Through the first half of this year, even as oil and gas prices stayed above $24 per barrel and $3 per thousand cubic feet, no feelings of euphoria swept the industry such as we witnessed last year, when the rig counts in the U.S. and Canada hit 15-year highs. So far this year, the domestic count has been running about a third lower than it was last year at this time, or around 700 to 750 rigs. But to what degree does the industry's cautious attitude affect the amount of cash companies are willing to reinvest in drilling? Salomon Smith Barney recently updated its annual midyear spending survey to give us one indicator. Following last year's crest in activity, this year North American E&P spending will end up declining about 15.6%, in line with the 14.7% decrease operators projected last December. Remarkably, this decline will hit north and south of the border evenly, with U.S. spending forecast to drop 15.5% and the Maple Leaf decline forecast to be15.7%.However, many companies are reviewing their budgets and since March, the trend has shifted from most reducing their spending, to most revising their budgets upward for the remainder of 2002. "The results were generally in line with expectations, reflecting a cautious outlook for 2002 and more optimism for 2003," said oilfield service analysts Geoff Kieburtz and Mark Urness in New York. "The survey supports our view of 10%-plus growth in 2003." They surveyed 159 U.S. independents, 10 majors, 91 Canadian companies and 94 outside North America. "For some months now, we have noted a sense of caution among many U.S. independents. In investor presentations, they may call it capital discipline, but it is just as easily caused by uncertainty about the U.S. economic recovery and energy demand and the sustainability of oil and gas prices." One way that caution plays out is in commodity price assumptions. Respondents used oil price assumptions averaging $22.70 per barrel, an increase from the $20.72 they cited last December, the survey said. Natural gas price expectations averaged $3.04 per thousand cubic feet versus $2.83 per Mcf last December. "These assumptions appear conservative when compared to the [recent] oil and gas price strips of $24.50 and $3.50," Kieburtz and Urness noted. In its December 2001 survey, Salomon Smith Barney had cited the global economic downturn, uncertain OPEC policy and warm weather as factors that would hinder activity by keeping prices low. At that time the analysts assumed North American drilling levels would fall 20% and international activity would be flat. In light of that, however, the latest survey results seem modestly positive. "We attribute this slight positive character to the more encouraging economic environment today compared to six months ago," they said. The cautious stance apparently is taking hold abroad as well. Although international spending is still expected to increase, it will do so by about half the rate operators originally predicted. It is now projected to rise 5.8% this year, which is well below the 9.7% projection made last December. "The majors are shifting their focus away from consolidation and cost reduction toward reserve and production growth, particularly in deepwater and remote regions," the analysts said. "Moreover, international spending growth would likely have been higher if not for the economic fallout of contracting Latin American economies, particularly Argentina and Venezuela." Looking to 2003 The survey indicated operators are more optimistic for 2003. Nearly 60% of the 256 companies responding said they anticipate higher spending next year, compared to 20% that expect a decline in budgets. Some 42% expect "substantial" growth of at least 10%. More than 60% of respondents said oil price trends since December have not yet affected their outlook for 2003. The strong emphasis now being placed on development drilling, as well as gas-directed drilling, has some implications, the analysts said. "It reinforces our belief that drilling for natural gas in the Gulf of Mexico, particularly deep gas drilling, will continue to lead the recovery in 2002. We expect onshore drilling activity in North America to initially lag the recovery. Increased activity has thus far been primarily on the part of smaller independents, while many of the larger companies continue to defer plans for increased drilling." The U.S. land rig count has been about 700 lately, down from 1,100 last summer. "But as we have noted recently, the U.S. rig count bottomed higher and rebounded faster than was expected." At press time, 1Lehman Brothers ÇS ' E&P research team issued its own midyear spending survey, and its results echoed those of the Salomon survey. For the 358 companies Lehman polled, including some government-owned and other foreign entities, worldwide spending was to fall 0.6% to $123.7 billion. U.S. E&P budgets in 2002 are to fall by 20.2% versus the17.9% decline that was projected last December. Canadian E&P expenditures in 2002 are forecast to fall 20.7%. "In the U.S. we see two cross-currents: larger companies that reduced their U.S. spending shortly after last December's survey, and independents that increased their U.S. budgets fairly recently as a result of stronger gas prices." For 2003, 58% of all companies said they expect to increase E&P budgets and 31% projected them to remain flat with this year's levels. Of those who said they would hike spending, some 75% plan to raise them by 10% or more and 28% of respondents said they would do so by more than 20%.