As the industry rounds the corner of another year of strong commodity prices, John Thieroff, director, Standard & Poor's Corp., is wondering if it's time for a breather.

"We hear companies are still doing the things they need to do to run their businesses-they just have so much cash," he said at a recent oil and gas conference hosted by S&P in Houston. "[But] we're not completely convinced the level of investment necessary has taken place. The amount of cash flow generated in the current environment is extraordinarily high, but the industry has not replaced production for the last three years.

"It likely won't this year, either."

It's not that E&P companies aren't trying. Capital spending continues to rise worldwide even as acquisitions continue to cost more, with companies paying top-dollar for acquisitions they wouldn't have had to pay much for in the past.

"We are seeing a bigger increase in price relative to other components in the unproved component of acquisitions," Thieroff said. "The unproved component and development drilling (opportunities) have become costlier."

Rising worldwide political risks are leaning on the industry as well. This year has seen increased government taking, outright nationalization, physical threats such as war, terrorism and insurrection, and diminished spare oil-production capacity heightening the risk of supply disruptions, Thieroff said.

"There has been a big increase in headline events this year," he said. "There has been a definite shift of the pendulum over to the side of the host countries. They have more leverage now and are able to force better terms."

Even OPEC might not matter much in the future, Thieroff said. "OPEC just doesn't have the capacity to control prices the way it did."

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