Oil Shipping Costs Are Rising: The Upstream Trend.

Estimates for global E&P spending (Capex) in 2003 have been revised downwards, with most majors anticipating lower oil prices through the year, compared with buoyant Capex in 2002. Lehman Brothers believes its original estimate of a 7% increase in global E&P spending in 2003 will come in closer to 4% or less.

The Capex downgrade is likely to compound the industry's mixed record on production growth. Both the majors and independents were struggling on the production front in 2002. In the US, many of the independents in 2002 downgraded production forecasts.

Most of the decrease in Capex will be in the US where, according to Lehman, there would be a decline in spending of less than 1%, compared to earlier estimates of a 7% increase nationally. Among the majors, only ExxonMobil (+5%) and BP (+4%) are expected to spend more in the US in 2003 than they did in 2002.

UBS Warburg says both international and US domestic spending and activity trends in the first quarter of 2003 will be flat. This does not bode well for drilling contractors, with the situation in the Gulf of Mexico forecast to remain sluggish at best in 2003.

Any meaningful recovery in the US is tied closely to natural gas prices. Lehman believes the industry needs gas prices above $4 per thousand cubic feet to see strong drilling levels and noteworthy day-rate gains. In late 2002, rig demand in the US Gulf rose to its highest level since early August. But with 133 of the region's 186 units under contract, rig utilisation was limited to 71.5%. Worldwide, drilling fleet utilisation is just above 82%.

The integrated US and European majors had boosted upstream Capex for the first three quarters of 2002 by 6% to $36.1 bn. Strong spending by ExxonMobil, BP and Shell (even excluding Shell's buying of British producer Enterprise Oil) helped lift the figures. Changes in exchange rates also affected the increase. By end-September ENI of Italy had raised spending by more than 25%, mostly to cover continuing development work. But TotalFinaElf's Capex by end-September had a double-digit fall after it brought four flagship projects on stream, according to Petroleum Argus of Dec. 9. Repsol/YPF's Capex had fallen by almost half because of its exposure to the financial woes of Argentina.

Upstream Capex in the first nine months of 2002 hit 75% of the annual budget, providing a clear signal that firms were likely to spend well over planned levels. According to Lehman, ENI and Norsk Hydro spent over 80% of their budgets. ExxonMobil, Shell and BP spent around or above 75% of their budgets. In contrast, TotalFinaElf only spent two-thirds of its budget. Repsol/YPF spent 56% of its budget.

A similar picture emerged among the US independents. Anadarko increased its budget by around $200m to $2.2 bn and, by end-September spent more than 70%. Kerr-McGee raised its budget by the same rate to $1.07 bn and by end-September spent over 75%. Murphy Oil also spent more than 75% of its budget.