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Gold/Mining/Energy : Strictly: Drilling and oil-field services -- Ignore unavailable to you. Want to Upgrade?

To: waverider who wrote (13018)	2/26/1998 6:44:00 PM
From: Czechsinthemail	Read Replies (3) \| Respond to of 95453

Oil price fall to hit industry capex by year-end Reuters Story - February 26, 1998 09:16 By Sean Maguire LONDON, Feb 26 (Reuters) - The global oil industry is quietly preparing to trim capital expenditure in the wake of the collapse in crude prices but hopes to stave off cuts until later this year, analysts said on Thursday. Exploration and production budgets will be hit, with inevitable consequences for service companies, as operators retrench in the face of a $5-$6 fall in the value of each barrel of oil they produce. Budgets were already under pressure from rising field costs. The 10 percent average increase in capex allocations over last year has been far outstripped by the soaring price of drill rigs and other oil field services. That has already led to an effective cut in exploration activity, apart from in the booming deepwater sector, says Stuart Cochrane of Aberdeen-based oil consultants Petrodata. But cheap oil represents a far greater threat to the health of the industry. Benchmark Brent blend has already sunk more than $5 below last year's average value. "Falling oil prices will blow some holes in upstream budgets this year if current trends persist through the second quarter," said Petrodata. A global survey in January of some 200 oil and gas companies by Salomon Smith Barney said more than half would cut spending if prices averaged $3 below the $19.23 a barrel for West Texas Intermediate which they used in planning. WTI, the U.S. pricing benchmark, is currently worth $15.70 a barrel. Some 25 percent of respondents said they would cut spending by between 16 and 20 percent, while seven percent envisaged cutting back by between 26 percent and 50 percent. "We've not as yet seen any fall away in business but we're predicting it will happen," said John Macdonald, spokesman for Britain's oil service industry trade body. "There is not the air of buoyancy there was at the end of last year," he added. BG Plc , the British gas supply and exploration company, on Wednesday said 25 percent of this year's planned production growth was vulnerable to low prices. Anglo-Dutch major Royal Dutch/Shell has already said the price slump has forced a review of its upstream portfolio with project deferrals possible. U.S. majors have not announced any cut backs but acknowledge budgets are under review. Canadian producers of heavy oil, which has suffered proportionally stiffer price falls, have already begun to shut in production. "Companies say they test developments down to an oil price of around $14 and they still show profits. But they also want to present a reasonably stable cash flow and earnings stream," an oil analyst with a U.S. investment bank. "So we may well find some E and P deferrals." Cochrane said highly cost sensitive regions were already showing signs of a slow down, with a softening of the market for jack-up rigs in the shallow waters of the Gulf of Mexico. "We'll see most of the effect in late 98 and into 1999," said Cochrane, "but most of 1998 is insulated because budgets are in place and spending committments have been made." Norway will be at least in part protected because the majority of operators have long term drilling contracts, said Edinburgh analysts Wood Mackenzie in a recent report. But companies may dilute contract costs and defer expensive drilling by sub-letting rigs, if they can find takers, said Cochrane. The slowdown will delay the arrival of new oil and gas originally forseen on stream in 1999 and 2000 and confirm the trend away from exploration work to development projects, which promise quicker positive cash flows. "It is exploration, with no immediate positive impact on profits, that is most vulnerable," said Petrodata. This may be a good news/bad news story with short-term reductions in drilling activity (particularly among land drilling projects) contributing to increased long-term demand. May also slow the rate of rig-building and help keep a cap on the supply side. Baird