At press time, we were eagerly waiting for the 2003 exploration and production spending outlooks to be released by Lehman Brothers and Salomon Smith Barney. These surveys are probably our best peek into the future for company performance and the U.S. reserves picture. But these were no doubt exceedingly difficult to compile this year because the mood of uncertainty has grown more pronounced among E&P companies. Caution is the byword while producers and investors alike wait to see where the economy is headed, where commodity prices stabilize, and whether George W. Bush goes into Iraq or holds his peace. Meanwhile, Salomon analyst Geoff Kieburtz says early indications are that 2003 E&P spending will not be as robust as he previously supposed. A few weeks ago, he had forecast worldwide spending might grow 8% to10% next year, with independents alone increasing their spending10%. Now, lower expectations are nudging that forecast down. Recent contacts with E&P companies suggest worldwide spending will go up only 2% to 3% for independents and 3% to 5% for majors. At the same time, several companies have revised their production forecasts down for 2003 and 2004. This would seem to indicate their need to increase spending, not lower it or delay it. Moreover, North American production declines also seem to demand that E&P companies step up their drilling pace. "With three quarters of 2002 behind us, we believe the evidence continues to build that there is a significant supply slowdown occurring in Canadian and U.S. natural gas production," says a recent report by FirstEnergy Capital in Calgary. Most observers on both sides of the border agree. Analysts at A.G. Edwards now expect U.S. gas production to be flat in 2003. One reason? They think the U.S. rig count will stay below the threshold of the average 900 rigs that the company says are needed to affect gas supply. Lower production ahead, slower growth and yet, a lower rig count forecast. What gives? There is a new emphasis on creating returns as opposed to growth at any cost. Whether one defines this as return on capital employed or return on investment, doesn't matter. And so, the pattern of North American drilling is changing. The goal is to find higher-return hydrocarbons, which usually means to drill deeper, whether it is an onshore well in Louisiana, Oklahoma or Alberta, or on the Gulf of Mexico Shelf, or in deep water. But deep means expensive. More capital at risk calls for a better return-the bar keeps getting raised higher. "I think you are looking at very disciplined decision-making these days, compared with what we saw 10 or 20 years ago," Anadarko Petroleum president and chief executive officer John Seitz told me recently. He said growth has to occur within certain return parameters. If capital markets are to recover, the oil and gas industry needs to show viable and sustainable returns, Thomas A. Petrie, principal with Petrie Parkman & Co., said at the annual meeting of the Independent Petroleum Association of America. OK, we'll pursue returns. But if growth at any cost is no longer a good idea, then a no-growth strategy is not valid either. E&P companies must find some happy medium between irrationally exuberant-yet profitless-drilling and tight-fisted caution. If growth is too slow, even if it generates the "right" return, investors will move their dollars elsewhere. Limited access to capital markets will force producers to ration their capital even further, by allocating it only to the highest-return plays. A well spud or production-facility start-up can be delayed for any number of reasons that have nothing to do with U.S. oil and gas demand, commodity prices or investors' demand for returns. When Marathon Oil Co. lowered its production targets for 2003 and 2004, it mentioned several operational reasons. These included project delays in Norway, slower response time for coalbed-methane gas production in Wyoming's Power River Basin, and permitting delays for development of its Ozona discovery in the deepwater Gulf of Mexico. Even though executives are focusing on returns as opposed to growth at any cost, they do not see this as an either-or proposition. At the RBC Capital Markets' investment conference in Houston last month, after mentioning that they are return-driven, many E&P companies foretold strong production growth ahead. The size of the prize is now bigger for the large-cap independents, many of which are beginning to resemble mini-majors in size if not in the upstream-downstream mix. They have more opportunities, just as a major does, but absent an acquisition, the pace of their production growth will be slower from now on, also like a major. Will investors reward that?