Cash is king. When it comes to monitoring the future health of the oil industry in 2000 and beyond, nothing speaks plainer than planned expenditure levels. From what the latest sets of figures would have us believe, things are looking up.

The most striking (and reassuring) trend to be seen in the predictions made by oil companies as to their upstream spending plans is that the vast majority are expecting substantially increased E&P expenditure this year.
The vast consensus appears to be that an increase of at least 10% compared to 1999 will occur in the next 12 months. Barring any oil price disasters, this trend is also expected to hold its course for a number of years to come.
The simple reason? The reserves race is on: with the demand for oil now envisaged for the next 10 years, the world will consume an average of 30 billion barrels of oil per year over that period. If the upstream industry wants to replace this consumption with new reserves without diluting the world's ultimate existing reserves of some 1 trillion barrels, the exploration sector must find an additional 300 billion barrels of oil in the next decade - a huge challenge.
The shorter term ambition of individual oil companies is to at least replace consumed volumes with new reserves on a year-by-year basis, and this is the driving force behind their exploration and appraisal plans both on and offshore.

Increase
In a recent detailed report by Salomon Smith Barney (SSB), undertaken when the oil price was back on its upward path, an impressive 73% of companies surveyed globally planned to increase their spending in 2000 - the most positive year-ahead indication SSB had ever recorded in the 11 years it has been running its annual E&P spending survey.
Not surprisingly, of course, this also has to do with the fact that 1999 was so badly hit by the previous year's oil price downturn (1999 E&P spending fell 21% compared to 1998 levels, the most severe drop since 1986 and the second worst in 40 years covered by reliable data).
In more detail, out of the 73% who predicted increased expenditure this year, 65% of those surveyed expected spending to rise by more than 10%, with SSB's own forecast predicting a 10% to 12% rise for 2000.
"However, we note that historically when the direction of spending trends changes, the magnitude of the change is generally under-estimated," added the analyst optimistically, "and would suggest that an even sharper rebound can be anticipated."
It also pointed out that a significant majority of the respondents planning substantial increases this year were operators with budgets of less than US $500 million.
Outside North America, 79% of respondents to the survey expected 2000 spending to be flat or increase, with 53% expecting to substantially step up their spending by 10% or more.
In the United States the picture was even more upbeat, with 64% of independents expected to increase their spending by 10% or more this year, and more also likely to revise upward their plans.
Among the majors covered in the survey, 66% were again expecting 2000 spending to be revised upward. In Canada the picture was much the same, with 60% expecting a substantial increase for 2000.
An important trend that also became evident was that both majors and independents globally planned to increase their spending mix toward gas drilling.
Of course, many of the independents and majors are likely to have since approved their upgraded spending plans since the SSB survey was conducted, helped by the continuing strength of the oil price into the new year.

Onshore and offshore spending
Latest figures from several leading analysts confirm this trend in the longer term too. Tables 1-4 show forecast figures from UK-based Smith Rea Energy Analysts covering both onshore and offshore E&P expenditures from 2001 to 2010.
Focusing on the offshore sector in particular, specialist Norland Consultants states that current and anticipated short-term cash flow will allow for significantly expanded expenditure budgets for 2000.
"In the meantime offshore field development projects awaiting investments are piling up in some areas of the world. Never before in the history of the offshore industry has there been a higher number of very large offshore oil and gas fields around the world awaiting development. This extensive portfolio of large offshore fields are mostly in deepwater, and the size of both the fields and the investments required promise well for the future of the field development segment of the business," said Norland.
Interestingly, Norland points out that one of the most striking features of the world offshore market in terms of total expenditure is the dynamic situation of the US Gulf of Mexico. "Not only is the Gulf the first regional offshore market to collapse when the oil price plunges. It is also the first regional market to recover when the oil price goes up."
The reason for this is that Gulf of Mexico activities are spurred by two factors - firstly, the persistent strength of natural gas prices in the United States. Secondly, the operators are coming under increasing pressure to drill exploration wells as well as initiate field development projects, in order to avoid relinquishment of deepwater leases. More than 3,000 undrilled leases are in water depths of more than 800m (2,609ft), said Norland, and most of these come up for relinquishment in the next 3 years. "Massive exploration and field development programs have to be initiated to meet deadlines under prevailing lease duration regulations. The US Minerals Management Service is hardly prepared to offer moratorium on these regulations."
A similar trend is being seen for Latin America - where policy developments in Brazil are starting to add dynamics to the market - and Asia and Australasia, where the economic recovery is adding momentum both to the gas markets and to deepwater oil developments.

Less competitive
The offshore regions that will suffer from the more selective distribution of oil company funds are those offering less competitive fiscal and regulatory regimes, and less prolific prospects. Northwest Europe has seen a fall of 20% in total offshore expenditure from 1998 to 1999 alone, and is the hardest hit, mainly due to the downturn in capital investments.
In conclusion, it can been seen that as the industry moves into 2000 and beyond, expenditure plans remain optimistic and are likely to stay that way. The threat of a sudden plunge in oil prices must always be acknowledged for the effect it could have on upstream investment globally.
But for the reasons mentioned previously, the industry must continue to invest if it is to find the reserves necessary to supply future energy demand. It is also clear that the upstream sector will have to increasingly rely on the deep waters of the world to provide the large discoveries of oil and gas that are needed. And here is where a growing share of expenditure will head as a result.
Acknowledgments
Ernst & Young's "Energy In Focus" report; Salomon Smith Barney's "E&P Spending Survey"; Smith Rea Energy Analysts; Norland Consultants