Billion 1993 Dollars Figure 10. Exploration and Development Expenditures for FRS Companies, 1977-1993 Note: Includes expenditures for unproved acreage. Source: Energy Information Administration, Form EIA-28. Note: Excludes expenditures for proved acreage. Less Exploration, More Development The FRS companies spent $5.8 billion on worldwide exploration in 1993, the lowest amount since 1977 (Figure 10). Many FRS companies cut costs through "prospect highgrading," where only the most promising prospects are drilled. In the process of highgrading, the companies discarded many onshore exploration prospects, as evidenced by the drop in their acreage holdings. Undeveloped onshore net acreage held by FRS companies fell from 90 million to 42 million acres between 1987 and 1993. Offshore exploration spending in the United States in 1993 was up slightly from 1992, but still lower than at any time since 1977 (Figure 10). Offshore prospects tend to be more promising than onshore, but offshore exploration opportunities are limited because much of the Outer Continental Shelf is Table 13. Exploration and Development Expenditures for FRS Companies by Region, 1992-1993 The breakup of the Soviet Union unlocked the world's most promising oil and gas reserves outside of the Middle East. More than 100 consortia of American, European, Japanese, and Middle Eastern companies are beginning to bring capital and technical expertise into the region. Among the FRS companies, participation in joint ventures is widespread and geographically dispersed, from offshore Latvia in the Baltic Sea to Sakhalin Island in Eastern Siberia (Figure 11). The FRS companies reported total exploration and development spending of $263 million in the Former Soviet Union in 1993, a relatively small sum in view of the number of projects and the extent of potential reserves. This partly reflects the early stages of many of the projects in which agreements have been reached, but drilling has yet to begin. It also reflects the effect of non-cash agreements, primarily Chevron's Tengiz purchase of over 1 billion barrels of reserves in Kazakhstan, where the company paid in property rather than cash.a Production of oil and gas from the Former Soviet Union by the FRS companies was minor in 1993, but will increase as exploration and development gets under way. Bringing oil and gas to market from remote regions with undeveloped infrastructure promises to be challenging. Companies must build (or rebuild) pipelines and seaports, and manage export quotas and political complications regarding the use of pipelines. In moving oil out of landlocked Kazakhstan, Tengizchevroil has been impeded by Russian authorities controlling the export pipeline. Other routes out of Kazakhstan, through Azerbaijan, Armenia, Iran, and Iraq, are equally precarious. "Chevron Corporation, Supplement to the Chevron Corporation 1993 Annual Report, p. 24, and Chevron Corporation, 1993 Annual Report, pp. 54, 58. b"Russia Grappling with Economic and Political Challenges," Oil and Gas Journal (August 2, 1993), p. 60, and “Transport Troubles," Petroleum Economist (February 1994), p. 25. Figure 11. FRS Companies Participating in Oil and Gas Projects in the Former Soviet Union Note: Projects are defined as joint ventures signed or operating as of August, 1994. Source: Energy Information Administration, "Joint Ventures in the Newly-Independent States of the Former USSR," August 1994. restricted from exploration due to concerns about possible damage to the environment. Rather than pursue exploration, the FRS companies have emphasized intensive development of existing fields (Figure 10). Using new technology such as threedimensional seismology and horizontal drilling, the companies find new reservoirs to maintain production from mature fields. This short-term strategy is intended to maintain cash flow for use by other parts of the company. For example, Unocal plans to accelerate its development efforts in North America to increase cash flow to finance long-term expansion in Southeast Asia. Oryx reported investing in maintenance development to sustain cash flow from production.40 and In foreign regions, a similar move away from exploration and toward development was evident (Figure 10). Spending in OECD Europe (mostly for North Sea projects) dominates the FRS companies' foreign exploration and development spending. Several years ago, some FRS companies began intensive development of mature North Sea fields, often using horizontal drilling to reach reservoirs that were too small to justify an expensive drilling platform. In 1991, Unocal produced more than 70 percent of its Dutch North Sea oil with horizontal wells.41 North American Natural Gas Leads Upswing in Drilling With natural gas price deregulation complete and surplus capacity in the United States reduced, average wellhead natural gas prices for 1993 were higher than at any time since 1985, providing an incentive for natural gas production.42 The increasing use of natural gas (due to its relatively less-harmful environmental effects) is also expected to provide growth opportunities. This growth potential is viewed by several FRS companies as a key component of corporate strategy, especially to sustain operations in the United States. Burlington Resources, whose reserves are 85 percent 44 43 gas, intends to stay heavily weighted to natural gas. Coastal Corporation plans to concentrate on natural gas in its U.S. exploration and production program.** KerrMcGee's North American operations will focus on natural gas, and FINA designated low-cost production of natural gas to be the company's primary long-term goal.45 Amerada Hess cut back U.S. drilling to concentrate on other projects, but plans to focus on natural gas when it resumes domestic drilling." Amoco, the largest producer of natural gas in the United States and Canada, looks forward to "exploiting North American natural gas.' In 1993, the FRS companies completed more natural gas wells in the United States than at any time in the past 10 years (with the exception of 1990). 1147 48 46 Outside North America, demand for natural gas is also expected to increase, providing marketing and production opportunities. Demand for natural gas in Western Europe is predicted to grow more than 55 percent over the next 20 years. Demand in the AsiaPacific region is also growing rapidly, particularly for liquefied natural gas (LNG) for the Japanese market, leading those FRS companies extensively involved in Pacific Rim natural gas development to gear up to increase sales.49 Mobil plans to provide LNG to the Pacific Rim by developing 300 trillion cubic feet of gas reserves offshore of Qatar.50 Unocal began negotiations to acquire offshore gas fields in Myanmar, and added to its already extensive prospects in the Gulf of Thailand.5 Chevron views its worldwide holdings of large undeveloped natural gas reserves as a key opportunity for growth.5 52 The increase in wells drilled by FRS companies in foreign locales in 1993 was concentrated in Canada (Table 14). Many companies participated in this increase, notably Exxon, with 216 new development wells in Canada (up from 50 in 1992), and Enron with 150 gas wells in Saskatchewan.53 Non-FRS companies were also enthusiastic about Canadian prospects, and 40Unocal Corporation, 1993 Annual Report, p. 7, and Oryx Energy Company, Form 10-K, (1993), p. 3. "Unocal Corporation, 1991 Annual Report, p. 7. 42Energy Information Administration, Monthly Energy Review, DOE/EIA-0035(94/03) (Washington DC, March 1994) p. 123. 43Burlington Resources, Thomas O'Leary, Chairman, President and CEO, (1993) Letter to Shareholders. "Coastal Corporation, 1993 Annual Report, p. 4. 45Kerr-McGee Corporation, Annual Report 1993, p. 9, and FINA, Annual Report 1993, p. 3. Amerada Hess, 1993 Annual Report, p. 9. 47 Amoco Corporation, Annual Report 1993, p. 8. 48"Gas in Europe: Supply," Petroleum Economist (March 1994), p. i. 49"Regional Trade in Gas Grows," Petroleum Economist (December 1992), p. 13. 50 Mobil Corporation, Annual Report 1993, p. 12. 51 Unocal Corporation, 1993 Annual Report, p. 8. 52 Chevron Corporation, 1993 Annual Report, p. 9. 53 Exxon Corporation, Form 10-K, 1993, p. 5, and Enron Corporation, 1993 Annual Report to Shareholders and Customers, p. 32. Table 14. Well Completions by Region for FRS Companies, 1992-1993 the number of oil and gas wells drilled in Canada in 1993 doubled over 1992 levels. Canada expects this drilling boom to be temporary, since it was partly generated by the province of Alberta allowing new crude oil exploration wells to produce without paying royalties for a year. However, higher natural gas prices in Canada, such as those experienced by the FRS companies in 1993 (Table 12), may sustain drilling activity. 56 55 Anticipation of the significant 1993 increase (24 percent) in pipeline export capacity to the United States provided another impetus for gas well drilling in Canada. Exports of natural gas from Canada to the United States began increasing several years ago when the countries simultaneously decontrolled their natural gas industries.57 Subsequently, the Canada-United States Free Trade Agreement of 1989 formalized the trade relations that developed as a result of the deregulation. Because the recent North American Free Trade Agreement reiterates the terms of existing trade relations as they pertain to oil and gas, it probably had P. p. little direct effect on the 1993 increase in export capacity. 58 Although low in historical context, the FRS companies' drilling in the Gulf of Mexico and other offshore areas of the United States increased in 1993 over 1992 levels (Table 14). New technology for exploring under large horizontal salt sheets in the Gulf of Mexico (the subsalt trend) paid off in 1993 when wells drilled by Amoco, Anadarko, and Phillips reached hydrocarbons.59 Anadarko called the subsalt trend "the high-potential domestic exploration play of the 1990's," and plans to produce 45 thousand barrels per day by 1996.60 Oryx is also exploring the subsalt trend, but considers exploration in this area to be a relatively high-risk program.61 Finding Costs Stable, Lifting Costs Total finding costs are defined as exploration and 54Canadian Oil Markets and Emergency Planning Division, The Canadian Oil Market Annual Review for 1993 (Ottawa, Ontario, July 1994), vii. 55 Canadian Oil Markets and Emergency Planning Division, The Canadian Oil Market Annual Review for 1993 (Ottawa, Ontario, July 1994), 5. 56 Energy Information Administration, Natural Gas 1994: Issues and Trends, DOE/EIA-0560(94) (Washington, DC, July 1994) p. ix. 57 Andre Plourde, "Natural Gas Trade in North America," The Energy Journal, 14 (1993), p. 54. 58"Little U.S. Benefit Seen in Nafta," Oil and Gas Journal (August 30, 1993), p. 42. 59 Anadarko, 1993 Annual Report, p. 6, "Truly, Deeply and Profitably," Financial Times (September 5, 1994), p. 46, and Phillips Petroleum Company, Annual Report 1993, p. 9. 60 Anadarko Petroleum Corporation, 1993 Annual Report, p. 6, and "Mahogany Group Sees Output from Subsalt Flowing 45k B/D in '96," Platt's Oilgram News (August 8, 1994), p. 1. 61Oryx Energy Company, Annual Report 1993, p. 10. |