Producers Likely to Increase Capital Spending in 2008

Capital expenditures by oil and gas companies worldwide will rise by 11% in 2008 on growing confidence in the longevity of high oil prices, investment firm Lehman Brothers said Friday.

Global exploration and production capital budgets will expand by $369 billion in 2008 from $332 billion in 2007, marking the sixth consecutive year of double - digit growth, according to a Lehman survey of 344 companies.

"Gains continue to be driven by strong increases in international spending," said analyst Jim Crandell . "Moderate spending growth is expected in the U.S., but reductions are forecast in Canada ."

Oil and gas companies have shifted into a more aggressive investment mode in recent years in the wake of higher commodity prices, shifting away from a long period that emphasized capital discipline.

The report notes that most of the major oil companies continue to show solid growth, with many boosting their budgets by double-digit percentages, according to the survey.

Chevron Corp. (CVX) said Thursday its capital spending budget for 2008 will be $22.9 billion , up 15% from $20 billion last year, while ConocoPhillips (COP) Friday announced a total capital program of $15.3 billion for 2008, compared with the $13.5 billion announced a year ago for 2007.

Lehman's survey showed that spending outside North America continues to drive the increases, with exploration and production expenditures slated to rise 16% in 2008. Canada is the exception to the international growth. The survey forecast capital expenditures will be cut by 12% to $20.3 billion in 2008 from $ 23.2 billion , reflecting the industry's dissatisfaction with increased royalties and rising costs.

Lehman Brothers said companies are basing their 2008 budgets on an average oil price of $68 a barrel and an average U.S. natural gas price of $6.80 per million cubic feet. The majority of the surveyed companies expect the long-term price of oil to be more than $70 a barrel, with 35% expecting the long-term price to exceed $80 a barrel.

The survey showed companies have become slightly more cautious on the long- term outlook for natural gas drilling in North America , with 77% of companies responding that the outlook was "good" or "excellent," down from 86% last year.

Lehman's survey also polled companies about the threshold for spending cuts, showing that the average price at which companies would reduce their exploration and production budgets is $50.65 for oil and $5.23 for natural gas.