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Friday January 23, 6:13 pm Eastern Time
Oil capital spending plans remain intact, for now
By David Chance
NEW YORK, Jan 23 (Reuters) - Alarmed by the drop in oil prices to nearly four-year lows and by
warnings from energy service company Schlumberger Ltd (SLB - news), shares in the sector tumbled
again on Friday after Thursday's losses.
However, the oil majors and industry watchers said that it was premature to predict that spending on
exploration and production will slip in line with the $4.00-per-barrel drop in U.S. crude oil prices, to below
$16, in the last few months.
Among oil service companies, Schlumberger, which on Thursday tiggered the selloff when it said that
spending plans could be modified due to the Asian crisis, lost 15/16 to 70-5/8.
For the big drillers, Falcon Drilling Co Inc (FLC - news) was the biggest loser, down 9/16 at 28-13/16.
However, none of the big oil companies was relying on rising oil prices to lift earnings and many have
costed their spending at levels even lower than the present sub-$16 level, the sources said.
Chevron Corp. (CHV - news) reaffirmed its commitment to a $400 million increase in capital spending to
$6.3 billion when it reported earnings on Thursday.
The San Francisco-based major will spend almost $4.0 billion on exploration and production spending.
''We plan our projects on the basis of $18.00-$21.00 oil, but we test them down to $15.00 and at this
point in time we are committed to our capital spending plans,'' Mike Libbey, a spokesman for Chevron,
said.
A survey from Arthur Andersen LLP in October showed that 77 percent of oil and gas companies
planned to increase E&P capital spending in 1998.
''If it ($16.00 oil) continues to be a short-term situation, it is very likely that capital plans of exploration
and production companies will not be affected,'' said Jim Petrie, senior manager for the consultancy's
energy practice.
''However, if it lasts longer, say six to nine months, you could see capital spending plans reduced,'' he
added.
Texaco Inc. (TX - news) aims to double its earnings over five years to 2001, helped by a growth in
hydrocarbon production to 1.75 million barrels of oil equivalent from 1.19 million in 1997.
To this end, Texaco raised its 1998 capital budget to $3.8 billion from $3.5 billion in 1997, chief executive
Peter Bijur told the company's annual analysts' meeting in December.
''Texaco has no current plans to alter its capital spending as a result of lower oil prices, but if this trend
continues, we could modicfy the timing of projects,'' said a spokeswoman for the company on Friday.
She added that Texaco tested projects at $15.00 oil.
Salomon Smith Barney's annual survey of capital spending plans predicted a 10.9 percent rise in
worldwide exploration and production spending from 1997's $84.6 billion.
''An unusually large number of respondents plan on spending more than cashflow, indicating that
spending plans are increasingly based on a multi-year outlook rather than near-term conditions,''
analysts Geoff Kieburtz and Mark Urness said.
They noted that the average oil price assumptions had fallen to $19.23 per barrel for 1998 from $19.67 in
1997, and that some projects were tested as low as $12.00.
Despite lower prices, evidence is that oil companies are still stumping up for long-term contracts for
drilling rigs.
On Friday, Oryx Energy Co. (ORX - news) entered two five-year deals for deepwater rigs to drill in the
Gulf of Mexico.
John O'Keefe, a spokesman for Oryx, said that the rig supply situation remains extremely tight.
''The only way to give yourself any confidence is to sign up for a long term,'' he said.
According to driller Global Marine Inc. (GLM - news), lower oil prices actually stimulate demand for
hydrocarbons and thus demand for rigs.
It notes that the excess oil production worldwide is near a historic low, just two percent of the total.
Global Marine says that in order to meet a rising demand, production would have to rise by 30 million
barrels of oil per day by 2006, in addition to a further 25 million barrels per day that will be required to
offset field declines.
All of this will keep demand for rigs strong and should support rising dayrates.
Oil companies are now paying $165,000 per day for a semisubersible rig, up from $32,000 in 1993 and are
paying 80,000 per day for jackup rigs, up from $24,000, according to Global Marine.
More Quotes
and News:
Chevron Corp (NYSE:CHV - news)
Global Marine Inc (NYSE:GLM - news)
Oryx Energy Co (NYSE:ORX - news)
R&B Falcon Corp (NYSE:FLC - news)
Schlumberger Ltd (NYSE:SLB - news)
Texaco Inc (NYSE:TX - news)
Related News Categories: US Market News, oil/energy
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