Oil and gas producing companies worldwide whittled 2009 exploration and production budgets as they watched oil and gas prices tumble more than 50%.

In the US, the price of West Texas Intermediate light sweet crude fell from $145 a barrel in early July 2008 to less than $42 by late December. Similarly, wellhead natural gas prices fell from an average of near $11 per million Btu in June 2008 to just more than $5 in late December, according to the US Energy Information Administration.
The declines triggered cutbacks in drilling rig operations in more expensive plays, such as the popular gas shales, late in the year.

Prospects for a continued weak world economy and possible further price declines persuaded nation-state and private operators to lower 2009 spending plans 12%, from US $453.5 billion in 2008 to $400.2 billion, according to the “Original E&P Spending Survey.” The survey, compiled by James D. Crandell and James C. West, moved to Barclays Capital when that company acquired Lehman Brothers assets and people.

Breaking down the numbers, 245 US operators cut spending plans by 26%, from $106.3 billion in 2008 to $78.6 billion in 2009. Budget plans for 85 operators in Canada fell 23% from $28.7 billion in 2008 to $22 billion in 2009.

Internationally, the 100 operators surveyed seemed less apprehensive as they planned to lower spending only 6%, from $318.6 billion in 2008 to $299.6 billion in 2009. The cuts marked the end of a six-year streak of increased spending.

The report said real cutbacks for 2009 could reach even greater depths. When surveyors gathered their information, operators based their plans on an average $58 per barrel of oil and $6.35 per thousand cubic feet of natural gas. With even lower recent prices, more plays and prospects will fall off the list of economically acceptable projects.

Crandell and West asked companies about prices that would cause budget re-evaluations. Those estimates averaged $50 per barrel for oil and $5 per thousand cubic feet for gas.

Looking for the lining

Price wasn't the only factor that influenced spending plans. Reporting companies said the state of credit markets affected spending plans in 2008 and 42% believed credit markets would impact those plans in 2009.

The current outlook is a long jump from the optimism that dominated the industry when the organization conducted its mid-year 2008 survey. At that time, operators based their spending plans on $85 oil and $8 natural gas prices.

Not only that, but companies piled more spending on top of their 2008 plans. They told the surveyors they planned to increase spending by 11% in 2008. By mid-year, plans jumped to a 20% increase, and a review of actual numbers reveals 22% inflation in real spending.

The outlook isn't all gloomy. According to Crandell and West, “We anticipate that North American E&P expenditures will rebound in 2010, driven by production declines and a rebound in demand. International E&P expenditures are anticipated to be flat to moderately up in 2010 as recovery in oil demand begins and non-OPEC production turns downward. At current valuations, we have a positive stance on the oil service and drilling group with an emphasis on those stocks with international and deepwater exposure and lower evaluations.”

Even in the US where planned spending dropped furthest, 32 companies (13%) said they would increase spending in 2009.

US companies involved in shale plays planned some of the largest spending declines in 2009. Among those were Chesapeake Energy (-51%), Devon Energy (-44%), EOG Resources (-34%), Hess Corp. (-62%), ConocoPhillips (-23%) and Anadarko Petroleum (-32%). Each of those companies will drop 2009 budgets by $1 billion or more from 2008 levels, according the the Barclays report.

Cuts among operators working in Canada include Husky Energy (-47%), Devon Energy (71%), Talisman Energy (-47%), Canadian Natural Resources (-23%), EOG Resources (-50%), Nexen (-47%), Murphy Oil (-25%) and Crew Energy (-56%).

Sticking with the plan

Long-term planning and deep pockets clearly play a big part in exploration and production spending. ExxonMobil plans to increase worldwide spending 3% and ConocoPhillips will see its budget rise 5% in 2009. Among other super-majors, Chevron will hold its spending at 2008 levels, BP will shrink its budget 4%, Total 5%, and Royal Dutch/Shell 6%.

Overall, the six supermajors will pull back by 2%, from $69.46 billion in 2008 to $68.27 billion in 2009.

ExxonMobil CEO Rex Tillerson recently said his company will stick with its plan to spend $125 billion on capital projects over the next five years. According to a Dow Jones report, he believes lower oil prices may result in national oil companies accepting more favorable terms from international oil companies for access to their reserves.

He said some companies paid very high prices to reach those reserves. “They had to be operating on a very different [price] view than us,” he added.

Despite sharp cutbacks in the US, operators still like the economics. Among US producers in the 2009 survey, 58% felt exploration economics were good or excellent compared with 37% in Canada and 55% internationally. Those numbers were similar to 2008 responses, but only Canadian companies reported an increase in the excellent category.