The slump in spending plans for the United States continues.

The international oil community is managing its assets with a tight fist this year as worldwide spending by a large group of exploration and production companies will increase 4.2% for 2003, with solid gains in the international arena, larger gains in Canada and continued pessimism in the United States.

According to the annual Lehman Brothers Equity Research annual E&P Spending Survey, the 4.2% worldwide number is a decline from the company's earlier forecasts that spending would increase 7% this year.

Still the total spending budget for the 323 surveyed firms, which account for more than 90% of worldwide expenditures for exploration and production, should reach US $132.4 billion this year, up from $127.1 billion in 2002.

Operators with activity in the United States foresee a 0.7% drop in spending from already-weak levels in 2002. Lehman analysts James D. Crandell and Angeline M. Sedita blamed a continuing shift to overseas spending by majors, cautious oil and gas price forecasts, minimal growth in cash flow, drops in spending by merchant gas companies and a lack of quality prospects for the US slowdown.

In international activity, the analysts said an anticipated gain of 5.5% for international spending and a 7.2% increase in spending in Canada are close to its earlier forecasts of 5% and 10%, respectively.
Among the 78 companies surveyed for their Canadian activity, the 7.2% increase will move the spending level to $12.6 billion this year, up from $11.8 billion in 2002. Internationally, the 5.5% increase takes spending to $89.5 billion from $84.8 billion.

The greatest optimism in the survey came from national oil companies and European major producers, according to the survey.

The leader of the group was Oil and Natural Gas Corp. of India with plans for a 152% increase, as it solidifies a deepwater drilling program off the country's east coast. Trinidad and Tobago's Petrotrin was second with expectations for a 140% increase, largely because of the new liquefied natural gas (LNG) train being installed.

Among Latin American countries, Mexico's Pemex anticipates a 15% spending gain as it concentrates on modernizing its plant and increasing production to meet future needs. Petrobras will use its 10% increase to analyze recently discovered heavy oil fields on the offshore border between the Campos and Espirito Santo basins. It also has an aggressive drilling program in the works for its Guando oil field in Colombia's Magdalena Valley.

Russia's Gazprom is looking for higher demand for its gas, and it wants to increase supplies and transportation from northern Russia to meet that demand. This year, that aggressive campaign takes the form of a 33% spending increase. Yukos, with plans for development of fields in the northern Caspian Sea, some in cooperation with Kazakhstan, will pay for its added activity with a 22% planned spending boost. Sibneft plans an 11% spending decline.

Pruessag leads the Europeans with expectations of a 32% increase in spending, followed by Spain's Repsol YPF with a 27% increase. Norwegian firms Norsk Hydro and Statoil will add 20% and 13%, respectively, to their exploration and production spending programs.

It's reasonably easy to build in high gains with a small base, but most of the supermajors also are in the hunt. ExxonMobil leads the way with plans for a 13% spending increase, while BP follows at 3%. ExxonMobil would like to start a huge pipeline project between Papua New Guinea and Queensland, Australia, this year. It also has been offered a piece of the $2.6 billion West-East pipeline in China. Major projects for BP include the Baku-Tbilisi-Ceyhan pipeline bringing oil from offshore Azerbaijan to Turkey's Mediterranean coast and its Tangguh LNG plant on Irian Jaya, Indonesia. ChevronTexaco, with big expansion plans in China's Bohai Bay, will raise spending 3%.

ConocoPhillips plans no worldwide spending increase this year as it sorts its assets after the merger of the two companies, but it will lower US spending 10%, and Royal Dutch/Shell was forced to cut its capital budget 19% after encountering heavy overruns in 2002.

Among other significant companies planning declines, BG plc wants to drop 29% from its 2002 level, China National Offshore Oil Corp. will cut 13% from its budget, and EnCana will reduce spending 25%.

Even though it is continuing to explore aggressively in the Gulf of Mexico, Kerr-McKee has lowered spending plans 18% this year. Nexen, another active Gulf of Mexico driller, and a partner with Petrobras in Guando field, expects to spend 30% less this year than last.

Venezuela' PdVSA will keep spending at 2002 levels in spite of anticipated drilling on the Deltana platform with some 30 Tcf of gas off the southeastern corner of Trinidad.

Spending plans for US companies read like late 1929 stock market reports. In US activity, Royal Dutch/Shell will cut spending 9%, TotalFinaElf 29%, Marathon Oil 7%, Occidental Petroleum 8%, Kerr-McGee 5%, Unocal 18%, Noble Energy 17%, J.M. Huber 16%, Pogo Producing 5%, Spinnaker 17% and Swift Energy 17%, the Lehman report said.

Anadarko Petroleum, ChevronTexaco and Devon Energy plan to keep spending at 2002 levels in the United States.

The good news comes from Apache Corp., EOG, BP and ExxonMobil, with anticipated US spending gains of 7%, 9%, 4% and 5%, respectively.

Even better news come from Canada, a nation anticipating a 7.2% increase in exploration and drilling expenditures. Although Canada is closely aligned to US markets, the perception is brighter. Canadian production leans toward gas, and gas has provided strong cash flows to companies in the nation. In addition, Crandell and Sedita said, the geology and exploration climate appear more attractive.
Among the more optimistic companies working in Canada, Penn West Petroleum will increase its spending 45%, Canadian Natural Resources plans a 39% rise for exploration and production work, and Nexen will spend 20% more this year than last in Canada. Burlington Resources, with an aggressive campaign along the Canadian foothills in Alberta and British Columbia, will increase expenditures 14%, while EnCana, with big plans for its Deep Panuke project offshore Nova Scotia, has set aside an additional 12% in its spending budget this year.

Additional increases will come from Petro-Canada (15%), ExxonMobil (5%) and Shell Canada (5%).
Anadarko Petroleum, Devon Energy, Husky Oil and Imperial Oil told the Lehman Brothers survey crew that they would keep Canadian spending at the same level as last year.
Companies planning to lower their Canadian budgets include ConocoPhillips
(-8%), Dominion Energy (-14%), El Paso
(-33%), Forest Oil (-71%), Murphy Oil
(-11%), Unocal (-16%), Paramount Resources (-19%) and Vintage Petroleum (-18%).

The annual survey also found operators spent more in 2002 than they planned. A similar survey a year ago showed exploration and production companies planned to cut spending by 1.4% in 2002, and they actually trimmed only 1.2% off their 2001 budgets. Within that figure, US spending dropped 18.5%, compared with an anticipated 17.9% decline, while international spending rose 9.3% instead of the expected 10.5%. Canadians moved to a slightly more optimistic mode, recording a decline of 13%, much better than the 19.6% decline forecast in the December 2001 survey.

About 30% of the companies surveyed overspent their beginning-of-the-year exploration and production budgets, and about 35% spent less than they planned. More US companies underspent their budgets than raised spending, while the opposite was true in Canada. In the international marketplace the overspending and underspending balanced.

Companies setting exploration

and production budgets based their expectations on a West Texas Intermediate oil price of $23.22/bbl, but they will watch prices carefully, and 37% will trim their capital expenditure budgets if prices drop to $20/bbl, cutting spending 10% to 20%.

Exploration and production companies in the United States based their spending on an average gas price of $3.42/Mcf through 2003, but if the price falls to $3/Mcf a third would trim up to 10% off their budgets.

The survey showed that major oil companies plan to spend slightly less of their capital budgets on exploration and production this year than last.

Only 23% of the companies surveyed plan to spend more than their 2003 cash flows for exploration and production. That shows companies are getting more conservative. A year ago, 35% planned to spend more than they brought in from cash flow.

Among all the companies surveyed, the biggest factors in setting capital budgets were anticipated gas prices, availability of good prospects, cash flow and oil prices, in that order.

In addition to the apparent move of companies from US exploration and production spending toward international activity, the survey showed a movement toward offshore prospects. More than twice as many companies increased offshore spending as onshore spending in 2002, and that trend continued into expectations for 2003.

In the "So what's new?" section of the survey, 75% of the companies said they would cut exploration and production budgets if they faced a significant increase in drilling rig rates. That's a strange statistic, since it would take an increase in drilling to allow contractors to raise day rates on their rigs.
Still, 37% of companies expect rig rates to increase this year, while 11% said they would fall, and the remaining 52% believed they would stay flat.

Technologies that influence exploration and production, in order of importance, are 3-D and 4-D seismic, horizontal and directional drilling, fracturing and stimulation technology, reservoir recovery optimization techniques and intelligent well completions.

Nearly three-quarters of the companies surveyed said drilling wells makes more economic sense than acquiring properties. That broke down to 71% of US operators, 74% of Canadian operators and 88% of companies operating outside North America.

In spite of the lower budgets, 63% of the people surveyed felt the economics of exploring in the United States were good or excellent compared with 65% for Canada and 75% for international operators.
Among the operators in the survey, Nexen said it planned to invest $833 million in 2003. "We're focused on delivering significant value growth through full-cycle exploration and development activities. Our 2003 program supports our growth in three of the most attractive basins in the world: the deepwater Gulf of Mexico, offshore West Africa and the Athabasca (Canada) oil sands. Athabasca contains long-life resource capable of delivering predictable, steady growth, while the Gulf of Mexico and West Africa provide the opportunity for step-change growth," said Charlie Fischer, president and chief executive officer.

Within that $833 million, Nexen will spend $358.8 million on core projects to generate 6% to 10% growth, net of royalties. Another $256.3 million will go into major development projects with mid- to long-term production growth objectives. Another $182.6 million will go into high-potential exploration projects.
If the company achieves its objectives, net production will increase to between 190,000 b/d and 196,000 b/d with substantial help from the newly producing Aspen development in the deepwater Gulf of Mexico. Nexen's 60% share of that project should add 15,000 boe/d to 18,000 boe/d of production when both field wells come on line.

Among other significant projects, Kerr-McGee Corp.'s Gunnison field should come on line in the Gulf of Mexico this quarter, adding 12,000 b/d of oil and 60 MMcf/d of gas net to Nexen's 30% share.
As a partner in Guando field in Colombia with Petrobras as operator, the companies will drill 24 wells and build infrastructure, including a 35-mile (56-km) tie-in to an existing pipeline. They also will evaluate a pilot waterflood that could expand to the entire field next year. Nexen has a 20% interest in the field.
In the longer term, Nexen is expanding its synthetic crude oil operations in Canada with a goal for adding 8,000 b/d of net production in 2005.

At its Long Lake Premium Synthetic Crude project in Athabasca, Nexen will put up $115 million for a pilot test steam-assisted gravity drainage system to evaluate costs for the full-scale project aimed at recovering 4 billion bbl of bitumen.

Exploration for conventional oil and gas includes at least five high-potential exploratory wells in the Gulf of Mexico's Alaminos Canyon, Green Canyon and Garden Banks areas and a deep Miocene prospect in shallow water on the shelf. Those prospects will use up half the exploration budget. "We view the Gulf of Mexico as one of the most attractive exploration frontiers in the world," Fischer said.

Much of the remainder of the budget will go into the Usan and Ukot discoveries in OPL 222 offshore Nigeria where Nexen holds a 20% working interest. It also expects to drill at least one exploratory well on its substantial Yemen properties and another on Block BC-20 offshore Brazil in the Campos Basin.
Nexen's Canadian exploration remains in the foothills area of Alberta and British Columbia.

The $6 billion in capital expenditures planned this year by ConocoPhillips represents a 25% decline from the combined exploration and production expenditures to the individual companies last year, but the new budget will focus on upstream spending. About 73%, or $4.4 billion, will go to exploration and production, said Jim Mulva, chief executive officer.

Priority projects include: $1.1 billion destined for the Asia-Pacific, most going into the giant Bayu-Undan project in the Timor Sea northwest of Australia; offshore Block B in the Natuna Sea northeast of Singapore; onshore fields in South Sumatra, Indonesia; Vietnam blocks 15-1 and 15-2; and Bohai Bay in northeastern China. The company's Penglai field in Bohai Bay is scheduled to begin production this month at a rate between 40,000 b/d and 50,000 b/d.

ConocoPhillips will spend another $1.1 billion in North and South America. North American projects will focus on the deepwater Gulf of Mexico, south Texas, the San Juan Basin of New Mexico and Colorado, the Permian Basin, the Texas Panhandle and northern Louisiana.

In South America, ConocoPhillips will funnel more funds into its Hamaca heavy oil production project on Venezuela's Orinoco Belt and its Corocoro development, also in Venezuela.

It also will spend some $950 million on projects in the southern North Sea, in the Norwegian Sea in European Russia and on preliminary exploration and infrastructure work for giant Kashagan field in the Caspian Sea area.

Another $640 million has been allocated to its operations in Alaska. Most of those funds will go into the Prudhoe Bay, Kuparuk and western North Slope operations and the construction of Endeavour-class tankers to transport Alaskan North Slope crude oil.

Canada will get $410 million in capital expenditures targeted toward gas in western Canada, expansion of syncrude production and investment in Surmont heavy oil development.

The smallest portion of the budget, $160 million, is going to Middle East and Africa projects.
Among smaller companies, Denbury Resources Inc. of Dallas, Texas, approved a $130 million exploration and development budget.

About a third of that money will go into CO2 enhanced oil recovery in Mallalieu and Little Creek fields in western Mississippi and the start of a new flood in McComb field.

A fourth of the budget will go into eight to 10 wells in the Gulf of Mexico, split almost equally between exploration and production activities.

The remaining funds will go into two of the company's core areas, onshore Louisiana and eastern Mississippi. That budget includes 15 onshore wells in Louisiana, 20 wells in eastern Mississippi and funds to gather seismic and acquire additional land.

If everything goes according to plan, that $130 million will raise production to an average 37,500 boe/d during 2003, a gain of more than 5% from 2002 levels.

Canada's Vintage Oil, fresh off a debt reduction program in 2002, plans to increase its capital spending to $180 million from $144 million last year.

Part of that budget will go into three or four high-impact exploration projects in Yemen, including the Nagyah prospect, which spudded late last year, aimed at the Alif and Lam formations. The company also is analyzing 85 sq miles (220 sq km) of 3-D seismic to select its next two prospects. Among those prospects, Vintage expects gross reserves potential of 50 million boe per prospect.

Vintage recently completed its second exploratory well in Yemen, the An Nagyah No. 2, for 860 b/d of oil and 400 Mcf/d of gas with flowing tubing pressure of 150 psi from the upper Lam sand in a 65-ft (20-m) interval from 3,310 ft to 3,375 ft (1,010 m to 1,029 m). After adding perforations from 3,326 ft to 3,345 ft (1,014 m to 1,020 m), the well flowed at a rate of 1,091 b/d of oil and 543 Mcf/d of gas in a short-term test.
That nonacquisition budget includes $43 million each in exploitation spending in Argentina and the United States and $42 million for development in Canada. It also includes $31 million for exploration in the United States, $8 million for Canadian exploration and $13 million for other international exploration.
In Europe, Sweden's Lundin Petroleum plans $25 million in exploration expenditures with four wells planned for Indonesia, another two exploratory wells in the Netherlands and one well each in Albania, France and Iran. If the movement toward peace in Sudan moves far enough for operations to resume, Lundin will drill two wells in that country.

With the $18 million budgeted for development, it will concentrate on interests in Venezuela, Indonesia, France and the Netherlands to try and maintain production at 15,000 boe/d.

Calling the 2003 program an exciting one for the company, President and Chief Executive Officer C. Ashley Heppenstall said, "The exploration and development program will be fully funded from internally generated funds, and success in any one of the wells is likely to have a material value impact on a company of our size."

Argentina's branch of Germany's Wintershall plans a slightly higher budget in 2003 than in 2002, largely because of its recent awards of the San Jorge and Gan-Gan blocks in Chubut province, where it is a 50-50 partner with Repsol YPF.

The 2002 budget, however, was 67% lower than the 2001 budget because of the economic crisis that continues in Argentina.

Since some of the oil production can be exported for dollars, the work will concentrate on finding and increasing production of oil.

That's an easy decision, since the price of gas at the wellhead in Argentina is $0.27/MMBtu, down from $1/MMBtu before the economic crisis hit. "The price of gas is 30% of what it was before the crisis, and it's even lower than in Russia," said Gerhard Hasse, Wintershall Energia's exploration and new business manager in an interview with BN Americas.

"I would shrug off people rather than encourage them to spend money in Argentina. Once you're here, you can maintain your level to a certain extent, but for new money, it is very difficult," he added.
In Asia, China's Sinopec, the nation's second largest oil company, will increase its capital expenditures by 50% to $180 million in 2003 in its gas-prone northwestern China fields. Most of the money will go into 12 to 15 wells, mostly exploratory, in the Sinjiang Uygur Autonomous Region.