Budgets going up with oil, gas prices Signs of bottom bring on

HOUSTON -- Oil companies that scaled back drilling last fall are cautiously moving budgets back up for the second half of the year.

Large independent oil companies are typically in the vanguard of increasing or decreasing spending on oil and gas drilling. Virtually all are spending less this year than last, but their exploration budgets appear to have bottomed out.

Those spending more are wary of big commitments. Ocean Energy will end the year spending more on oil and gas exploration and production, but it will be the result of special items rather than a significant increase in wells drilled.

The company will spend $50 million on acquiring offshore leases and drilling deep-water wells that were not in the budget earlier, said Bill Transier, Ocean Energy's chief financial officer.

"We started the year with a budget of $650 million and will end around $700 million," Transier said. "We are going to wait until the end of the third quarter before making any more decisions about spending. If prices stay up, you might see us spend more."

As oil and gas companies adjust their budgets, they have to be careful to not get ahead of their cash flow for the rest of the year, said Tyler Dann, oil analyst with Bank of America Securities in Houston.

"The U.S. natural gas market has firmed up considerably from earlier this year and late last year when budgets were formed," Dann said. "The challenge now will be to maintain discipline; the coffers are filling up, and these companies will need to define the oil price outlook that they use in making spending decisions."

Baker Hughes reported the North American rig count, including Canada, had risen by 35 rigs over last week, although it is running about 450 behind last year at this time. A rising rig count and increased spending will be welcome for oil-field services companies that have been showing signs of strength as prices have moved up. The Oil Service Index compiled by Jefferies & Co., an index of stock performance of publicly held oilfield services company, is up about 22 percent for the year.

Not all of the oil and gas companies are rushing to increase their budgets: Neither Burlington Resources nor EOG Resources will increase spending this year.

Much of the reborn spending will be on international projects, but there will be plenty of new drilling domestically.

Anadarko Petroleum recently announced two major natural gas discoveries in East Texas and northern Louisiana that led it to predict a 5 percent increase in production next year.

Those successes, along with some others in Canada and the Gulf of Mexico, will lead to about a 10 percent increase in spending for the year, said Bill Sullivan, Anadarko's executive vice president of exploration and production.

"We haven't made a final decision, but we think the timing is pretty good to add about 10 percent to the capital spending program," Sullivan said. Anadarko's $2 billion budget will grow to $2.2 billion.

The company will continue to focus on natural gas projects in North America and Algeria. It recently increased its acreage under contract from 400,000 acres to 4 million acres in the North African country.

All the budget decisions turn on oil and natural gas prices, and indications are that they will remain strong for the near term.

The recent decision by the Organization of the Petroleum Exporting Countries to maintain its current quotas has stabilized oil prices around $25 per barrel, and natural gas prices have strengthened above $3 per thousand cubic feet going into the peak demand months of the summer.

Natural gas prices have risen about 30 percent since the beginning of this year and aren't expected to decline anytime soon.

A survey of the major natural gas producers in the second quarter by Raymond James & Associates found that natural gas production declined in the April-June period for the fourth consecutive quarter. A waning supply should support higher gas prices.

Apache will be raising its spending in the United States but more so internationally, where it has had two new major discoveries in Egypt: The Tut 51 well and the Al Bahig-1X well, 37 miles offshore.

The company has at least seven prospects in waters off Egypt and plans to drill three more wells there this year.

Apache is not disclosing how much it will increase its drilling budget, but spokesman Tony Lentini said it will rise. However, it will still be much lower than the $700 million spent in 2001.

"We started out the year at about $350 million, and we have increased it somewhat," Lentini said. "We are still concerned about some volatility in prices. The international market is a bit different because there we have long-term contracts."

Devon Energy has increased its drilling budget from $1.2 billion- $1.4 billion to $1.3 billion-$1.5 billion, said Brian Engel, a spokesman for the Oklahoma City-based oil company. "Of that, we will be spending about $830 million in the United States, $520 million in Canada and $85 million internationally," Engel said.

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