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. Last Updated: 07/27/2016

Energy Firms' Exploration Rose in '98, But Profits Fell

HOUSTON -- Worldwide capital spending by publicly traded energy firms increased in 1998, even though falling oil prices sent revenues and profits plummeting, a report released Tuesday by Arthur Andersen said.

The increased spending reflected optimism in late 1997 that oil prices would remain firm in 1998, when in fact they dropped to near record lows, Arthur Andersen's managing director of energy industry services, Victor Burk, said.

"Exploration and development spending cannot be turned off and on like a faucet," he said.

The report said that the 182 U.S. and foreign firms included in the study spent a total of $83 billion on exploration and production in 1998, up 5 percent from 1997.

At the same time, revenues dropped 24 percent, to $124.6 billion, and operating profits fell 87 percent, to $4.6 billion, the report said.

Spending in the United States was flat, at $29 billion, the report said. Burk said major oil companies cut their U.S. expenditures by 15 percent, while raising worldwide spending by 22 percent.

Independents went in the opposite direction, increasing domestic spending by 7 percent and cutting international expenditures by 13 percent.

Burk said that the industry's 1999 capital spending may have decreased by as much as 25 percent because of low oil prices in 1998. Prices have rebounded to near $20 a barrel in recent months, which means companies will likely step up spending in the year 2000, he said.

"Both price uncertainty and the inability to forecast prices are still with us," he said. "Companies must develop strategies to survive, if and when prices decline again."

One of those strategies, he said, is to get bigger through mergers and buyouts.

Burk warned that while mergers bring economies of scale, the layoffs that accompany them have led to "an erosion of the industry's knowledge capital with the exit of many highly experienced, skilled employees."