Arco Trims Budget for Oil, Gas Exploration
The precipitous fall in oil prices prompted Atlantic Richfield on Wednesday to dramatically reduce the amount it plans to spend this year looking for more oil and gas.
The announcement of Arco’s big cutback to $1.3 billion from last year’s $2.9 billion is thought to signal a sharp industrywide falloff in exploration for new sources of energy, accelerating a more gradual decline that began in 1982. Arco is the sixth-largest oil company in terms of assets.
Reduced exploration, in turn, is expected by some energy observers to begin setting the stage for rising oil prices and revenue--and a possible new energy crisis--several years hence as old oil reserves are exhausted and fewer new ones discovered.
Industry spending on exploration and research has been flat or modestly cut in recent years. But Arco is the first big integrated oil company to carve deeply into its capital spending budget since crude oil prices began to plummet in December.
‘Deferral’ of Spending
“I look for substantial cuts from practically all the large integrated companies,” said M. Craig Schwerdt, oil analyst at Morgan, Olmstead, Kennedy & Gardner in Los Angeles.
Arco described the cutbacks as a “deferral” of spending until oil prices turn up. It said the biggest reductions will come in exploration in the 48 contiguous states.
Overall capital spending, adding such projects as refinery upgrading, will decline to $2 billion from last year’s $3.6 billion. During Arco’s 1985 retrenchment and layoffs, it had planned a cut in 1986 spending to $3 billion. But the oil-price collapse forced stronger action.
“Given the uncertainties of the external environment for oil prices, these actions will preserve our operating and financial flexibility,” said Chairman and Chief Executive Lodwrick M. Cook. “We will pace the resumption of higher spending programs in these areas to the emergence of firmer crude oil prices.”
No Big Projects Ending
Arco said no big projects were being scrapped, but timetables will be stretched out and other economies imposed. It wouldn’t discuss specifics except that spending in the 48 contiguous states will total just $500 million versus last year’s $1.7 billion, Alaska spending will drop to $500 million from $880 million and overseas outlays will climb to $350 million from $300 million.
A spokesman said the sharp reduction in the capital budget is related to Arco’s Jan. 27 announcement of about 2,000 layoffs, consolidation of U.S. oil-producing properties and the sale of about 4% of its non-Alaskan domestic oil and gas reserves. No additional layoffs are planned, Arco said.
Analyst Schwerdt called the budget-slashing step “appropriate” because “this is no time to be a hero.” He said it is fruitless to forecast earnings of Arco or other oil producers because of the uncertainty surrounding prices.
However, Schwerdt said Arco has indicated that a $1 drop in the price of a barrel of crude would cut after-tax income by $100 million per year. Contract prices for crude oil have dropped about $10 per 42-gallon barrel since late November to the $20- to $22-per-barrel range. Arco reported operating income of $1.48 billion for 1985.
Oil and gas companies tend to quit looking for new reserves when prices drop because they have less money to spend on exploration and because the financial pay-back on the inherently risky and expensive process is often no longer worth it. The opposite occurs when prices rise.
That cyclicality has characterized the industry since its beginnings in the 1850s, but the effects have been especially severe since the energy shocks of the 1970s. Most recently, exploration and prices peaked in 1981 when conservation efforts and new energy reserves discovered with the help of skyrocketing prices created an oil surplus.
Drilling Peaked in 1981
New U.S. drilling peaked at more than 91,000 wells in 1981 and has been declining since. Last year, about 65,000 oil and gas wells were completed, a 20% decline from 1984, according to Petroleum Information Corp. of Denver.
Likewise, the number of active drilling rigs has been falling daily. The falloff is especially severe in onshore U.S. fields, where most drilling is done by small independent firms that are most vulnerable to falling prices, said Stephen Smith of Data Resources in Lexington, Mass.
“The rig count is dropping by 100 a week,” Smith said.
The president of the American Petroleum Institute, a trade association, predicted last week that the number of rigs could fall below 1,000 by year-end for only the second time since World War II. It recently dipped below 1,500.
‘Next Energy Crisis’
Sharply lower production and exploration could lead to the nation’s “next energy crisis” within five years, the trade group’s Charles J. DiBona said. He said that will lead to declining production by nations outside the Organization of Petroleum Exporting Countries, leading to increased U.S. reliance on imports and a replay of the oil crises of the 1970s.
Oil prices continued to slide for the third straight day Wednesday. The futures price for March delivery of a 42-gallon barrel of crude oil known as West Texas Intermediate fell 82 cents to $15.73 on the New York Mercantile Exchange.
At least four U.S. producers cut the prices they will pay for the same oil to the $19- to $23-per-barrel range. And non-OPEC producer Egypt said it was slashing the price of its oil exports to less than $20 a barrel, a decline of as much as $3.70.
Meanwhile, the latest estimates of production by Saudi Arabia--the nation whose sharp boost in production is cited as the major reason for the price collapse--had the Saudis averaging about 5.2 million barrels a day in early February. That is down from 5.6 million in early January but well above the Saudis’ supposed OPEC quota of 4.35 million barrels per day.
