Many of the world's international producers looked at oil and gas prices late in 2001 and decided to take the cautious approach by trimming capital spending plans, but the worldwide decline, if any, will not be large.
The prime indicator of spending trends comes from oil and gas operating companies as they tell shareholders and analysts that they plan to spend less in the approaching year. One of the first indicators is that they have lowered capital spending, regionally and locally. The next indicator might be seismic acquisition activity, followed by drilling rig count. The most advanced indicators, however, are present and anticipated oil and gas prices.
Prices
Oil prices, frankly, aren't great. Since the end of the third quarter of 2001, the declining world economic situation - particularly in the United States - and the uncertainty of the impact of the terrorist attacks on the United States and the effect of retaliation for those attacks have driven prices lower.
Much of that decline falls on the economic strength of the United States and the fear that it is slipping into recession and will be unable to grow internally or buy products from other nations.
That fear may not be as justified as news headlines imply.
According to Stratfor global intelligence analysts, the Sept. 11 attacks, declining energy prices before the attacks, severe cutbacks in air travel and shaken consumer confidence have had an economic impact. But that impact hasn't been great. US gross domestic product (GDP) contracted only 0.4% in the third quarter. "When the depth of the terrorist attacks and the relative strength of the GDP are compared, it becomes apparent that the United States was well into robust recovery before the strikes," Stratfor said, adding the recovery will continue in the fourth quarter and into 2002.
Still, as oil prices dropped below Opec's US $22/bbl to $28/bbl target level and stayed there, they triggered action.
That action has taken three forms. First, Opec nations lowered the amount of cheating on their target production. Second, Opec lowered target levels by 1.5 million b/d, conditionally. Third, Opec nations stipulated their cuts depended on non-Opec producers to share the pain by cutting their production by 500,000 b/d.
Russia has agreed to cut 150,000 b/d - and may cut more, reluctantly. Mexico has not committed to reduce production, but Norway has committed to cut up to 200,000 b/d. The United States committed to increase demand with an immediate campaign to add 150 million bbl - possibly at rates as high as 800,000 b/d, according to Merrill Lynch analyst Kevin Simpson - to the Strategic Petroleum Reserve to bring the reserve up to its 700 million-bbl capacity. But it isn't clear whether Opec will equate increasing demand with lowering production.
Watch for reluctant non-Opec countries to bide their time to see if the organization is serious. That should hold prices near or below the $20/bbl mark going into 2002. Then watch for commitments to cut that somehow never show up in the statistics. That will continue to hold prices low.
If Opec does decide to get into a market-share war, it can do that, Simpson said. Saudi Arabia can earn more money producing flat out at $14.32/bbl than by conforming to the quota at $20/bbl. Kuwait's break-even point is $14.28/bbl, and Venezuela starts losing money below $15.85/bbl, he added. They have the oil. They already have cut production by 3.5 million b/d this year, and the conditional cut would bring the market withdrawals to 5 million b/d, assuming nobody cheats.
Worldwide gas demand has remained strong nearly everywhere but North America, where sliding demand drove prices to $2.24/MMBtu in September 2001, down from $9.13/MMBtu in January 2001.
The oil and gas price situations will keep operators from dedicating huge amounts of capital to exploration and production, even though they know the markets will come back. Prices and spending commitments should increase in the second half of the year, but they should remain within Opec's $22/bbl to $28/bbl target price.
Spending plans
In its "Global E&P Trends 2001," Arthur Andersen showed capital spending plans in 2000 and previous years for 155 companies, including 34 non-US companies. Those firms accounted for 87% of US oil and gas liquids reserves and 68% of US gas reserves but only 9% of worldwide oil and 8% of worldwide gas reserves.
That survey said 2000 spending for exploration and production amounted to $81.1 billion for those companies. As far back as July 2001, analysts with Wall Street investment firms Salomon Smith Barney and Lehman Brothers conducted their annual survey of public companies operating worldwide. The surveys did not include national oil companies. At that time, Salomon Smith Barney expected 2001 worldwide capital spending for exploration and production to increase 25.3% to $115 billion. That 2001 percentage increase level would raise spending to $101.6 billion in the Andersen companies.
In October, after the price declines were apparent, Lehman Brothers predicted declines in capital spending for 2002 - 20% in the United States and 12% in Canada. The company expects a 5% increase in capital spending for exploration and production outside North America.
If the Lehman percentages are right, using the Andersen figures, that would put US spending at $28.1 billion in 2002, or slightly more than the 2000 level. It would lower Canadian spending from about $10.2 billion in 2001 to $8.6 billion in 2002 and put spending for the Andersen companies in the rest of the world at $58.6 billion. That would put worldwide total exploration and development spending at $95.6 million, an overall decline of about 6% from 2001.
If that sounds high, remember that several large projects are headed for production. Among them:
• Development will start at the 13 Tcf Camisea gas field in Peru. Partners will spend $450 million or more by 2003. Total development will take $1.6 billion.
• Kashagan field in the Caspian Sea may get sanctioned next year at a development cost of more than $10 billion.
• ExxonMobil will move ahead with its Kizomba complex offshore Nigeria.
• ExxonMobil just sanctioned Sakhalin 1 off the east coast of Russia with a $12 billion investment to produce first oil in 2005.
• BP's Crazy Horse and Crazy Horse North fields in the Gulf of Mexico with 1.5 billion bbl of oil reserves will be getting ready for first oil in 2004.
• The latest lease sale offshore Nova Scotia set records for work commitments for individual tracts and total bids.
• If the Alaska National Wildlife Refuge opens, it will attract huge investments, first for exploration, then for development.
• China is going all out for investment in the western Tarim Basin so it can have gas for the West-to-East pipeline early in 2003.
The international areas apparently headed for questionable investment levels in 2002 are low-return areas - the North Sea, South America and Southeast Asia - according to Merrill Lynch's Simpson.
Exploration
Seismic activity usually counts as a leading indicator with more activity signaling future drilling. North America doesn't look good in this comparison, either.
According to a Lehman Brothers publication of information from World Geophysical News, 56 crews were working in the United States in September, down from the year's high of 63 in April and less than half of the 134 rigs working in September 1998. All that annual decline came from onshore seismic activity.
Offshore, the 18 active crews matched the high for the year, and three-quarters of those vessels were shooting 3-D or 4-D seismic.
Canada's 16 crews working in September was a drop from the nonsummer high of 24 in May.
Internationally, not counting the United States and Canada, the Lehman Brothers report showed 182 crews working, down from a high of 211 in June.
The count of 50 marine rigs was the low point of the year, down from a high of 76 in January. Nearly 55% of the marine crews were shooting 3-D or 4-D seismic.
It will take a significant upward move in prices next year to increase those crew counts.
Drilling
The US count of active drilling rigs had dropped to 993 in mid-November, according to Baker Hughes. That was down from 1,057 only a month earlier and from a high of 1,293 in mid-August.
The slump played no favorites. The land rig count fell to 840 in November from a high of 1,136 in mid-January. The offshore count dipped to 134 in November from 181 in January 2001.
Canadian results were similar as active rigs plunged to 268 in mid-November from 379 a month earlier. The peak for the year was 579 in January, but winter always is strong in Canada since it allows drillers to work in the far north without damaging the tundra.
Analysts expect counts to remain fairly low as long as gas prices remain low with a recovery around the middle of 2002.
The picture was brighter in most areas of the world, supporting analyst speculation that drilling outside North America will at least stay even in 2002.
The total non-North America count was 750 rigs in October, down from a peak of 766 rigs in September. Land rigs fell from their 540 peak in September to 520 in October. Offshore, however, the count of 230 working rigs in October was beaten only by the 232-rig count in January.
The European count of 101 land rigs in October was the high for 2001.
Working rigs in the North Sea slipped to 58 in October from 62 in June, leaving the North Sea as the hottest offshore region in the world.
The Middle East rig count slipped to 178 in October from 189 in August.
Latin American working rigs dropped to the lowest point of the year at 252, down from 268 in September and from a high of 270 rigs in March.
In the Asia-Pacific, the 167 rigs at work represented the high point for the year.
Meanwhile, Africa remained steady at 52 rigs, with most of them working in Algeria and Nigeria.
That strength should continue into 2002 unless an oil price war breaks out.
Corporate plans
Australia's Woodside Petroleum spent $444 million in 2001 and plans to spend another $2.4 billion by the end of 2005. The company is looking at selecting a floating production, storage and offloading vessel for its Enfield/Laverda complex by mid-2002.
The world's biggest private producer, ExxonMobil, already announced it would raise its capital spending budget to $9.9 billion from $9 billion in 2001.
Shell plans to stick with its investment strategy by continuing to invest $7 billion to $8 billion a year.
BP will spend up to $500 million in China this year. In a speech, BP Chief Executive Lord John Browne said he was looking at a world growing to 7 billion people by 2010 and adding 250,000 potential new customers every day.
Gas is no longer local. Some 27% of all gas sold passed a border before it reached the end user, he added. At the same time, oil and gas prices are volatile. That has forced BP to use a price of $16/bbl for Brent crude as its underlying price assumption for planning, but it also makes sure it can return its cost of capital at a price of $11/bbl.
Using that foundation, Browne will stay on the company's track of spending $8 billion a year drilling in 25 countries.

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