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Oil Majors’ Costs Have Risen 66% Since 2011

by Nick Cunningham of Oilprice.com

The oil majors reported poor earnings for the fourth quarter of last year, but many oil executives struck an optimistic tone about the road ahead. Oil prices have stabilized and the cost cutting measures implemented over the past three years should allow companies to turn a profit even though crude trades for about half of what it did back in 2014.

The collapse of oil prices forced the majors to slash spending on exploration, cut employees, defer projects, and look for efficiencies. That allowed them to successfully lower their breakeven price for oil projects. However, some of that could be temporary, with oilfield services companies now demanding higher prices for equipment and drilling jobs, in some cases upping prices by as much as 20 percent. The result could be an uptick in the cost of producing oil for the first time in a few years. Rystad Energy estimated the average shale project could see costs rise by $1.60 per barrel, rising to $36.50.

That does not seem like the end of the world. After all, those breakeven prices are still dramatically lower than what they were back in 2014. In fact, Reuters put together a series of charts depicting the fall in costs for shale production in different parts of the United States. Every major shale basin – the Eagle Ford, the Bakken, the Niobrara, and the Midland and Delaware basins in the Permian – have seen breakeven prices fall by as much as half since 2013. The slight uptick in costs expected in 2017 is a rounding error compared to the reductions over the past half-decade.

But that is just for shale drilling. The oil majors produce most of their oil outside of the shale patch, with much of their output coming from longer-lived projects in deepwater, for example. To be sure, some of the largest oil companies have made some progress in cutting costs over the past few years, but a new report casts doubt on the industry’s track record.

According to new research from Apex Consulting Ltd., the oil majors are still spending more to develop a barrel of oil equivalent than they were before the downturn in prices – in fact, much more. Apex put together a proprietary index that measures cost pressure for the “supermajors” – ExxonMobil, Royal Dutch Shell, Chevron, Eni, Total and ConocoPhillips. Dubbed the “Supermajors’ Cost Index,” Apex concludes that the supermajors spent 66 percent more on development costs in 2015 than they did in 2011, despite the widely-touted “efficiency gains” implemented during the worst of the market slump. It is important to note that this measures “development costs,” and not exploration or operational costs.

Sto1

However, performances varied by company. Eni, for example, saw its development costs decline by 32 percent between 2011 and 2015, a notable achievement. Chevron and ExxonMobil also posted efficiency gains, although more modest figures than Eni. Chevron’s costs fell 6 percent and Exxon’s were down 5 percent over the five-year period.

At the other end of the spectrum is Royal Dutch Shell, which saw development costs quadruple. ConocoPhillips and BP fared only slightly better, with costs roughly doubling over the timeframe. As a whole, the development costs for the group of “supermajors” rose 66 percent to $18.39 per barrel.

After the collapse of oil prices in 2014, the cost index did decline. Oil producers squeezed their suppliers, streamlined operations, and improved drilling techniques. But costs still stood 66 percent higher than in 2011.

Nick2802B

The index points to underlying structural increases in development costs for the broader industry.

At $18 per barrel, the cost figure would seem rather low. But it is important to note that this is just for “development costs,” which represent just over half of a company’s total cost. That figure excludes the cost of exploration as well as funding ongoing operations. So the “breakeven price” so often quoted in the media is actually quite a bit higher. BP, for example, recently admitted that its finances will not breakeven unless oil trades at roughly $60 per barrel.

The supermajors are in a tricky position. They are trying to cut back on spending in order to fix their finances and pay down the massive pile of debt that they have accumulated in the past few years. However, their reserves will decline if they fail to replace them. Exxon, for example, only replaced 67 percent of the oil it produced in 2015.

Moreover, as Apex Consulting notes, oilfield services might demand higher prices in the future as drilling activity picks up. Right now, offshore rigs are still underutilized, meaning that price inflation has yet to kick in.

In other words, the decline in costs post-2014 are, at least in part, cyclical. Costs will rise again as activity picks up unless oil producers work with their suppliers to address the underlying structural costs of oil production.

Link to original article: http://oilprice.com/Energy/Energy-General/Oil-Majors-Costs-Have-Risen-66-Since-2011.html

Comments

Jeffgreen54

Renewable energy is coming down in price and fossil fuels are increasing in price.New wind now beats new coal plants. We are now at the break even point in price comparison. It will be interesting to see what happens next decade when renewables shift downwards even more.

Marshall Taylor

Oil prices are low, production prices are rising. Love this news!

Account Deleted

US oil and gas drilling is now 80% fracking/horizontal drilling and the productivity of these wells have gone up 500% since 2011. So it does not matter that it is, say, 50% more expensive to make a state of the art fracked well today. It is still far more cost effective than it was in 2011. This is was oil and gas fracking is booming again despite low oil prices of 50-55 USD per barrel.

The evidence can be studied here:

http://www.wtrg.com/rotaryrigs.html shows 63% annual growth in number of horizontal drilling rigs. That is a boom.

And here http://www.eia.gov/petroleum/drilling/#tabs-summary-2 shows the 500% growth in productivity for nearly all rigs at the shale plays numbers in pdf files.

I am all for going fully electric and renewable and to build the 100 Tesla sized giga factories that can replace gassers and diesels on a global scale. However, it will take decades to get rid of the global fleet of nearly 2 billion combustion vehicles so meanwhile we need to drill at full speed.

We need to prepare for increasing wars between the free world and the part of the world that does not believe in freedom or science. Our cultural differences are growing all the time (increasing terrorism against us is evidence of that) and one way to prepare for this escalating war is by banning import of energy from all of our cultural adversaries. Another is to stop accepting immigrants from countries that are not fully democratic and science based. If people are unhappy with where they live they should do something about it in the country they were born in. We could help them with that in the form of money and weapons if their agenda is the same as ours: democracy, freedom and science as the foundation for knowledge.

SJC

Instead of Exxon making $40 billion per year in profits they make $30 billion.

Lasvegas

Hello Change,
The war is between evidentiary reality and Republicans with Trump leading the charge against science.
The clock is rapidly advancing toward midnight because of AGW denial on the right. We all need to make monetary decisions to ditch oil use starting now. My wife and I have been doing so since the 1980s.

gorr

Many time i've said to increase ice mpg efficiency to over 100 mpg. It is doable if we go serie hybrid with exhaust heat and pressure capture instead of just crankshaft horsepower like it is the case with the volt, the bmw i3 rex and the upcoming nissan e-note. Im sick and tire of the high cost of gasoline, we need to drastically lower consumption to provoke a complete collapse of petroleum price and we gonna decrease 4x our gas bills and dramatically decrease air pollution. Here in this blog each blogger should take his responsability and stop all car buying till they release an over 100 mpg gasoline car at the same price than actual gas car. manufacturers and goverments and bank entities will never release an over 100 mpg cheap car except if we make a buying strike where we keep our car almost forever except if they decide to offer a really better car. they tried to hack us with costly battery cars and costly hybrid and the market didn't buy in great quantity because it end-up costing more. Say no to mediocrity and ask for an over 100 mpg car or keep your old car forever.

Brotherkenny4

Don't worry, population decline is coming. There will be plenty of oil for the people left.

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