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Lloyds List: Oil majors square up for surge in exploration spending in 2005: “Outside North America, Royal Dutch/Shell will have the highest capital expenditure of all the oil majors. The survey estimates Shell has spent $9.35bn this year and will increase this by 3% to $9.67bn. The previously troubled oil group is battling to raise its booked oil and gas reserves by moving forward projects after having to face a scandal this year, lowering estimates of its reserves by a fifth and replacing senior management.” ( Dec 16, 2004


High oil prices throughout 2004 and the rising cost of steel have driven oil companies to raise capital expenditure in 2005. Analysts at Lehman Brothers published their 2005 survey this month, predicting a 5.7% rise in oilfield spending, writes Martyn Win


CONFIDENCE is running high in the oil industry, with most oil companies and contractors looking forward to a promising year of continued strong demand, high oil prices and surging activity levels.


One upside of this good cheer is an increase in exploration and production spending by oil companies, but at least some of the expected rise in capital expenditure will be due to higher project costs.


New York-based analysts Lehman Brothers published a 2005 spending survey this month, the largest in the industry, where oil companies pledged to spend a total of $177bn next year.


This will be a 5.7% rise from the $167bn spent around the world by oil majors, independents and national oil companies this year, which itself is a 11% gain on the figures in Lehman Brother's survey last December.


The analysts took survey replies from 327 oil and gas companies and concluded that most of them will be boosting their capital expenditure in 2005.


One of the most striking features of the survey is that the highest increase in E'P spending will be on North American assets. This is a function of the high oil and gas prices in the US, plus the ease of developing assets close to ever hungry markets.


A survey of 249 companies operating in the US showed capital expenditure will rise by 7.8% to $41bn. Although a large proportion of this will be in deepwater projects in the Gulf of Mexico, it is still surprising given that the onshore US is considered an exceptionally mature province.


Less surprising is that 75 companies operating in Canada, which is considered to hold huge untapped oil and gas resources, will be raising their expenditure by a total of 8.6% to $18.6bn.


These figures are dwarfed by expenditures outside North America, but oil companies seem more reluctant to raise international (from a US point of view) spending, perhaps because of the higher risks involved for American firms.


Lehman Brothers surveyed 87 companies working outside North America, including majors, independents and state oil firms. Combined, they estimated increasing E'P expenditure by 4.5% to $117bn.


'The relatively small gain that we forecast is due to modest increases by many of the supermajors and flattish to lower numbers at other major spenders,' said the Lehman Brothers analysts in the report.


Deepwater developments and integrated oil, gas and liquefied natural gas (LNG) projects will dominate this spending as they require the largest structures and can only be undertaken by the oil majors and state oil firms.


Outside North America, Royal Dutch'Shell will have the highest capital expenditure of all the oil majors. The survey estimates Shell has spent $9.35bn this year and will increase this by 3% to $9.67bn.


The previously troubled oil group is battling to raise its booked oil and gas reserves by moving forward projects after having to face a scandal this year, lowering estimates of its reserves by a fifth and replacing senior management.


One of Shell's biggest projects is $12bn Sakhalin II in eastern Russia, where two offshore oil and gas fields are being developed and an LNG plant is being built. Costs on this project have risen due to higher steel costs.


The European conglomerate has a major project on the Bonga field offshore Nigeria, will become operator of Ormen Lange in the Norwegian Sea in 2007 and is involved in several projects in the North Sea and Malaysia.


Shell's rival supermajors are also considering increasing expenditure in the face of higher steel costs, but again at a low rate. ExxonMobil is second of the majors in the survey, forecasting a 3% rise in spending to $9.2bn. The Houston-based group also has a project on Sakhalin Island, has its Kizomba projects off Angola, and Erha in Nigeria. It is also involved in several projects in the UK, Norway and the Far East.


French firm Total is the third largest oil major spender in 2005, predicting a 3% rise to $6bn. Its main projects are Dalia and Rosa in Angola. It also participates in developments all along West Africa, in the North Sea and the Far East.


Italian oil firm Eni comes in at number four in the survey of international E'P spending of public oil companies, with $5.6bn, but this is a 9% drop from 2004.


British oil firm BP is fifth in the survey, with a modest 1% rise to $5.47bn. Its investment areas are Angola, Azerbaijan and Trinidad. But this does not take into consideration its spending in Russia under the TNK-BP joint venture or its investments in the Gulf of Mexico BP is likely to be the largest spender in the US in 2005.


Of the national oil companies those in the Middle East did not reply Petroleos Mexicanos (Pemex) remains the top spender in upstream projects, despite a forecast 14% decrease to $9.56bn, which is just lower than Shell's forecast expenditure of $9.67bn.


PetroChina is forecasting a 5% rise in its investment levels to $7.2bn and Petroleo Brasiliero (Petrobras) thinks its spending will increase by 1% to $5.44bn as it moves ahead with deepwater projects off Brazil.


Petroleos de Venezuela expects a 10% increase in its expenditure to $5.28bn as it moves forward from the oilfield problems two years ago and looks to bring new onshore fields online.


'Among the companies we estimate will spend significantly more in 2005 internationally are ChevronTexaco, ConocoPhillips, Talisman Energy and Woodside Petroleum,' said Lehman Brothers.


California-based ChevronTexaco is expecting a 23% rise to $5.3bn and its rival ConocoPhillips has a similar percentage increase on the cards to spend $3.25bn.


Calgary-based Talisman is predicting a 45% expansion of spending to $1.34bn and rival Canadian group Nexen is likely to increase spending by 86% to $698m as it takes over operatorship of EnCana's Buzzard project in the UK.


Australian oil firm Woodside Petroleum is looking to double its expenditure as it moves forward with the Chinguetti and Tiof projects offshore Mauritania, plus several projects in Australia.


Oil and gas price gains seem to have the greatest effect on spending patterns in North America, where fields can be brought on stream rapidly to feed local markets. But the reserves in fields, except in the deepwater Gulf of Mexico, are smaller than many regions elsewhere.


In Lehman Brothers' survey, BP is set to be the top spender in the US, with $4.1bn, much of this on large-scale deepwater projects. But EnCana takes the top spot for the whole of North America, with a 5% rise to $4.6bn, including $3.1bn in Canada and $1.5bn in the US.


Other large investors next year will be ExxonMobil ($2.6bn), oil independent Devon Energy ($2.5bn), Anadarko Petroleum ($2.5bn) and Shell ($2.2bn). ChevronTexaco and ConocoPhillips will both be spending roughly $1.9bn, according to the survey.


Although some of the forecast rises in expenditure will come from oil companies moving forward projects under higher oil price predictions, a doubling in the steel price is also having an effect. This year's spending is already up because of this.


'Due primarily to rising commodity prices throughout 2004, companies in total overspent their E'P budgets by 4% compared with responses for our mid-year 2004 survey and by 11% compared with responses from our year-end 2003 survey,' said Lehman Brothers.


BP's chief Lord Browne recently highlighted his group's expenditure is on the rise because of higher steel costs and operating rates.


Oil companies have incorporated a higher oil price in their budgets with $35.80 a barrel for US light oil compared with only $25.30 in the 2004 budgets. They are also more likely to raise investment levels if new oil and gas resources are discovered through exploration programmes.


'Prospect availability continues to be a leading issue hampering spending, domestically (North America) and internationally,' the Lehman Brothers report noted.


Higher investment is bound to bring a lot of cheer to the oilfield contractors, who are the key beneficiaries of this new spending.


Oil production outside the Middle East is also likely to rise due to the large levels of investment, especially in deepwater regions. The Middle East itself is mostly absent from this survey.


But with analysts predicting high growth in demand again in 2005, led by economic prosperity in China and India, companies will need to spend more to keep the oil flowing for the rest of this decade.

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