% from 1994. Chairman James L. Payne said, "Our accelerated 1995 capital program will allow us to begin exploiting our inventory of some 1,600 oil and gas development locations which, even at today's prices, will yield very attractive rates of return."

Tide West Oil set a capital budget for 1995 of $50 million, with $10 million for development drilling. This is an increase over 1994 spending of $19 million for acquisitions and $7 million for drilling.

Triton Energy's budget is $175 million, compared with $140 million in 1994. The increase is due mainly to exploration and appraisal programs in the Gulf of Thailand and an expansion of exploration in other areas.

Most of 1995 spending, $100 million, is allocated for development of Cusiana and Cupiagua oil fields in Colombia.

Union Texas Petroleum set a 1995 budget of $212 million, up from $131 million in 1994. The exploration portion calls for an 85% increase. During 1995, Union Texas expects to spend $74 million for exploration, including at least nine wildcats in new venture areas in Argentina, Alaska, Tunisia, Viet Nam and eastern Indonesia.