"This year, around 75% of capital spending will occur in the second half, mostly concentrated in the fourth quarter."
U.S. halts oil output decline, but future uncertain
By Matthew Robinson
NEW YORK, July 30 (Reuters) - U.S. crude oil production, sent into spiraling decline by last year's oil price collapse, is expected to get a boost from increased capital spending as companies begin to reevaluate budgets after a rebound in crude oil prices, industry analysts said.
But how quickly budget spending will transfer into higher production, and by how much, remains uncertain.
Crude oil production for the entire United States has been in decline for decades, though in recent years production losses from the mature ''lower 48'' onshore region and Alaska's giant Prudhoe Bay field have been offset by gains in the offshore Gulf of Mexico sector.
But the rate of decline for U.S. onshore production accelerated sharply as lower oil prices in 1998 and early 1999 forced marginal ''stripper'' wells to shut, and many development plans to be shelved.
Where analysts had been looking for U.S. crude production to remain flat for 1997 and 1998, it fell from about 6.3 million barrels per day (bpd) in early 1997 to a low of 5.8 million bpd in February of this year, according to the American Petroleum Institute. As prices have risen, it has since climbed marginally to 5.95 million bpd.
Analysts are now saying that companies are revising upstream budgets and beefing up spending.
According to Fadel Gheit, industry analyst for Fahnestock & Co., the increase in capital spending will become more apparent as the second half of the year goes on.
Typically, around 68% of capital spending occurs in the second half of the year. This year, around 75% will occur in the second half, Gheit reckons, mostly concentrated in the fourth quarter.
He predicts that a rise in onshore ''lower 48'' activity could combine with rising output from the Gulf of Mexico to translate into significant gains in US output by the middle of 2000.
Companies have been initially cautious to react to the price uptick, and should become more confident as they see prices stabilize for around six months, Gheit added.
Ken Miller, analyst for Purvin & Gertz Inc., agrees that it will take time before companies start spending more. ''Prices have to get up to a certain level for a period of time'' for companies to become confident that a large price shift is lasting, and begin to modify budgets, he said.
Not all of the production lost during the price collapse can be brought back or replaced, however, as the cost of bringing back shut wells is high.
The situation for U.S. marginal stripper wells - high cost wells run by small independents that produce less than 10 bpd -- is especially grim as the cost of bringing them back up can be prohibitive. And even large oil companies are keeping a harsher eye on the bottom line, so that fields that were profitable at $15 dollars a barrel may not be coming online again soon, even with oil at $20 a barrel, according to some analysts.
''We'll probably never get it all (shut-in production) back,'' Miller predicted.
Purvin & Gertz forecasts that U.S. output for 1999 should average 6.1 million bpd and rise to 6.2 million bpd for 2000, led by rising volumes from big offshore fields in the Gulf of Mexico.
Many analysts are pointing to the increase in rig usage as an indicator that companies are increasing activity onshore, too, though a closer look shows that it is the natural gas sector rather than oil that is the early focus.
Latest information on the U.S. Rotary Rig count from Baker Hughes Inc. shows the rig count at its highest this year, but still way below last year and with all of the recent increase coming from natural gas drilling.
Indeed, the number of oil rigs in service fell by three to 102 in the week ended July 23, 167 below levels for the same week in 1998.
Even with prolonged stability for oil prices, it is still uncertain whether overall U.S. production will recover in the next year or so.
The Gulf of Mexico, which added a net 120,000 bpd increase last year, should see production hit 1.5 million bpd in 1999, 1.67 million bpd in 2000, and 1.8 million bpd by 2001, according to Purvin & Gertz.
Alaskan production is another swing factor. Output has been falling since 1988, when it peaked at around 2.0 million bpd, hitting a record low in June of around 990,000 bpd. Producers hoped to compensate for declines in main producing field Prudhoe Bay with development of other North Slope fields. The target was a halting of the decline in 1999, and according to a DoE forecast, Alaskan production should average 1.07 million bpd this year, but decline to 960,000 bpd next year.
biz.yahoo.com |
