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Figure 7. Worldwide Effective Income Tax Rates for FRS Companies and S&P 400, 1981-1993

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Sources: FRS Companies: Energy Information Administration, Form ElA-28. S&P 400: Standard and Poor's Compustat Services, Inc.

3. Petroleum and Natural Gas

Exploration, Development, and Production

Income and Profitability

Worldwide oil and gas production is the major source of income for the FRS companies. Net income from oil and gas production (excluding unusual items) was down 14 percent in 1993. Cost cutting and favorable natural gas prices could not offset the effects of lower oil prices in 1993. In U.S. operations, revenues from natural gas sales increased over $3 billion (Table 11). However, the decline in oil prices (to an average of $13.56 per barrel) reduced FRS company revenues from U.S. oil production by $4 billion in 1993 (Tables 11 and 12). Expenses decreased, with declines in depreciation, depletion, and amortization costs, and in exploration expenses, reflecting continued consolidation of U.S. operations. Lifting costs (the out-of-pocket costs of oil and gas extraction) fell, due in part to declines in production of oil and gas. On a per-barrel basis, U.S. lifting costs continued to decline, but not as steeply as in 1992 and earlier years (Figure 8). This decline may indicate that the rising expense of producing from increasingly mature fields in the United States is offsetting cost reductions achieved by scaling back domestic operations.

In the foreign market, falling prices reduced the FRS companies' oil and gas revenues, despite increased production (Tables 11 and 12). Although the FRS companies increased foreign oil and gas production, lifting costs fell substantially, by $1.5 billion (Table 11). This steep decline was due mainly to increased efficiency and cost reductions in producing fields. Also contributing to the decline was a 29-cents-per-barrel decrease in production taxes levied by foreign jurisdictions, particularly in the United Kingdom's section of the North Sea.33

Income tax expense fell as the result of decreased operating income from both U.S. and foreign operations (Table 11). Although income tax expense declined in the United States, the effective tax rate (income tax expense divided by pretax income) rose from the prior year. The legislated 1-percent increase in the Federal corporate tax rate, passed on a retroactive basis for the full year in 1993, and its added effect on deferred taxes (previously discussed in Chapter 2), accounted for this increase. In foreign areas, the effective tax rate fell nearly 5 percentage points due to rate reductions by foreign. governments.

Although the profitability of U.S. oil and gas production has yet to match the profitability of foreign production, the gap between the two generally narrowed following the oil price collapse of 1986 (Figure 9). The year 1993 was a modest exception to this trend due to the effects of unusual items on bottom-line net income (Table 11). Excluding unusual items, the difference between U.S. and foreign profitability continued to narrow in 1993.

Expenditures, Activity, and Results

Consolidation Continues

The decline in crude oil prices throughout 1993 put continued pressure on the FRS companies to cut costs and consolidate their U.S. oil and gas operations, especially onshore. For example, ARCO reorganized its lower-48 oil and gas operations, eliminating 1,300 jobs.34 Oryx cut back spending for new onshore operations.35 Coastal and FINA both restructured exploration and production operations in 1993, and Chevron "streamlined" its U.S. reserve holdings. Cost cutting in 1993 included lower exploration expenses, reflecting a reduction in onshore exploratory well drilling (Table B26). The FRS companies' onshore exploration expenditures continued to decrease in 1993, reaching a new low (Figure 10). Onshore development expenditures

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33"Tax Reforms Raise Questions for Oil Industry in the U.K.," Oil and Gas Journal (August 30, 1993), p. 54. MARCO, 1993 Annual Report, p. 3.

35Oryx Energy Company, Form 10-K, 1993, p. 3.

Coastal Corporation, 1993 Annual Report, p. 19; FINA, Annual Report 1993, p. 3; and Chevron Corporation, 1993 Annual Report, pp. 7, 9.

Table 11. Income Components and Financial Ratios in Oil and Gas Production for FRS Companies,

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Earnings of unconsolidated affiliates, gain (loss) on disposition of assets, excluding unusual items not already excluded from operating income.

CCOE = Crude oil equivalent. Dry natural gas was converted at 0.178 barrels of oil per thousand cubic feet.

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Table 12. Average Prices, Sales, and Production in Oil and Gas for FRS Companies, 1992-1993

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aProduction is on a net ownership basis. Sales are domestic production segment sales. See Appendix A for discussion of FRS reporting conventions.

COE = Crude oil equivalent. Dry natural gas was converted at 0.178 barrels of crude oil per thousand cubic feet.

Sources: Energy Information Administration, Form EIA-28. Foreign production segment per unit sales values were compiled from information in FRS companies' filings of Securities and Exchange Commission Form 10-K, annual reports to shareholders, and supplements to annual reports.

spending changed little from 1992 in foreign regions as well (Table 13). Reductions were concentrated in OECD Europe, where spending often changes appreciably from year to year. These reductions were widespread: of the 16 firms reporting exploration and development spending in OECD Europe in 1992 and 1993, 12 reduced spending in 1993. The reductions reflect both cost-cutting efforts and efficiency improvements in North Sea projects, the completion of several large projects, and recent changes in petroleum tax laws. Because exploration expenditures are no longer tax-deductible in the United Kingdom, the FRS companies reduced reduced their North Sea exploration efforts.37

In addition to cutting costs for ongoing projects in the North Sea and elsewhere, several companies reported examining their entire overseas exploration and development programs, with the intent of consolidating operations. Amoco cut back its foreign exploration program from 100 countries to 30, and Phillips sold non-strategic assets in Indonesia, the Netherlands, Egypt, and offshore Western Australia.3 Australia.38 Shell restructured production operations in Syria as part of its refocused exploration program.39 Although consolidating their operations in other parts of the world, the FRS companies are expanding operations in the Former Soviet Union (see box "Oil and Gas Operations in the Former Soviet Union").

1993), p. 54.

37"Tax Reforms Raise Questions for Oil Industry in the U.K.," Oil and Gas Journal (August 30,
38 Amoco Corporation, Annual Report 1993, p. 9, and Phillips Petroleum Company, Annual Report 1993, p. 8.
"Shell Oil Company, 1993 Annual Report, p. 2.

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