Increasing costs squeezing oil industry

July 2, 2014 | By Barbara Vergetis Lundin

Despite stronger oil prices, corporate returns on average capital employed (ROACE) are lower than in 2001, when oil prices were less than $30 per barrel, according to research from information and insight provider IHS.

Credit: Meredith W./Wikimedia Commons

"Our IHS study, which assessed energy company performance and capital returns, included more than 80 oil and gas companies," said Nicholas D. Cacchione, director at IHS Energy and a lead researcher on cost and energy company performance. "Collectively, these companies averaged an 11 percent ROACE in 2012 and 8.6 percent in 2013, both of which are weaker than the ROACE achieved in 2001 when the WTI (West Texas intermediate) crude oil price hovered at just under $27 per barrel. The WTI crude oil price averaged $94 per barrel in 2012 and $98 per barrel in 2013."

This has left industry stakeholders scratching their heads.

"The culprit is cost escalation," explained Cacchione. "While returns have increased in recent years, costs have accelerated at a rate that has squeezed margins. The more than $60-per-barrel increase in global oil prices since 2002 has been offset by significantly higher costs, and to a lesser degree, weaker U.S. natural gas prices. Margins have basically been frozen."

Looking at the upstream sector, lifting costs have more than quadrupled since 2000 to greater than $21 per barrel. Finding and developing costs have followed a similar trend, reaching nearly $22 per barrel of oil equivalent (BOE) in 2013. Government fiscal take (based on financial disclosure), which excludes the impact of royalty volumes in the upstream sector -- increased from 49 percent of pretax profits in 2000 to 60 percent in 2013.

"The integrated oil companies earned a 15 percent ROACE since 2000, which is substantially higher than the 11 percent posted by pure E&P (exploration and production) companies," said Lysle R. Brinker, director of company research at IHS Energy. "The outperformance by the integrated oil companies can largely be attributed to their geographically and functionally diversified portfolios, which benefit from capital spending programs that are generally more disciplined. They are also aided by the lower-cost basis of the legacy assets that often comprise a large portion of their operations."

As a result, companies are increasingly scrutinizing cost containment and capital spending at all levels, and exercising greater discipline around the return on their capital investments.

"Every investment has to pass muster on several fronts before it will be funded, since there is significant internal competition for that capital," Brinker said.

For more:
- see this report

http://www.fierceenergy.com/story/increasing-costs-squeezing-oil-industry/2014-07-02