E&P holds key to offshore uptick 1

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GULF OFFSHORE 2000

April 11 & 12, 2000

E&P HOLDS THE KEY TO OFFSHORE UPTICK

by Whit Smith, Gulf Coast Editor

One might think that a $30/bbl oil price would have the oil and gas industry jumping to its feet and cheering, rushing to spend the windfall bucks on more production efforts to boost bookable reserves. After all, oil was at $12 per barrel about this time last year. And one might also think that the service companies that cater to the needs of exploration and production companies were in for a near-term bonanza based on the dramatic uptick of commodity prices.

Wrong on both counts. The surge in oil prices actually has the E&Ps worried in a way, and, with a few exceptions, has put the service sector in the doldrums awaiting a recovery from the last down-cycle. Why isn't there happiness on Oil Street, U.S.A?

For starters, a lot of oil and gas gurus say that oil prices are artificially high, the present price levels being the result of OPEC production constraints. The market price should be in the $20 to $24 range on a stable basis. They say there's no real shortage of crude, but concede there's a need for more natural gas, the price of which has shot up to about $2.75 per million BTU, a buck over last year.

So where's all the money going? A lot of E&Ps are repairing tattered balance sheets and buying back their own downgraded stocks. But some cash is trickling down to select service companies specializing in well optimization. Seismic companies, usually the first to benefit from the new-found largess of E&Ps, are a victim of their own success.

Eighty-nine of the United States' exploration and production companies were queried by Arthur Andersen in its twelfth annual survey of oil and gas executives regarding their outlook for the U.S. E&P industry. Salomon Smith Barney also sends out a capital expenditure questionnaire to roughly the same companies, asking how and where they expect to spend money.

Arthur Andersen's survey showed that expectations about the average annual increase in U.S. natural gas demand during the next five years continue to be bullish with 63% of companies predicting yearly increases from 2% to 4%.

A majority of respondents, 87%, thought there are significant gas reserves yet to be discovered in the U.S.; 44% said that the price necessary to boost the reserve base had to be greater than $2.50 per Mcf.

About half of the respondents believed that the annual U.S. increase in oil demand will average up to 2% during the next five years. A similar amount said there are "significant" oil reserves yet to be found in the U.S., with most saying prices in the $20 per barrel range would be needed to increase the reserve base.

Andersen's survey showed over 60% of the companies planned increases in domestic exploration spending this year, and about 70% are boosting domestic development activity.

For overseas spending, about 30% expected to increase spending for both exploration and development. However, the respondents continued to rate the U.S. as the most attractive area for exploration and development investment, ahead of Canada, West Africa and the Middle East. Attractive drilling prospects rated first among the companies' concerns over capital expenditure, followed by commodity prices for oil and gas and the availability of financing from the capital markets.